What habits are worth investing in

Investment property

Why an investment is worthwhile

1. What are investment properties?

You can live comfortably and quietly in real estate, but you also build up your wealth and make provisions for old age. Investors who value security and want to take advantage of profit opportunities like to invest in investment properties that promise secure returns. Properties that generate a regular cash flow in the form of rental income are referred to as real estate investments. This includes rented commercial and residential properties such as single and multi-family houses as well as condominiums. You can also invest in real estate indirectly, through real estate funds or real estate loans. In 2017 in particular, the real estate markets in major German cities and metropolitan areas are experiencing a real boom. But not every property is suitable for capital investment.

2. Why should you invest in real estate?

An investment in real estate pays off for several reasons, not only the lack of alternatives due to the long-term low interest rate phase and low-interest real estate loans speak in favor of it. Real estate is a low-risk and stable investment. Any well-diversified portfolio should include a portion from the real estate asset class. In this way, investors secure a long-term source of income and balance out price fluctuations in other asset classes such as stocks or bonds.

  • Advantages for real estate investment:
  • Disadvantages for real estate investment:
  • - minor fluctuations in value
  • - high acquisition costs, resulting in a lack of diversification
  • - long-term constant yields
  • - long-term capital commitment
  • - Crisis-proof material assets
  • - Selection difficult and time consuming
  • - longer-term growth in value
  • - Location-related
  • - secure capital investment
  • - unsuitable for short-term investment
  • - long lifetime
  • - invisible defects can occur
  • - tax advantages
  • - The hassle and hassle of renting
  • - is used for old-age provision
  • - Price drops and an increase in the tax burden are possible
  • - Loan possible
  • - high follow-up investments may be necessary
  • - better protection against inflation

3. How do you find the right investment property?

The search for the right and worthwhile property can be difficult because private investors lack the expertise or the demand for certain properties is very high. Real estate agents can be helpful when searching for real estate, as can social media, real estate portals, databases or advertisements in print media. Personal recommendations or so-called word-of-mouth information can also help interested parties find the right property. It is advisable to inspect the property beforehand in order to discover hidden defects. The geographical location is decisive for the price of the property, the development, orientation and contaminated sites of the property are important.

The Location of the object is the decisive criterion as to whether the real estate investment makes sense or not. The location of the property can become a risk factor or the decisive aspect for a high rental yield. Only properties that are specifically selected from the point of view of future viability ensure future value growth. Investors who acquire real estate in locations with population growth, developed infrastructure and existing jobs can assume permanent rentability and stable demand. There is increasing demand for real estate in certain regions with promising future prospects, so there is inevitably potential for price increases there. In larger cities, for example, it is easier to find tenants with first-class credit ratings.

The micro-location in particular is decisive for the success of the investment. If there is good transport links in an attractive area in a reputable neighborhood, the property will permanently attract tenants. A lively area with lots of green is appreciated by many people. The house itself should of course be in good condition and equipped with modern technology.

First of all, the property should present itself without structural defects on the facade, windows or roof. The building structure must not only look good, it must also withstand a technical examination. The year of construction of the house and the maintenance of the property are decisive for this. The equipment in the apartments should be modern and functional in order to attract tenants. The shape and size of the residential or commercial units must be tailored to the requirements of the rental market and the economy so that continuous income can be achieved for the profitability of the capital investment.

4. What real estate investments are there?

Real estate investments can be divided into different categories:

Houses and homesthat are partially inhabited by the owner have the advantage that the owner can make all design decisions himself. Whether and how many solvent tenants can be found depends on the location of the property and the commitment of the owner. Time and costs must be budgeted for the search for tenants. The energetic equipment of the house is a decisive factor for the operating costs and the finding of suitable house residents. Borrowing is often required to buy a house. Apartments or condominiums are cheaper than a whole house; apartment owners have to pay housing or house money for the repair and maintenance costs. The disadvantage of a condominium is that the owner is dependent on the goodwill of the community of owners, for example in the event of significant changes.

Commercial real estate or global properties such as shopping centers, hotels or office buildings usually guarantee very long-term rental income. Loss of rent is rather rare at large companies or international groups. If, on the other hand, it is rented to small businesses or solo self-employed persons and freelancers, rents may not be available and the profitability of the property may be endangered. Commercial real estate returns are generally higher than residential real estate, but the entrepreneurial risk is significantly higher due to the size and capital outlay.

With the purchase of Real estate fund shares small investors who lack the capital for their own economic property participate in promising properties in various regions. You do not have to worry about the selection of the properties and benefit from the increases in value of the fund shares. After a legally stipulated minimum holding period, owners of open-ended real estate funds can convert their shares back into liquidity at any time. Buyers of investments in closed real estate assets, on the other hand, usually have to allow for a long investment period.

Digital real estate investments are a relatively new form of investment that can be used to successfully invest in real estate without investing a lot of money. Crowdinvesting platforms enable private individuals to achieve high returns, for example from financing property developments or renovating existing properties. There are no additional costs involved.

DIGITAL REAL ESTATE INVESTMENTS

Exporo opens the door to the world of real estate investments for you - simple, digital and free of charge.

5. Which types of property can be distinguished?

The expected returns are different for the individual real estate investments and are therefore associated with different types of risks. These primarily depend on the type of investment property. A distinction is made between new buildings, used or existing properties, listed properties and foreign properties.

Listed real estate are sophisticated, attractive buildings that can pay off for investors. They are in demand with solvent tenants, as these are mostly uniquely renovated old buildings in popular areas. Although this goes hand in hand with increased repair and maintenance costs, these can be compensated to a limited extent with higher rental income, subsidies and tax advantages. In the case of rented listed buildings, the renovation costs must be offset against tax over twelve years. The depreciation is higher than for other buildings; for eight years, seven percent of the renovation costs can be deducted for tax purposes for nine years and four additional years.

New building objects can be realized by contracted construction companies or bought as a new building from the property developer. Building a new one requires a lot of time, research and capital. However, new-build properties can be planned according to the investor's ideas and do not require renovation for years. The latest energetic and technical housing standards ensure that the running costs of the property are low. However, rising construction costs and rent increase limits result in higher returns on existing properties.

The profitability of real estate second hand primarily depends on the purchase price of the property and upcoming renovation and modernization measures. Therefore, investors have to watch out for hidden defects and should obtain an appraisal of the used property. Since smaller house types such as semi-detached or chain houses have a high proportion of real estate in real estate expenditure, the return is correspondingly lower than in multi-family houses with higher rental income. Vacancies are rare in small house types. The disadvantage of the lower rental income can turn into an advantage when selling, since a property in a good location generally experiences increases in value later.

Buying a property abroad is a complex process. Foreign properties are subject to the same requirements as domestic properties if an appropriate return is to be achieved. Investors face more potential hurdles, however. Risks lie in different legislation, unknown language and habits as well as higher ancillary or consequential costs of buying a property. Therefore, well-founded and complete information on purchasing property in a foreign country is required in advance.

6. What returns can you achieve?

For the investor, the return is the decisive point when purchasing the property, whether the investment is worthwhile or not. The return on a real estate investment can be clearly calculated so that the investor knows exactly what profit his investment will generate. The following value is required to calculate the property return: the earnings value of the building, which results from the purchase price or production costs and the annual income in the form of the calculated rental income.

The returns on the investment property market range between around two and twelve percent per year. However, this statement is very generalized and is of little use to investors, because real estate returns are exclusively property-related and individual. They depend on the type, location, age and equipment of the property. So that investors do not assume that the promise of returns is too high, a distinction must be made between gross and net rental returns. Identifying the Real estate return for a semi-detached house, for example, could look like this:

  • Net cold rent per year:
  • 18.000 €
  • Gross Rental Return:
  • € 18,000 / € 350,000 x 100 = 5.14%
When calculating the net rental return, additional parameters must be taken into account. All costs are to be included. This concerns the ancillary acquisition costs, the non-apportionable management costs, renovation, repair and administration costs as well as the house money and the loan interest in the case of apartments, if the property was financed by third parties. On the income side, the tax advantages are to be included. In the example, a realistic calculation looks like this:
  • Total effort:
  • € 350,000 purchase price + € 43,750 incidental acquisition costs = € 393,750
  • Annual net income:
  • € 18,000 net cold rent - € 500 administration - € 1,000 maintenance = € 16,500
  • Net rental return:
  • € 16,500 annual net income / € 393,750 investment costs x 100 = 4.19%

WHAT COSTS DO YOU HAVE TO EXPECT?

In addition to the purchase price or the production costs for the property, additional expenses must be calculated, which are referred to as ancillary costs of the property acquisition. These are the following positions:

The brokerage fee is freely negotiable. In some German federal states, the seller and landlord share the commission, in others it is borne by the buyer alone; it is usually between 3 and 7 percent of the purchase price. The real estate transfer tax is due when buying real estate or property; depending on the federal state, it is between 3.5 and 6.5 percent of the notarized purchase price. Notary and court costs are unavoidable fees for the notarial certification and entry in the land register of the change of ownership in accordance with the state fee schedule, they amount to approx. 1.5 percent of the purchase price. The administrative costs include the building management expenses of the property manager and landlord, management and auditing of the annual financial statements, they depend on the individual property. Maintenance reserves serve to maintain the value of the property, the money is put aside for repairs that may arise, the older the property, the higher the reserves must be. On the basis of the business plan that has been adopted, apartment owners pay housing or house money to the property management company, the amount of which depends on the furnishings of the property and the residential units.

INVESTING DIGITALLY IN REAL ESTATE WITH EXPORO

There are attractive investment alternatives even in times of historically low interest rates. Via Exporo you can participate in the high returns on investment properties on a joint basis with the crowd. Crowdinvesting for real estate has many advantages; even small amounts of 500 euros are sufficient for investments in the real estate market. In this way, private investors spread the risks across different locations and properties. You can participate in the medical center in Hamburg as well as in luxury apartments in Potsdam without having to invest a lot of time and capital. The investor money is only bound for short to medium-term periods, mainly for two to three years. You invest in new property development projects or revitalized existing properties. In return, investors receive a fixed, lucrative interest rate for their money from day one. The investment is made in a relatively late planning phase, which increases the safety of the system. In contrast to buying their own real estate or real estate fund shares, private investors do not pay any additional fees, and there are no closing costs at all This is also based on the simple digital processing via the Internet platform. When choosing a project, use the technical expertise of one of the pioneering companies in innovative real estate investing and participate in quality real estate like professionals.

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