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Real estate as an investment: It’s worth it

Real estate is a high-yield and safe investment if purchased and financed well. The requirement to reduce risk through diversification applies to real estate as to all other asset classes: in order to avoid cluster risk, not all assets should be invested in a single property. Rental nomads, low birth rates and unforeseen damage to the house are less critical than feared or have already been priced in.

What is an investment?

A capital investment is the same as an investment or investment of capital. These terms are used interchangeably. Capital investment usually means investing money specifically in real estate or investing large amounts of money. Investment usually refers to overnight money, fixed-term deposits, stocks, gold and the like.

What is an investment in real estate?

The term capital investment alone, without the addition of real estate, usually refers to investments in real estate. The addition real estate makes it clear that this is actually about investing money in real estate and not in other valuables.

Are all rented properties an investment?

Real estate that is an investment is rented out and not lived in. Seen in this way, every rented property is a capital investment and every property owner has made an investment in real estate.

Are owner-occupied properties also capital investments?

You could go so far as to consider self-inhabited real estate as an investment. The Sparkasse did this in 2021 in a survey on the popularity of various investment options. There, self-used property as an investment was one of the possible answers. However, according to this logic, any residential property would be a capital investment. In the survey, around 20 percent of those surveyed viewed the property they lived in as “suitable for building wealth”. However, the ownership rate in Germany, i.e. the ratio of owners of inhabited property to the total number of residential properties, is just over 40%. 40% of all residential properties would therefore be capital investments, and in half of the properties affected (approx. 20% from the savings bank survey) the owners themselves see it that way. The property you live in naturally has an influence on your personal financial situation. In general, however, a home is not considered an investment.

7 ways to invest in real estate

Real estate as an investment essentially comes in seven different forms:

  1. Real Estate Stocks (Real Estate Investment Trust: REITs): Listed real estate stocks, REITs, are suitable for investors who like to earn dividends. REITs have been regulated in Germany since 2007, but there are very few German REITs. In Germany, REITs must distribute 90% of their profits to investors. REITs invest in many large real estate projects. The diversity reduces the risk, but the complexity remains, which arises from the fact that a large number of different real estate projects are packaged as securities.
  2. Real estate equity funds, actively managed: A real estate equity fund corresponds to actively managed equity funds. The real estate stock fund buys REITs like the stock fund buys stocks. As with stock funds, the provider tries to outperform the general price development of REITs by buying and selling.
  3. Real estate equity fund, passively managed: A passively managed real estate equity fund corresponds to the ETF for stocks. Instead of trying to outperform the general price performance of REITs through ongoing buying and selling, existing REITs are bought and held according to their size, as is the case with ETFs.
  4. Closed real estate fund: The closed real estate fund is a German peculiarity and is not known or not permitted elsewhere. In contrast to open real estate funds and REITs, closed real estate funds are not listed on the stock exchange. The provider collects the investors’ money and when the target amount is reached, the fund is “closed”, meaning no further investors or investment amounts will be accepted. The closed-end real estate fund has a term, usually in the range of 10 to 20 years. The fund provider uses the money collected from investors to invest in larger real estate projects. Any current profits from rental income are distributed to investors. At the end of the term, the fund is dissolved and any profits are distributed to the investors. The problem with closed real estate funds is that they are hardly regulated and the providers have almost limitless design options. This is all very opaque for the investor.
  5. Open real estate fund: The open real estate fund is preferable to the closed real estate fund. In contrast to the latter, the open real estate fund is listed on the stock exchange and is therefore significantly more regulated. Unfortunately, listing on the stock exchange in the context of real estate also means that a lot is involved in the “valuation” of the real estate portfolio. And this is where extensive accounting design options come into play. These also exist with stocks, but stocks rely a little more on comprehensible parameters such as profit and loss from active business activities. The proportion of pure “valuation” of fixed assets is lower than in a company that essentially holds real estate and whose rental income offers little scope for ups and downs. The providers are tempted to show a less volatile, constantly increasing performance and to optimize the books accordingly. These open real estate funds were quite popular until the financial crisis of 2007/2008. The fact that the fund is listed on the stock exchange also means that investors can sell their shares back to the fund at any time. This was the providers’ downfall in 2008, when many investors panicked and tried to cash in on their shares. In general, when trading on the stock exchange, you are always in danger of being negatively influenced by panic-like herd instinct. Herd instinct and sudden mass panic are not an issue when it comes to classic investments in real estate. It is difficult to imagine that many property owners would suddenly want to sell their property, which is secured by a land register entry.
  6. Property for personal use (own home): The home ownership rate in Germany is 40%. So you could say that 40% of residents in Germany are real estate investors. However, a home is usually not considered a classic investment, although a property you live in naturally has a major influence on your personal financial situation. The profitability calculation would look completely different here than for a rented property.
  7. Investment property: The classic investment property is an apartment or house that is rented out. With this non-standard form of investment, there is a lot of scope for design. At the same time, transparency is very high. The process of buying and renting a property is tried and tested and legally secure. All aspects of the transaction are open. This form of investment can be very profitable, but it can also be a flop if a property is chosen in an unfavorable location.

A classic real estate investment is a bit scary because it is a long-term commitment and requires at least 15, 20 thousand euros in equity. The alternative methods of investing money in real estate are possible with smaller amounts of money and the transaction costs and transaction duration are lower than with direct real estate investment. However, the alternative investment options are very non-transparent and put the investor in a position in which he is very dependent on the reliability and performance of the provider due to a lack of insight into the internal processes. When it comes to direct investment, i.e. buying an apartment or a house, everything is clear. The question arises as to whether classic ETFs or stocks are better suited to complex real estate products than these real estate constructs pressed into stock form. We recommend direct investments in real estate as well as ETFs for long-term investments and daily money, fixed-term deposits and savings accounts to park money for a few months.

When is a property worthwhile as an investment?

A property as an investment is particularly worthwhile if it is purchased at a reasonable price and the location is and remains good. So it is not enough to buy a property that is cheap given the location. It must be foreseeable that the situation will remain good. Of course, this doesn’t mean that the property changes location; Their “immobility”, i.e. immobility, is ultimately the main characteristic of a property that gives it its name. But the situation itself could worsen in the long term, for example due to companies, authorities or educational institutions moving away or closing. The real estate investor tries to predict future developments by looking at the past development of the region.

How much equity for an investment property?

Buyers should be able to raise 10 to 20 percent of the purchase price as equity. Depending on the federal state, around 9-12 percent goes towards the additional purchasing costs. The bank would like to have a high equity share, unless the borrower has excellent creditworthiness. The borrower, in turn, wants to use as little equity as possible. The crucial return on equity is higher the less your own money is used.

How much money do you need to invest in real estate

Investors should at least be able to cover the additional purchase costs themselves. Depending on the federal state, these can be up to 12% if a real estate agent is involved. Investment properties are located in growing medium-sized and large cities and therefore cost 150,000 euros and more. If we assume average additional purchase costs of 9%, then in this case the investor would have to bring 9% of 150,000 euros, i.e. 13,500 euros, in order to have a good chance of receiving a financing commitment. Roughly speaking, it can be said that an investment in real estate is possible from around 15,000 to 20,000 euros. A permanent job and a household budget that makes paying the monthly loan installments seem unproblematic are also required.

Which type of property as an investment

Investment properties are mostly residential properties and primarily small to medium-sized apartments, as these are the easiest to rent out. Multi-family houses, apartment buildings and entire residential complexes can also be a high-yield investment. Larger, complete units offer more design freedom and there is no need for coordination with the owners’ association that is necessary for condominiums. However, investing in larger properties requires more equity and larger loans. The cluster risk is also greater here, unless the investor has the means to invest in several, larger properties.

Apartment as an investment – what to consider?

The maker mantra of “location, location, location” also applies to investment properties, but not necessarily in the same way as it does to owner-occupied properties. While personal preferences often come into play when it comes to owner-occupied properties, when it comes to investment properties, even greater and more sober attention is paid to long-term, general rentability. This is one reason why working with professionals when buying an investment can make sense: the investor doesn’t have to personally like the property anyway. Investment properties are by no means always in top locations, but rather in B and C locations.

Disadvantages of investing in real estate

Investing money in real estate has the following disadvantages.

  • Cluster risk: Investors must bring a five-figure amount with them in order to be able to invest in a property. If this involves the entire savings, a cluster risk arises: the welfare and woe of the entire asset depends on a single asset class and even on a single asset, the single property. Solution: Don’t put all your savings into real estate. ETFs are a good additional investment and are suitable for diversification.
  • Not a standardized product: An investment property is not a standardized product such as ETFs, equity funds or bonds. Therefore, the success of the investment varies greatly from individual case to individual case. A house or apartment as an investment can significantly outperform other investment options, but can also lag far behind. Solution: Find a property and a location that is profitable in the long term. This is best achieved with professional support.
  • Rental nomads: The topic of rental nomads lives primarily from the smug term “rental nomads”, which suggests that there are a significant number of people who rent apartments on purpose and then move on, like the “nomads”. and destroy the next apartment. If you take a closer look at the cases picked up by the media, you can see a need for psychosocial care for marginalized people who are overwhelmed by their entire lives, not just paying the rent. The underlying problem is much smaller than is sometimes suggested and affects very unattractive properties that would never have been considered as an investment property. Solution: In an investment property where the tenants are professionally checked, the question of “rental nomads” basically doesn’t arise at all. The interested parties are vying for the offer and the investor can choose his tenants accordingly.
  • Unexpected damage, therefore costs: A house is exposed to the elements and the use of tenants, and over time damage can occur that was not expected and which costs a lot of money to repair. Solution: Firstly, choose your house or apartment carefully and, secondly, have the building structure checked before buying. A property is anything but fragile, and the main value is in the property anyway. This maintains its value even if a bomb falls on it. Setting aside money for renovations is standard practice and is factored into every return calculation.
  • Demographic development in Germany: Since the birth rate in Germany is low, real estate investments are doomed to failure in the long term. Solution: The birth rate alone actually indicates population decline, as in many industrialized countries. But that doesn’t take into account that this is more than offset by immigration. As the EU’s “powerhouse”, Germany’s population would shrink exactly when politically desired. But Germany, supported by the majority, is committed to growth and there is no shortage of human resources.
  • High transaction costs, long transaction times: A property cannot be converted into cash as quickly as a fixed-term deposit account, stocks or ETFs, that’s right. Solution: We do not have a solution for the comparatively longer transaction duration and costs in the event that the investment property is to be sold again. An investment property is a very long-term investment that is kept for a very long time. Any sale is usually planned well in advance.

Real estate as an investment – how does it work?

Investing in real estate works as follows:

  1. Search for a suitable object
  2. Purchase / financing of the property
  3. Renovation / renovation / modernization / possibly division
  4. Rental / management by the owner themselves or by property management

Non-binding, free advice on investing in real estate

Did you know that Meine-Erniteimmobilie are not brokers and that there are no broker fees for properties brokered by MRI? My investment property buys and sells itself and takes care of both the renovation and – if desired – the subsequent rental and management. Arrange an appointment and let us show you your options by phone, chat or in person at the office in Schwabing over a freshly brewed cappuccino.