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Investing in real estate: 10 tips
Investing in real estate: 10 tips
Video: Investing in real estate: 10 tips
Video: 5 Successful Real Estate Investing Tips for 2020 - Millennial Money 2023, February
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An investment in real estate can promise high returns, especially in times of low interest rates. Read here what you should look for in this type of investment in order to achieve the best possible result for you.

Table of contents Table of contents Investing in real estate: 10 tips for sustainable success

  • Consider investment as a long-term investment
  • Weigh the pros and cons
  • Choose investment properties carefully
  • Tip 4: Find the right property
  • Realistically assess the market value
  • Know the purchase price and incidental purchase costs
  • Tip 7: choose the right financing
  • Tip 8: Realistically assess the return
  • Know the advantages and disadvantages of own use / rental
  • Tip 10: Choose tenants wisely

Table of contents Table of contents Investing in real estate: 10 tips for sustainable success

  • Consider investment as a long-term investment
  • Weigh the pros and cons
  • Choose investment properties carefully
  • Tip 4: Find the right property
  • Realistically assess the market value
  • Know the purchase price and incidental purchase costs
  • Tip 7: choose the right financing
  • Tip 8: Realistically assess the return
  • Know the advantages and disadvantages of own use / rental
  • Tip 10: Choose tenants wisely

Making the best of saved money is no longer as straightforward as it was a few years ago when you got satisfactory interest rates for overnight or fixed deposits. Today, the interest rate in many places is zero percent or only slightly above it, which means that money placed there will not experience any increase in value - due to inflation, it will even lose value. An investment in investment properties can be a sensible alternative to generate an attractive return with the money. If you are considering investing your money in this form, you should keep the following tips in mind to avoid risks and get the best possible result:

  1. Consider whether the capital investment is right for you.
  2. Know the pros and cons of investing in real estate.
  3. Recognize recommended investment properties.
  4. Find the right property.
  5. Determine the market value of the property.
  6. Pay attention to the essentials when buying the investment property.
  7. Choose the right funding.
  8. Realistically estimate the return.
  9. Decide whether you want to live in the property yourself.
  10. Choose tenants wisely.

Tip 1: Consider whether the capital investment is right for you

The persistently low interest rates currently make buying a property significantly cheaper than was the case a few years ago. At the same time, the low interest rates make other forms of investment such as time deposits or overnight money unattractive. Buying a property therefore appears in many cases as a sensible alternative. However, it must be clear to you that you must have a certain amount of equity that will then be tied up for many years. If this makes you uncomfortable, investing in real estate may not be for you.

If the necessary equity is available, there is creditworthiness and there are no obstacles to tying up capital in the long term, buying a property can be a profitable way to invest your money. Especially if you buy in one of the popular metropolitan areas such as Berlin, Hamburg, Munich, Frankfurt or Cologne, where property prices and rents continue to rise. However, to be sure that home ownership is the right form of investment for you, it is definitely worth realistically considering all the advantages and disadvantages.

Ehepaar im Rentenalter beim Beratungsgespräch
Ehepaar im Rentenalter beim Beratungsgespräch

Pensioners in particular benefit from investing in real estate: they can live in it themselves and thus save rental costs or top up their pension with rental income.

Photo: iStock / fizkes

Tip 2: Know the advantages and disadvantages of investing in real estate

Home ownership has numerous advantages, but also disadvantages. Before you decide to buy investment property, you should be aware of a few points.

What are the advantages of investing in real estate?

The advantages of buying property for investment include these points:

  • Stable value

    The value of private assets is stabilized through the purchase of a property if it complements other types of investment. The existing assets are then spread across different investments, which minimizes default risks.

  • Capital gain

    Investing in real estate generally pays off in both the short and long term: rental income can immediately generate a return. In the long term, an increase in the value of land and house or apartment can be expected.

  • Inflation security

    Inflation minimizes wealth in the long run, as money gradually loses its purchasing power. You can avoid this effect by investing in real estate, as land prices and rental income generally continue to rise.

  • Income from rents

    In areas with high demand, rental income can be gradually increased in line with the rental price brake and the cap in order to increase rental income.

  • Tax benefits

    It is above all the tax advantages that make capital investments in real estate so attractive. The interest payable to finance the property purchased is offset by the rental income. Added to this are the expected expenses for repairs and the management of the property. The building depreciation also helps to relieve capital investors of their income tax returns.

  • Financial security as a pensioner

    If the property was purchased for personal use, investors benefit when they reach retirement age, as there is no rental payment to be made during this period of lower income. If the property was acquired for rent, the rental income supplements the pension, so that there is usually a much greater financial leeway.

What are the disadvantages of investing in real estate?

However, if you use your money to buy a property, you also have to factor in some disadvantages and risks. These are:

  • Maintenance costs incurred

    An apartment or a house needs maintenance as well as maintenance measures here and there. These can sometimes have a significant impact. If the property is part of a community of owners, the power to decide what to repair and at what cost is not in your hands alone.

  • Restrictions on possible rent increases

    Legislation (for example, the rental price brake and capping limit) limits the freedom in determining the rent amount, which in turn limits the return.

  • Reduced yield on follow-up financing

    The currently favorable interest rates may not be permanently available. If a real estate financing with only a short debit interest rate was chosen, a worse effective annual interest rate can possibly be granted with the subsequent financing that will soon become necessary, which reduces the overall yield.

  • Long tie-up of capital

    When buying a property, the capital invested is tied up over many years, usually even over decades, and cannot be used for other investments. In addition, considerable sums are invested. If the property is a bad buy, there is a risk of enormous losses.

  • Administrative expenses for rentals

    If the property purchased is rented out and is not part of a community of owners, the administration will have to pay considerable costs. The extent of this depends to a large extent on the nature and behavior of the tenant. This should therefore be chosen carefully (see tip 10).

Risiken einer Kapitalanlage in Immobilien
Risiken einer Kapitalanlage in Immobilien

When investing in real estate there is always a certain risk: if the property turns out to be a bad buy, a lot of money is lost.

Photo: iStock / Andrii Yalanskyi

Tip 3: Identify recommended investment properties

If you want to invest your capital in real estate, there are various options.

  1. Houses

    If the investment property is to be rented, houses on large plots of land achieve a relatively low return. However, the large site is a huge advantage when selling. A property is a particularly valuable asset. If it is in an attractive location, it is very likely that the property will be able to achieve a significantly higher selling price in a few years.

  2. Apartments

    An apartment as an investment requires more coordination than a house. Because agreement with the community of owners is always necessary here when it comes to community property. Decisions must be made jointly here and are not always in the interests of all owners. If the owner community rejects certain desired measures that would allow higher rental income, this can lead to a loss in yield.

  3. Commercial real estate

    Commercial real estate can reward investors with high returns. However, this gain is associated with a high risk. A strong knowledge of the market is essential to be able to estimate the demand for commercial space. Otherwise, vacancies in real estate threaten to ruin the return.

Tip 4: Find the right property

In order to find the ideal property for you to invest in, it is worth looking into the corresponding real estate portals on the Internet, just like with the "normal" search for a house or apartment. There is sometimes a separate category for investment property in the desired location. Alternatively, a broker can be consulted who is looking for a particularly suitable property for the investment. Although this is associated with considerable costs, it can still make sense if you do not have the time for a conscientious search. Finally, banks and insurance companies can also offer attractive properties.

Basically, the search should be done without hurry - even if the low interest rates attract. A hastily bought property that has deficiencies after the purchase quickly nullifies any return opportunity.

Tip 5: Realistically assess the market value of the property

The high demand for attractive real estate is driving up prices. It is therefore important to keep a cool head and realistically assess the real market value of a property. As a rule of thumb, the price of a house or apartment should be in an area that can be achieved in about 30 years from rental income. This so-called rental multiplier is calculated as follows:

Monthly rent in euros x 360 months (30 years) = reasonable price of the property

Assuming a monthly rent of 1, 600 euros as an example, this would result in this value:

1, 600 euros x 360 months = 576, 000 euros.

The house or apartment should therefore not cost more than 576, 000 euros. Of course, this calculation only provides a rough guide for the price of the investment property. You can get more precise information if you use our guide "How to determine the market value of a property".

Tip 6: Pay attention to the essentials when buying the investment property

When looking for a property, do not only pay attention to the price. Be sure to consider the key factors that determine what the property is currently going to cost and how its price will develop. In addition to the location, this also includes the equipment, the transport connection and other factors in the area, such as shopping facilities, kindergartens and schools, green areas and so on.

Also think about the costs that you incur for investment properties in addition to the purchase price, because the ancillary purchase costs must be taken into account in the calculation if you want to realistically estimate the possible return. These items are part of the incidental purchase costs:

  • Brokerage commission (brokerage fee)
  • Real estate transfer tax
  • Notary fees and court costs

These expenses make up a significant portion of the total cost of buying property.

Verkehrswert ermitteln
Verkehrswert ermitteln

When searching for a suitable property, take the time to realistically assess the market value.

Tip 7: choose the right financing

Depending on how much capital you have, you can get more or less out of yourself when financing real estate. It is advisable to secure the currently low interest rates. If it is foreseeable that the loan can be repaid within a short time (for example within 15 years), the fixed interest rate should be chosen accordingly. Because: The shorter the fixed interest rate, the cheaper the banks' loan offers are generally.

A mortgage loan may also be conceivable with mortgage lending. Here you buy the property fully financed, so that you have paid the investment property in full after the loan term and are free of debts. These full repayment loans can currently also be obtained very cheaply, but the banks generally require quite high repayment rates of up to four percent of the loan amount. Think carefully about whether you will be able to pay this amount monthly over the entire term of the loan.

When financing, also make sure not to choose too little of the loan amount. If the property is rented out, you will regularly earn money on the rent (provided there is no vacancy). However, maintenance measures and / or repairs in the apartment can result in financial expenses that you should roughly take into account in the construction financing. It is advisable to add 10 to 20 percent of the total investment to be prepared for the unpredictable.

Tip 8: Realistically assess the return

What return you can expect from your investment property depends, of course, primarily on the rental income to be expected and the additional costs that you have to pay when you buy an investment property. However, there are other items involved in the calculation.

How to calculate gross return

Assuming the assumed annual rental income of EUR 19, 200 (EUR 1, 600 per month) and the market value of EUR 576, 000, the gross return is calculated as follows:

19, 200 euros x 100 / 576, 000 euros = 3 percent

How to calculate the purchase effort

No expenses (e.g. for repairs and maintenance) are included in the gross return. Likewise, the costs that are commonly referred to as "acquisition costs" are missing. To determine the total purchase cost, add the purchase price to the incidental purchase costs:

Purchase price + notary / court costs + brokerage fee + real estate transfer tax = acquisition costs

In the current example, the purchase cost would be:

576, 000 euros + 8, 640 euros + 20, 563.20 euros + 20, 160 euros = 625, 363.20 euros

How to calculate the net rental income

What income you actually earn from the rent depends on the non-apportionable operating costs and the annual reserve, for example for repairs. The formula here is:

Annual rent - non-apportionable operating costs - annual reserve = net rental income

How to calculate the net return

In order to calculate the actual net return, the cost of interest and repayment of the mortgage must also be included. The tax benefits that come from renting also play a role here.

Net rental income / investment costs * 100 = net return

Assuming, for example, the above-mentioned property and a net rental income of 1, 450 euros per month (17, 400 euros annually), whereby the additional rental costs, reserves and tax benefits have already been taken into account, the net return is calculated as follows:

17, 400 euros / 625, 363.20 euros x 100 = 2.78 percent

Tip 9: Decide whether you live in the property yourself

Whether you live or rent the property you have acquired as an investment has an impact on how lucrative the purchase is for you. Basically, it can be said that rented real estate is better suited as an investment than one that is occupied. One of the reasons for this is that some tax benefits are only granted if the apartment or house is rented.

The advantages and disadvantages at a glance:

Real estate

benefits

disadvantage

self inhabited

  • rent-free living after

    Funding phase

  • Sales after ten years

    possible tax free

  • safe living situation
  • Interest rate risk with follow-up financing
  • Risk of loss of value
  • Residence obligation

rented

  • Tax breaks
  • When sold after ten years:

    tax-free profit

  • safe investment in

    regions in demand

  • long-term financial resources
  • Administrative burden
  • Rental income must be taxed

    will

  • Risk of vacancy in less

    asked

    Locations

  • financial expenses for

    Repairs / maintenance

Tip 10: Choose tenants wisely

If you want to buy the property in order to rent it out, you should once again take the time to look diligently for a tenant. Because its reliability essentially determines to what extent the property pays off for you as an investment.

It is essential to rely on tenants who have the necessary solvency. If there are defaults in the rental payment, this in turn can put you in financial distress if you still have to pay off the real estate loan. It is better to be given proof of income of the prospective customers and to examine them extensively. Also insist on Schufa information to protect yourself from unpleasant surprises. Because once you have nomadic tenants in the house, you quickly face significant problems.

Nadine Kleber

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