How It Works: How Much Money The Leasing Of Apartments In Moscow Brings
Three businessmen from the Moscow suburbs earn about 12,500 dollars per month by leasing stylish studios at a price twice higher than the one-room apartments.
The founders of Mama Ro Anton Kozlov, Volodya Nizovtsev and Anatoly Smirnov have always dreamed of living in the center of Moscow. “I’ve always wanted to absorb the spirit of Moscow night adventures in Kitay-Gorod,” Smirnov says in an interview with RBC, “Moreover, we didn’t want to lose an hour and a half of life every day by getting to the center from the dreary sleeping suburbs of the capital.” Kozlov was the first one to risk moving to the city center. In 2010, he rented 18 square meters in the basement in Maly Ivanovsky pereulok (side-street) where he did all the construction work on his own and made a cozy place where all friends would soon be able to gather together. Thanks to this small success, the guys had a business idea: to create low budget housing in the center of the capital for people like them. “The idea was that one night would be comparable to the cost of a taxi ride,” says Anton. According to their estimates, the potential market volume of such «pendulum migrants» was about 700 thousand people every day, which meant that the product should be in demand.
Luck with your own hands
They gathered together to create a business plan and realized that to create a “hostel for hipsters” that would be 600 sq. m. they would need at least 312,500 dollars of investments. “We didn’t have that money,” Nizovtsev says – “I was a cameraman-freelancer, Anton – a porter at the hotel and Tolya organized television broadcasts.” As a result, the founders of Mama Ro decided to try a less expensive project and in May 2012 they had some luck. “One morning I was on the website www.cian.ru (CIAN – the real estate database) and saw that there was a room for a rent in the basement in Spiridonovka street: 80 sq. m. for only 2 093 dollars a month” – says Smirnov – “This was the most important moment of the whole project: we realized that if we want to do something, then we need to start right now.” The guys scraped together 937 dollars for the deposit and proceeded to the construction work.
First they wanted to divide the whole space into several rooms of 12-15 square meters. “But then we realized that we wouldn’t be different from typical hotel rooms,” – Kozlov explains – “We realized that we ourselves didn’t want to live in such cells. So we had an idea to create not just an interior for temporary accommodation, but studio-apartments, a space for living.” The guys did all the construction work within 2.5 months and did it with 25,000 dollars. “We smeared plaster first with our hands but then we learned how to use a spatula,” – says Smirnov – “We collected the money from our friends: somebody gave 1 562 dollars, the other one 3 125 dollars, and we also took 10 937 dollars from a familiar capitalist at interest.” In mid-July, two studios in Spiridonovka were ready to receive its’ first guests. They posted an announcement on the same website – cian.ru – and on July 19th the first client came. “The couple rented an apartment for two days for 250 dollars” – Nizovtsev says with a smile – “It seemed to us that exactly what we were most afraid of happened: our customers would be those who usually rent apartments for a day.” But the beginners-businessmen were mistaken: the first and all subsequent customers were from a different audience – they were ordinary or business tourists who wanted to be in a foreign city in a comfortable environment, seeking something different from small and identical hotel rooms.
Mama Ro Figures
14 apartments – in the Mama Ro’s list
218 dollars — the average price of apartments rent per day
588 500 dollars — total investment
20 thousand apartments for rent in Moscow per day
109 dollars — the average rent price per day of an apartment in a good state
Source: Mama Ro, “Miel” (real estate agency), “Sutochno” (daily booking platform)
After the relatively calm August (75% of the load), September was fully booked. “From September 2012 to February 2014, we did not have any idle time in Spiridonovka,” the entrepreneurs say proudly. Within the first five months of their work, they repaid all their debts (about 25 000 dollars). At that time, as in the construction times, they would go to Metro (a wholesaler) to buy shampoo and towels, and would repair broken things in the studios. “Every three days, each of us had a duty to clean and wash the toilets” Smirnov says – “We realized that the principle is simple: either you are drowning and this is only your business, or you fight and win.”
After the business started going well, the guys thought about its expansion. They began to intensely monitor the advertisements on CIAN, but in the beginning they were unlucky. “There was either an old lady with a three-room apartment or the owner who lives permanently in the Emirates and offers to sign a contract via Skype” – Kozlov recalls. And, one day, by chance they got in contact with a representative of a man who bought an entire building in Chistye Prudiy, in Gusyatnikov Lane. In early 2013, the founders of Mama Ro rented from him 300 sq. m. on the third floor and began to look for money for construction works. In total, they collected 46,875 dollars and another 78,125 dollars they borrowed at 20% per annum from one of the Moscow banks. And in January 2013 they started the construction. “Each of us had his own vision of how the studios should look. I adore Suprematism, so I did a Suprematist studio, Anton is crazy about the Byzantine mosaics,” – says Nizovtsev – “Each of us started with his own dream.” Now they rent two of the three floors in the building. In launching 12 apartments in Gusyatnikov Lane, the founders of Mama Ro invested a total of 588,500 dollars. They had to actually do a major overhaul of the building by changing pipes and wiring, reinforcing the floors, replacing the walls and ceilings.
Vladimir Nizovtsev: “The lease of the space on Spiridonovka, of course, was quite relative (sublease from the city), and, in fact, we could at any time be asked to move out, or in simpler words, our business could be taken away. Here, what is important to understand is that any business is made of a doer. Without a doer business is useless. And, thank God, our business environment begins to understand that without guys who are ready, excuse me, to wash the toilet with their own hands, there wouldn’t be this load, there wouldn’t be people who come here, everything would fail, and nothing would work at all.”
Anatoly Smirnov: “These are all my psychological features in the Jazz studio. For example, when I was a kid I didn’t have my own work place, I lived with my parents in the living room. Therefore, in the studio, I made a chic workplace with a view from the window. I wanted a sense of a psychological reliability, so I made the floor of an ash-tree array. As an actor by profession, I replaced the usual lighting with theatrical spotlights soaking the air with the feeling of the theater. And so, we have done this in each studio. Perhaps this is what attracts customers to Mama Ro: all the interiors are very personal.”
Anton Kozlov: “Russia is a difficult country to do business, but it is as promising as it is complex that, in principle, you can choose any business and make it truly high-quality, and honest. This will be the factor which will guarantee success, because the market, especially in the service industry, is very unfinished, undervalued, underfunded. Everything is usually done in a slipshod way for the sake of quick profits and escape abroad. We don’t have the desire to leave, we understand that we are connected with the country and want to develop it. This honesty is one of the components of the present case.”
Economics of apartments
The standard Mama Ro apartments allow the accommodation of four guests. Most of them are realized in two stories: downstairs there is a living room with a cinema and stereo system, a bar counter and bathroom, and upstairs there is a bedroom. Each studio has its own unique interior design. For example, “Bauhaus” is made in a laconic German design of the beginning of the XX century with the original furniture made of the Far Eastern ash. The “Jazz” studio refers to the American clubs and the theater of the 30s with open brickwork, the “Pine” studio with pine trees installed in the interior pays homage to a child’s dream of having a house on a tree.
For the individual design of each room, handmade furniture and equipment from Apple, the guests will need to pay anywhere from 203 up to 265 dollars per day. The cost is determined by the area and popularity of the studio. The entrepreneurs say that in 2015 they worked with a load of 97.2%. “There are foreign clients who move from hotels and live in our studios for a month,” says Vladimir Nizovtsev. According to the entrepreneurs, about 60% of clients are foreigners, but the share of tourists from Russian regions and from China have started to grow with the crisis. They say that there are those who live in apartments alone (about 20%) for several weeks or in a couple (also about 20%). Families and groups of friends are about 30% of customers. Most of the customers come through booking systems (booking.com, airbnb.com, etc.). Studios are often rented for parties or shootings. In this case they are rented according to a separate price list depending on the event. On average, Mama Ro earns about 87,500 dollars per month.
The main expenses of Mama Ro are rent (21,000 dollars a month) and payments on loans and debts (interest and repayments – 23,250 dollars per month) to banks and private individuals. The cost of personnel is about 13,000 dollars. Entrepreneurs pay a salary to themselves and two assistants. Municipal payments, cleaning (outsourcing), advertising and commission of reservation systems take another 12,500 dollars. Totally, it gives 69 750 dollars for all the expenses per month. The activity of Mama Ro is carried out through Anton Kozlov’s state of a sole proprietorship (tax – 6% of revenues a quarter).
Yuri Kuznetsov, the owner of the Internet project “Sutochno”, estimates the capital market of short-term rent of studios and apartments at 20 thousand of premises, most of them are standard one-room apartments. On the “Sutochno” website there are now about 3,5 thousand proposals at the price category of 62-156 dollars per day.
Julia Tseliakovskaya, the development director of LikeHome Apartments that manages 76 apartments in Moscow believes that the demand for studios and apartments presents different categories of customers. “Almost all of our facilities are within the Garden Ring and are aimed at wealthy citizens who more than often rent them for a few weeks and want to live there as if they were at home,” she told to RBC. “People often prefer not to save money on a hotel room, but to have the comforts that hotels usually cannot provide.” According to her, this is especially true for family trips with children, when apartment rent becomes economically more interesting than booking several rooms in a hotel. She estimates the market of similar accommodation facilities in the capital in just a few hundred proposals.
For a family or a group of four people now in Moscow, as a rule, it is cheaper to stay in apartments than in a hotel. According to booking.com, four nights from January 30th to February 3rd in Mama Ro will cost 912 dollars, in LikeHome – 750 dollars. 4-people room in Aeropolis hotel – 890 dollars, in the Adagio hotel – 1,312 dollars, in Novotel (two standard double rooms) – 1,593 dollars, and the Deluxe Suite with a kingsize bed in Four Season – 15,406 dollars.
Before the crisis, LikeHome Apartments operated one hundred apartments (all estates are privately owned, the company takes them into management), 60% of clients were foreigners, and the average annual load was about 80%. “Now the situation has changed: more than 60% of customers are Russians, loading has also fallen,” Telyakovskaya admits. In Mama Ro they say that the crisis didn’t affect their business – the loading of apartments in 2015 was 97.2%. The founders of Mama Ro are planning to take over the management of a whole mansion in the center of Moscow to create a real apart-hotel in there, but they haven’t yet found a suitable property and investor for this project.
Interior design and furniture for sale
The popularity of the Mama Ro studios is largely related to their unique interior designs, which the founders came up with and realized themselves. Nizovtsev says that some guests even ask to make similar design projects for their apartments. “Every fifth person comes in and says:” How cool! I want the same, “- he says. The team has already made four interior design projects and is currently working on the creation of design projects for three hotels in Europe, namely in Czech Republic, Latvia and Estonia. The furniture that the guys made based on their studios such as “Bauhaus” and “Pine” creates the same interest. “We were offered to make a whole collection and put it out for sale in Tsvetnoy department store,” Nizovtsev says. At the moment, Mama Ro is working on two furniture orders.