Posted over 3 years ago

Buying, Selling and Profiting in the Russian Real Estate Market (1/4)

This is the story of how I got involved in real estate investing and the tale of my very first purchase. This is how it all began for me. Years ago my wife and I moved to Russia to work with a Christian non-profit organization. Our plan was to live and work in Russia for 5 years. I noticed immediately that most expats from the west rented their apartments, but there were a few that were courageous enough to buy property. Hmmm, I thought, what do they know that the others do not?

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Now, I need to back up a second and share that my conviction to own real estate didn’t come from Rich Dad, Poor Dad but from a place much less exciting. For me the light bulb flicked on brightly one sunny spring afternoon in Dr. Weber’s Investment class in the Business School at the University of Montana. That’s where I first learned about the power of real estate for building long-term wealth and passive income. But it would be a few years before I had the capacity to act on that knowledge. So, chalk one up to the good ol’ college education and Dr. Weber for turning me on to real estate as an investment!

In Russia, I had my first shot of owning real estate, but it wasn’t going to be a typical acquisition and I was beginning to see that right away as I investigated the matter of owning property, as an expat, in a wild emerging market.

The first thing I did was to take a look at the price-to-rent ratios in the city we lived in. Samara, Russia was the third largest city in the country at the time and fairly expensive for most Russian cities. I calculated that the apartment we needed would rent for about $700/month at the time. Also, rates were climbing precipitously as inflation was much higher than what I was used to in the U.S. This same apartment might rent for $900 or more in a year or two. My back-of-the-napkin calculation for my total expense over 5 years for rent was $55,000-$65,000. At that time most of these same apartments were selling for around $65,000-$70,000. Wow! I realized that for the amount of money I would be spending on rent over 5 years, I could buy an apartment outright. Add to this the fiasco of being a renter in Russia and I was motivated.

Regarding the fiasco, Kristen and I had been renting for several months and had a rough experience. Our landlord would show up unannounced and at very inconvenient times to check in on us. Sometimes they would stay for hours. In the end, after the conviction to own was solidified by my research, we ended up getting into a dispute with them over damage they claimed we had done to their apartment. Merab, my landlord brought his son over who was a 6’5” Georgian bear of a man and very intimidating. They tried shaking me down for several thousand dollars over a small hairline fracture on the toilet and some small scratches on the stove. I invited another expat buddy to come over and my Russian attorney. We ended up settling after a 4-hour dispute in our kitchen with me buying the stove and the toilet. The other aspect of renting in Russia is that the tenant is afforded very little freedom to paint walls and make cosmetic changes. After our conflict with our landlord, my conviction to buy had reached fever pitch. I remember thinking: "I can't NOT buy in Russia!"

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The numbers made sense, but I knew I needed more information. I needed to know that my title was safe in the legal environment that existed in Russia. In those days, and to a large extent this is still true today, commercial property and business in Russia is risky. If you had a successful business in Russia you were expected to pay for protection and if not, you could lose your business, or something worse. The smart business owners kept their heads down, lived modestly and didn’t broadcast the success of their businesses for fear of losing them to larger more powerful forces. I had a friend who started a business manufacturing lights for the taxi vans to illuminate their route numbers at night. He told me he drank a bunch on vodka, poured some on his clothes and made himself disheveled when going into the government offices to get his paperwork signed. He told me that this was the fast way to get all his documents signed with no issue. Had he gone in looking like a professional with means, he would have been required to pay bribe money in order to get his documents signed. In his mind, it was better not to be taken seriously. Playing the fool makes strategic sense in a corrupt business climate.

In regard to real estate, however, I needed to find out if the mafia was going to be putting a target on me. It wouldn’t be worth it if that were the case. I consulted with an American expat who was a former real estate investor in New York who advised me against buying in Russia. He told me he worked with business people in Russia and that the risks were too high. He couldn’t recommend it. Another friend of mine back home told me he thought it was a bad idea. Now I was starting to get a little discouraged. That was until I spoke with a French business man in the city who owned his apartment and a chain of coffee shops. I weighted his advice more heavily because he was taking real action. We sat down for coffee in one of his shops and he shared his experience with me. He shared that there was a long-standing body of law that protected real estate ownership far more than commercial property. I learned that even the mafia respected home ownership and was never known to disown people from their homes. I took that as a green light. After that I felt I could safely own property in Russia with no legal challenges. I was excited again!

Finally, I had the finance questions. Kristen and I didn’t have much money. We had about $16,000 in our savings account. Clearly, we were going to need financing. I’ll continue my story in Part 2 because the financing part gets interesting. I was about to learn a hard lesson about banks outside the west and what it was going to take to pull this purchase off. I was about to also learn how to raise capital having no training at all. But one thing I kept thinking about, a quote I often heard from my mother, “Where there’s a will, there’s a way!”

To be continued...

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