Buying an investment property: House and apartment as an investment property
Every property that is rented out is an investment property, i.e. a structural investment that generates a return for the owner. An investment property can be an apartment, a house or an entire residential complex.
What is an investment property
An investment property is also known as an investment property, investment property, investment property or, in Austria, interest property. Also capital investment usually means an investment in a property, i.e. an investment property. Betongold is another whimsical term that underlines the attractiveness of real estate as an investment. That brings us to seven terms that all mean the same thing: a rented property.
Definition of investment property
An investment property is a property that is not purchased for owner-occupation, i.e. to live in, but as a capital investment, i.e. to rent out. Every rented property is therefore an investment property, and every landlord is the owner of an investment property. The investment property can be a single apartment, an entire detached house, an apartment building with several tenants, an apartment building with several tenants or an entire residential complex with a large number of tenants.
Literal meaning of investment property
The word “investment property” refers to the property and the word “yield” refers to the money earned from the property. With an investment property, investors earn money in two ways: firstly through the increase in value of the property over the years, and secondly through the rental income, which represents the ongoing yield.
What type of investment property to buy
Investment properties come in various sizes, from small condominiums for singles to residential complexes with several hundred tenants.
- Buy an apartment: The condominium (ETW), which is rented out as a whole rental apartment or split up as a shared apartment
- Buying a house: The single-family home (EFH) that is rented out as a whole house or as individual apartments or as one or more shared apartments
- Buy a multi-family house: The apartment building with approx. 2-6 apartments, which is rented out as several apartments, possibly after the floor plans have been changed. (This also applies to the EFH)
- Buy a rental house: A residential building with approx. 6-12 apartments that are rented out as apartments or shared apartments.
- Buy a residential complex: An entire residential complex consisting of several interconnected or detached buildings. Here, too, all apartments are usually rented out individually and not houses as a whole. Smaller units can generate higher returns with more effort.
Buying a condominium
The main advantage of an individual condominium as an investment property is that it costs less than a house. An apartment is also usually easier to rent out than a house. The disadvantage is that owners are restricted in their freedom of choice and must consult with the community of owners for structural changes to the common property.
| Advantages of an ETW | Disadvantages of ETW |
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Buy a house (detached house EFH)
An entire detached house as an investment property offers more possibilities for conversion. There are no co-owners and the entire structure is available for building work. However, a house costs more than an apartment and is usually less centrally located. This can affect rentability.
| Advantages of a house | Disadvantages house |
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Buying a multi-family house (MFH)
Due to its size, a multi-family home offers even more potential for optimization, for example through improved floor plans, than a single-family home. The location of a multi-family home also tends to be more central than that of a single-family home.
| Advantages of a multi-family home | Disadvantages of apartment buildings |
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Buy a rental house
Also known as an apartment building, investing in an apartment building is particularly interesting for wealthy investors. An apartment building or residential and commercial building, if there is also a commercial unit on the ground floor, is often quite centrally located compared to apartment buildings and, above all, single-family homes.
| Advantages of apartment buildings | Disadvantages of apartment buildings |
|---|---|
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Buy a residential complex
Investing in entire residential complexes probably appeals to you if you are considering a particularly high capital investment. Otherwise, it is not fundamentally different from that of apartment buildings.
Special case: buying a care property
Another variant that should not be neglected is investing in care properties. A number of aspects make this type extremely interesting:
- Rental security: The operator of the care facility has strong financial resources. Depending on the exact concept and provider pursued, it is even possible to obtain protection from the state in the event of a resident’s inability to pay by having the rent paid and thus avoiding any loss of rent. However, this topic should be treated with caution, as there are always black sheep among them. Even if a unit is not occupied, the operator of the care property to which you are renting is obliged to pay the rent. The generally long contract terms of 20 to 25 years also allow you to lean back when it comes to having to find new tenants. For particularly security-oriented investors, it is definitely an interesting option.
- Not least due to demographic change, a large growth market has emerged in the care sector, which can also be classified as cyclically resistant.
- Also good to know: if you or one of your relatives needs a place in a care home, you as the owner are automatically entitled to it.
Commercial property as an investment property
Another option is to invest in an investment property in the sense of a commercial property. Office buildings, shopping centers or industrial facilities; there are numerous commercially used properties that make particular sense for you as an investor if you have very good market knowledge or work closely with real estate agents and tax advisors. Attractive returns meet increased risk.
What to look out for when selecting an investment property
For an investment property to pay off in the long term, the basic factors have to be right:
1. future potential for value appreciation due to location and infrastructure
Undervalued growth locations are interesting. Instead of paying inflated prices for prime locations, smart investors are looking to the future in order to leverage dormant potential for value appreciation. Regardless of the location, a well-developed infrastructure is important. Shopping, work, education and leisure facilities attract tenants.
2. building fabric and structural condition
The general structural condition often already indicates the extent of necessary maintenance and modernization measures.
3. future possible uses (floor plans)
The more versatile the property is, the more likely it is to be rented out without gaps. The floor plan is important for apartments. Rooms that can only be accessed by entering other rooms and not separately via the hallway are a minus point. For commercial units, suitability for many sectors is an advantage.
Finding the right property – but how?
Finding promising properties is a little more challenging these days than it was a few years ago. If you currently want to buy a first property, you probably won’t find any properties worthwhile on Immobilienscout, Immowelt & Co. But where else can you find cheap properties?
Location, location, location? Where in Germany is an investment property worthwhile?
The microlocation of the property should be attractive for future tenants. This means good infrastructure, local amenities and leisure and cultural facilities.
Location, location, location
Private investors understandably prefer an investment property in their area. Meine-Renditeimmobilie offers investment properties throughout Germany, from Munich in the south to Kiel in the north. However, investors who live in a structurally weak region are better off with a property that is further away and managed by a property management company than with a property that is close by but less future-proof.
When is an investment property worthwhile
The gross rental yield is calculated as follows:
Annual rental income x 100 / purchase price = rental yield
However, the result is too good to be true. In fact, some additional information is required to calculate a realistic yield. The net yield is decisive. The expected return is not a lottery but, if you pay attention to the right factors, an estimable figure.
Calculate yield property
When is an investment property worthwhile? Before buying a property, everything should be calculated thoroughly, preferably with the help of an expert.
Additional purchase costs
In addition to the actual purchase price of the property, there are also various ancillary purchase costs. Depending on the federal state and whether an estate agent is involved, these amount to approx. 9-12% of the purchase price:
| Federal state | Buyer’s share of estate agent commission* | Notary and land registry costs | Real estate transfer tax | Total |
|---|---|---|---|---|
| Baden-Württemberg | 3.57% | 2.0% | 5.0% | 10.57% |
| Bavaria | 3.57% | 2.0% | 3.5% | 9.07% |
| Berlin | 3.57% | 2.0% | 6.0% | 11.57% |
| Brandenburg | 3.57% | 2.0% | 6.5% | 12.07% |
| Bremen | 3.57% | 2.0% | 5.0% | 10.57% |
| Hamburg | 3.57% | 2.0% | 4.5% | 10.07% |
| Hesse | 3.57% | 2.0% | 6.0% | 11.57% |
| Mecklenburg-Western Pomerania | 3.57% | 2.0% | 6.0% | 11.57% |
| Lower Saxony | 3.57% | 2.0% | 5.0% | 10.57% |
| North Rhine-Westphalia | 3.57% | 2.0% | 6.5% | 12.07% |
| Rhineland-Palatinate | 3.57% | 2.0% | 5.0% | 10.57% |
| Saarland | 3.57% | 2.0% | 6.5% | 12.07% |
| Saxony | 3.57% | 2.0% | 3.5% | 9.07% |
| Saxony-Anhalt | 3.57% | 2.0% | 5.0% | 10.57% |
| Schleswig-Holstein | 3.57% | 2.0% | 6.5% | 12.07% |
| Thuringia | 3.57% | 2.0% | 6.5% | 12.07% |
Rent multiplier and net yield
The rent multiplier can be used for an initial estimate of the purchase price. This involves dividing the purchase price by the annual basic rent. The higher the result, the more expensive the property.
Rent multiplier = purchase price / annual rent
Furthermore, the net yield should be calculated as follows
Net yield (in %) = (annual rent – management costs) * 100 / (purchase price + incidental purchase costs)
The rent multiplier and net rental yield provide an initial, approximate estimate of the potential yield of an investment property.
Consider future costs
A real estate investment also requires a certain amount of foresight. Renovation measures that may be required in the future must be taken into account in the calculation. Certain construction work can be passed on to tenants in the form of a modernization rent increase. This includes new windows, for example.
Tax advantages and disadvantages
The tax framework has always been advantageous for property owners in Germany, keyword “grandma’s little house”. The state grants both owner-occupiers and landlords different, but ultimately attractive, tax planning options.
- Depreciation (AfA): Landlords can claim tax relief on acquisition or production costs. For residential properties, this is two to three percent of the purchase price each year, depending on the year of construction, and is even higher for listed properties (9% each year for 8 years, then 7% each year for a further 4 years).
- Three-property limit: Anyone who sells three or more properties within 5 years runs the risk of being classified as a commercial property trader. The trade tax exemption is now nullified and trade tax must be paid in arrears.
- No speculation tax after 10 years: If the investment property is resold after 10 years at the earliest, the profit made – roughly calculated as the difference between the purchase price at the time and the current selling price – does not have to be taxed.
- Gift, inheritance, etc.: There are other tax aspects surrounding the purchase of an investment property that need to be discussed, weighed up and calculated.
Financing the investment property
There are various models for financing an investment property. In the rarest of cases, a property is financed purely from equity, as the principle of debt leverage is dispensed with. If you are one of those investors who like to take on as little debt as possible, the trick is to find the right balance between debt and equity. The more equity you contribute, the lower the interest rate on the loan you can expect.
Financing an investment property without equity
Financing without equity is more common today than it used to be. If the ancillary costs are also financed, this is referred to as full financing.
100% financing
With a good credit rating, i.e. a sufficiently high, secure salary, it is also possible to buy an investment property with very little or no equity at all. With 100% financing, buyers usually bear the incidental purchase costs.
110% financing
With 110% financing, the actual full financing, buyers also finance the ancillary purchase costs. In order for the bank to play along here, the credit rating must be even better than with 100% financing.
130% financing
With 130% financing, which requires an even higher credit rating, the buyer of the investment property even finances planned renovations or the installation of a fitted kitchen.
Conclusion
An investment property is a secure and profitable long-term investment. Acquiring an investment property requires a few tens of thousands of euros of equity, but full financing without equity, i.e. 110% financing of the investment property, is also possible with a good credit rating.
The location and characteristics of the property have a decisive influence on profitability. Therefore, the selection of a suitable investment property should be made carefully or, even better, with the help of professional advisors. An apartment that appears attractive for owner-occupation is not necessarily a worthwhile investment property.
Meine-Renditeimmobilie specializes in investing in investment properties and offers a 360-degree service for the acquisition, financing and management of investment properties. Arrange a non-binding consultation now.