Between return and risk: How sensible is a real estate investment??

Real estate prices are climbing steadily in many places. There are currently no signs of an end to the boom, because demand exceeds supply in many regions of Germany. Interest rates are historically low and are likely to remain so for the time being. Real estate is therefore equally suitable as a capital investment and retirement provision. But not every property is suitable.

Certain locations are now hopelessly overpriced. So when and where does an investment in real estate still make sense?? What yields can be achieved? Where the greatest risks lie? Answers to the most important questions can be found in the following article.

The basic advantages of a real estate investment

A property as an investment object has a concrete physical value that can be clearly determined by recognized methods. This is relatively stable and, unlike other capital investments such as shares, is hardly subject to fluctuations. A yield real estate, for example a free-hold apartment or a single-family house, which is not inhabited, but rented out, guarantees regular incomes.

As a rule, the average return on a rented property is significantly higher than the interest income from a savings account, fixed-term deposit or overnight deposit account. The yield is a percentage figure that is calculated as the difference between the income and the expenditure in relation to this expenditure. Currently, the value of a property usually increases at least at the rate of inflation. If the right property is selected, a real estate investment is therefore an almost inflation-proof investment.

How is the yield of a property calculated?

There are two different ratios for determining the yield of a property with different significance:

– The rent multiplier, often also called the multiplier, provides a rough overview of whether the investment in a property is worthwhile at all. It is calculated by dividing the purchase price by the annual rent. If it is above 25, the property is generally considered to be overpriced. This means: The purchase price is disproportionate to the expected profit. However: In metropolitan regions such as Munich or Hamburg, multipliers of over 30 are no longer an exception. Here, real estate prices are extremely high, but at the same time the risk of loss of rent is very low.

– A more reliable measure of whether an investment is profitable is the net rental yield. It also takes into account not only the incidental costs of purchase, but also the costs of maintenance and management of the property. The formula is:

(annual net rent – annual management costs) x 100 / (purchase price + incidental acquisition costs)

A net rental yield of between three and four percent is considered a solid basis. Private investors also benefit from the tax advantages of real estate depreciation.

From location to equity: Finding the right property

Observance of a few important criteria protects against bitter and sometimes painful disappointments in real estate investment.

– Real estate agents often joke that there are three criteria for the value of a property: Location, location and again location. In fact, location plays the most prominent role in real estate investment: among other things, (tenant) demand and the risk of vacancies depend on it. Many A locations are now almost unaffordable for buyers, B and C locations, on the other hand, offer thoroughly respectable opportunities for good returns.

– A solid building structure and a good energetic condition should be present as well as an attractive floor plan. If the property is poorly insulated and therefore consumes too much energy, this makes it more difficult to rent out.

– Precise knowledge of the (possible) tenant structure and the rental income is the basis for calculating the possible yields. Incidental costs, maintenance reserve and management costs must also be weighed in the balance.

– It is advisable to contribute a maximum of 20 percent equity capital to the real estate investment in order to be able to deduct the interest on the loan for tax purposes. With the help of a long fixed interest rate of a decade or more, the current low construction interest rates are guaranteed for the time being.

– The annuity that finally results should always be below the rental income. Only then does the investment pay off in the long term. If the opposite is the case, it is advisable to keep your hands off the investment.

– In view of rising real estate prices and rents, owner-occupied property can also generate long-term asset growth.

Which strategy can be used to increase the return on a real estate investment??

A real estate investment can be kept on track for success with three different strategies.

1. Buy and hold

With this strategy, the property is held for at least ten years because no speculation tax is due after that time. During this time, renovations are limited to what is necessary to maintain a rentable condition. Afterwards, the property is sold at a profit.

2. Fix and Flip

The "Fix and Flip" strategy focuses on the purchase of properties in need of renovation that have a solid building structure. They are renovated cost-effectively and sold again quickly. The difference between the purchase and sale price must be good, as the proceeds must be taxed. Within five years, private investors may acquire and sell a maximum of three properties in this way.

3. 1/3/10 Strategy

The 1/3/10 strategy is a combination of the previous strategies: a property that yields a return in the first year is held at the status quo for three years. Subsequently, larger amounts are invested in refurbishment and renovation, which are tax deductible as income-related expenses. Appreciation leads to higher rental income and, after ten years, usually to a higher sales price, which is also tax-free.

Which properties are suitable for investment?

The available capital is the decisive factor in determining which properties can be invested in. Investors should also decide on an investment strategy, taking into account how much time and effort they want to invest.

Condominiums are a fairly "low maintenance" investment. The prerequisite, however, is a good location, solid equipment and a functioning administration. The biggest risk is a prolonged loss of rental income.

Multi-family houses are ideally suited as yield properties. If the rents in the apartments are below the rent index, higher income can be achieved with targeted renovations. However, multi-family houses tie up a large part of the assets. Experts therefore like to refer to this as "cluster risk.

Single-family homes and duplexes derive their attractiveness from the fact that they usually include larger plots of land. However, the net rental return is often not overwhelming. However, the resale value is usually very high due to the land area. Single-family homes and duplexes are currently the property class with the lowest default risk. In addition, the already high demand has increased even further due to Corona.