Is it more profitable to invest in rental properties by the sea or in the center of Zagreb? We provide a detailed calculation

Investing in real estate and living off rental income has practically become our national sport. We would all love to work less and live off passive income. However, the situation with real estate, especially their prices, has been changing rapidly in recent years, and consequently, so have the amounts of investment and return on investment (popularly known as ROI). For an accurate calculation of how profitable this actually is, we have provided two examples of investment, one in a house by the sea and one in an apartment in the center of Zagreb.

 

Bojan Bernik, a versatile entrepreneur and owner of the IT company Morgan Code, purchased a 100-square-meter plot of land in Zadar, near the beach, in 2018 in agreement with his wife. The plot contained an old house measuring 70 square meters, and since it had a high ceiling, they managed to ‘raise’ it and create a high attic and upper terrace, so today the house has one bedroom on the ground floor and one on the upper floor, including the upper terrace. The total amount invested in the land and the house was 120 thousand euros five years ago, of which 40 thousand was a cash loan from the bank, with an interest rate of about five percent.

 

Two years ago, Bernik published an exact calculation of the return and profitability of the investment on his Facebook profile, from which the ratio of income and expenses over three seasons in today’s Villa Baronessa, which he rents out, can be seen, but he also uses it with his family in June and the first ten days of August.

 

The costs in the table include the installment of the cash loan (principal and interest) of 3,500 euros per year. He also provided a version of the profit without the loan to show the difference in profitability. The costs also include commissions for Booking and Airbnb.

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– Although I was initially skeptical, our investment turned out to be the move of the century. The house was purchased in 2018 and completely renovated in 2019 when we prepared it for the season. Last year was a record year; we earned over 16 thousand euros and raised prices by a few percent to 193 euros per night. Today, that house can be sold for double what we invested. In five years, prices have risen for everything, although recently the prices of construction materials have started to decrease.

 

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In Istria, where I am currently working with my partner on a similar but more luxurious property with a pool, everything is brutally more expensive than it was in Zadar. Back then, it was about a 10 percent return in 10 years, however today, when investing in real estate, the ROI extends to over 15 years. We paid off the investment in less than three years, but thanks to early repayment from other sources of income; otherwise, the return would have taken about ten years – says Bernik.  

 

 

The company Irundo, founded by the entrepreneurial duo, Igor Kordić and Tomislav Zovko, specializes in full property management in the strict center of Zagreb, and they have expanded their business to Dubrovnik, Rovinj, Opatija, and Vienna, where they recently contracted cooperation for 40 apartments.

 

The agency currently manages around 200 properties. Leader has already published an entrepreneurial story about them, but as a reminder of the challenges in renting today and more than ten years ago, it is worth recalling the difference: – When we started in 2011 in a previously unknown business, we had a vision and strategy for Zimmer frei 2.0. We became pioneers of a completely new concept and quickly became the leading agency in the property management industry. We sent Zimmer frei signs into the past, and we made life less stressful for numerous small apartment renters, with the same or even better earnings – Kordić recounted.

 

Their beginning, he adds, was very interesting because it was difficult to explain to apartment owners in Zagreb 11 years ago that they would renovate their apartment and rent it out to tourists for a few days. At that time, the concept of a city break did not yet exist, at least not in Zagreb. Today, the main activity of their agency is complete property management, which includes coordination with guests before, during, and after their stay, organizing self-check-ins or personal receptions for guests, and registration in the eVisitor system. After guests leave, they organize and coordinate the cleaning of the apartments, washing and ironing linens, delivering consumables for each guest shift, and taking care of any damages or malfunctions. In addition, Irundo also handles advertising, sales, pricing, and communication with guests.

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About 90 percent of the property owners that Irundo offers to guests are actually investors who have recognized real estate investments as the best way to enhance capital. Owners have other jobs, and Irundo ‘makes money’ for them.

 

Thus, Kordić says that property prices in the center of Zagreb are continuously rising, which everyone has experienced firsthand, and they largely depend on whether it is a new building or an old one. For tourist rentals, location remains the most important factor, the narrowest center, a maximum distance of 500 meters from Ban Jelačić Square.

 

– Currently, there is a significant range of prices for old buildings, ranging from 2,000 euros/m2 to 4,000 euros/m2, while for new buildings in the center of Zagreb, prices per square meter can reach up to eight thousand euros. Currently, the normal price at which old apartments for renovation are sold in the strict center of Zagreb is around 2,000 euros/m2. A number of parameters influence sales prices, including the construction of new residential buildings, the price of new construction, APN loans, earnings from the tourist season, and the method of financing real estate investments, which is mostly realized in cash, meaning apartments are bought ‘cash from the sock’.

 

In addition, more and more foreigners live or work in Zagreb, which also affects the increase in buying and selling prices – says Kordić. He adds that the decoration of apartments differs from that of residential apartments because there is more emphasis on interior design and less on functionality. The reason for this is that the average stay of guests in Zagreb is 1.5 days. Thus, Kordić claims that attractive decoration has the greatest impact on the achieved price per night and annual income. However, despite the fact that the prices at which apartments are sold in the center of Zagreb are rising, this does not reflect on the prices per night at which they are rented to guests.

 

– This is a completely different market influenced by completely different factors, which are exclusively supply and demand, heavily influenced by the availability of free rooms in hotels for specific dates – adds Kordić.

 

In his opinion, investing in a property in the center of Zagreb makes sense if the annual yield is at least four percent and if the total return on investment is initially calculated over a period of up to 25 years. Of course, over time, property prices rise, thus shortening the return on investment if the property is sold.

 

And here is a concrete example of a calculation for an apartment in the strict center of Zagreb, measuring 80 square meters:

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Renting properties without intermediaries certainly sounds much more appealing and profitable. It cannot be such a difficult job that anyone could not do it. However, in addition to time, renting requires some prior experience and knowledge, especially if it concerns the planning phase of the investment, where there are many details that are not even considered when entering into an investment. Owners often over-invest because they did not calculate well.