An old stock exchange rule is: real estate investment is safe, stocks bring returns. In turbulent times and because of persistently low interest rates, however, more and more Germans are turning to so-called concrete gold and buying apartments or houses.
But is it really worth it for everyone to invest in real estate? After all, the market has been booming for years, with the corresponding consequences for real estate prices, and buying real estate inevitably always involves financial risks and obligations.
However, this does not mean that real estate is not a good investment in principle.
On the contrary: If you buy the right property today, you will reward for it in the future. However, future investors should observe a few rules so as not to fall flat on their faces in the current tense market situation.
PROS AND CONS
Real estate as an investment is booming. According to surveys by the Federal Statistical Office, the home ownership rate in Germany is currently around 46.5% on average – and the trend is rising. The reason for this development is more than obvious: the classic savings book, one of the most popular investments of the Germans, hardly ever earns any interest, loans for construction financing are available at unbeatably favorable conditions and the share prices are simply unpredictable in economically turbulent times.
Because more and more people are afraid of old-age poverty and low pensions, many hope that investing in real estate will provide them with a certain level of security in times of crisis and for the fall of their lives – be it for their own use or for renting to third parties. For this it is assumed that properties in metropolitan and popular locations will continue to experience constant appreciation in value, which in turn will result in higher resale value and increased rental income for the owner. In short: the advantages of real estate as a sensible capital investment are obvious.
However, it would be a fallacy to rush the purchase of a property now. After all, who can still be sure of keeping their job permanently and being able to use long-term financing? But even if the financing can be done without credit, ownership also brings with it obligations that are not for everyone. As the owner, do you want to be the direct and permanent contact for your tenants, for example? Who takes care of tax matters and the annual service charge statement?
There are numerous pros and cons when it comes to buying real estate as an investment. However, you should definitely pay attention to the following tips if you want to get involve in the real estate market.
TIP 1: DO YOU HAVE ENOUGH TIME?
A real estate purchase can usually complete relatively quickly. However, a lot of time is often required in advance, because the property must first be found. This often requires extensive research and numerous visits. Appointments with the bank, your tax advisor or the notary also cost time.
If you have a full-time job and also take care of your family, a project in the real estate sector can quickly become very exhausting. But even after signing the contract, you have to invest some time in managing your property. Would you like to be available as a constant contact for your tenants or should this be done by a property management company? Who takes care of the garden, the sidewalk cleaning, the utility bills, Craftsman or tenant change? Anyone who wants to take care of all these tasks themselves will definitely be busy and should have sufficient time, availability and patience.
TIP 2: HAVE FUN WITH IT
Even if the management of the investment property is given to external hands, every owner of a house or apartment should be able to muster a little fun and a basic understanding. Because ownership obliges and nobody can avoid maintenance or modernization measures in the long run. This is especially true if the property is to increase in value over the long term. If you rent, you should even modernize regularly and ask for a rental price that is appropriate for the location.
Because anyone who demands excessive amounts and at the same time rejects any investment in an apartment or building will not keep their tenants for long. In any case, rents and investments must be within an economically sensible framework if the property is to generate good returns. This requires at least a minimum level of entrepreneurial thinking. This would not be the case, for example, if real estate was only rented to people who seemed particularly likeable at a friendly price well below the market value. Then it is definitely not worth investing a lot of money in real estate as a capital investment.
TIP 3: NO CLUSTER RISK
When buying a property, including any installment payments and the budget that has to be planned for any repairs, you should never use your entire personal assets. Because with such a so-called “cluster risk” without any risk distribution, the investor faces great economic damage in the event of a loss-making transaction, which in the worst case can result in personal bankruptcy.
TIP 4: PLAN FOR ADDITIONAL PURCHASE COSTS
When buying a house, in addition to the purchase price, there are other costs that should not forget when planning the financing. For example, between three and six percent of the purchase price for the broker, unavoidable fees for the notary and the land registry and the land transfer tax that is always incur, which amounts to 3.5% to 6.5% of the purchase price, must be planned for. These costs are not only important for financing, but must also deduct from the return on the investment as expenses.
TIP 5: CONSTELLATION COMMUNITY OF OWNERS
Anyone who buys an apartment within an apartment building can also have obligations as part of a home ownership community, even if it involves investments that do not necessarily increase the value of their own real estate property. However, instead of getting on bad terms with the other owners, it is sometimes advisable to agree to small cosmetic repairs in common areas such as the stairwell or laundry room. Conversely, however, it can of course also happen that the homeowner community decides against measures that could increase the value of their own capital investment.
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TIP 6: PLAN UPHOLSTERY
Unfortunately, the saying “The unexpected often happens” sometimes also applies to the real estate market. Because if defects only appear a long time after signing the purchase contract or if damage occurs for which no insurance will pay, it can cost a lot of money to rectify it. For cases like these, you should therefore have larger reserves, especially for real estate as a capital investment.
TIP 7: DON’T FORGET THE LANDLORD RISK
Anyone who does not live in a property themselves as a capital investment also automatically bears the risk of late rent payments or costs when changing tenants. Vacancies in particular are risky for investors who finance their property with a loan.
TIP 8: LONG BOND IN REAL ESTATE INVESTMENT
No matter how the purchase and maintenance of a property finance as an investment, be it through a loan, an inheritance or perhaps even a lottery win, it should never forget that such an investment is binding in the long term. Buying real estate as an investment only makes sense in the long term because its value usually only increases slowly. In return, this means that capital that has already invest or regularly occurring binding credit installments cannot access in the near future. As a result, other, new or spontaneous projects could often no longer or not additionally be realizable.
TIP 9: PREVENTION IN REAL ESTATE INVESTMENT
With the keyword long-term, also think of the possible case that one day you might no longer be able to take care of your capital investment yourself due to an accident or for everyday reasons. In this case, you should specify in a power of attorney, ideally at the time of purchase, who should take over your business in the event of incapacity to act. Such a power of attorney is in any case a sensible measure to protect yourself from misuse.
TIP 10: CALCULATE THE RETURN CORRECTLY
Anyone who asks the question “Is it worth investing in real estate?” is of course primarily interest in the expected return. However, there is no general answer to this, because nobody can say what the future will bring. There are various methods to calculate the possible returns on a property.
The simplest method is gross rental yield, which is the purchase price divide by the annual rental income. With the result, the so-called “raw rent multiplier”, the gross rental return can then calculate. Example: €100,000 (purchase price) / €5,000 (rental income) = 20 (“raw rent multiplier”), 100 / 20 = 5%. According to this calculation, an annual gross rental yield of 5% can expect.
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