Real Estate
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Real Estate as an Investment
In recent years, real estate has continued to be very popular among many investors, whether they are investing as a retirement provision or as a means of building up assets. Particularly during times of low-interest rates, many investors invest in real estate because comparatively safe investments offer little or no return. Nonetheless, real estate prices are on the rise, particularly in major cities and their surrounding areas, and this can negatively affect investment returns.
How Valuable is Real Estate as an Investment?
It is important to consider the following factors when deciding whether to invest in real estate:
- Location of the property
- Substance of the property
- Long-term development of the property
- Rent multiplier
Moreover, the goals you pursue with your real estate investment are essential, e.g. whether you wish to generate a return by selling it or whether the focus is on generating a constant rental income.
Location of the Property
In general, the location of the property is the most important factor, since it has the greatest impact on whether or not it will pay off, i.e. whether it will increase in value in the long run. Particularly important are the following aspects:
- Good transport connections
- Doctors
- Schools
- Daycare centers
- Shopping facilities in the surrounding area
When investing in real estate, you should also consider the macro-location or the prospects of the region. This includes the following factors, among others:
- Economic outlook
- Population development
- Vacancy rate for rental apartments
The Substance of the Property
The ability to accurately assess the condition of a property and, consequently, its value, requires expert knowledge.
Particularly when purchasing an old building, an appraiser should always evaluate the property, both to determine whether the purchase price is appropriate, and to estimate possible renovation costs.
Real Estate Investment: Returns and Risks
The expected return on real estate is also an important factor in determining whether it is a worthwhile investment. Due to the strong increase in purchase prices and the relatively stable rents in top locations, it is becoming increasingly difficult to achieve the desired return. Nonetheless, it is important to remember that top locations carry significantly lower investment risk, roughly in line with the rule of thumb for all capital investments:
low risk = low return
When calculating the return on a rented property, it is also important to deduct the management costs from the rental income. Additionally, keep in mind that renovation costs and vacancies can substantially reduce the return on the investment.
Buying Real Estate: Consider Ancillary Purchase Costs
Investors must pay more than the property price when purchasing real estate. There are also the following one-time costs to consider:
- Brokerage commission
- Real estate transfer tax
- Notary fees
- Land registry fees
- Debt certificate fees
Real Estate as an Investment - Advantages and Disadvantages
The purchase of real estate involves a substantial investment and should therefore be carefully considered. There are advantages and disadvantages to investing in real estate, as with any capital investment:
Advantages of Real Estate Investments
- Tax return: many costs can be claimed, e.g. maintenance expenses, depreciation
- Investing in real estate makes a good sense, as housing is always in demand, and real estate prices are less volatile than stock prices
- As long as the location and equipment are appropriate, there is a high likelihood of stability of value. There is also a possibility of appreciation.
Disadvantages of Real Estate Investments
- Renting can be associated with high expenditures, such as frequent tenant changes.
- The cost of administration and maintenance during the letting period - reserves are required
- Cluster risk, if real estate takes a high share of investment - of course, always depending on the assets of the investor and the extent of other investments
Renting or Using the Property
The rental income and tax advantages associated with rented property generally make it a more desirable investment. Despite the fact that owner-occupied property reduces rental payments, this is only a benefit if the monthly burden is low.
Many people consider owner-occupied properties to be a form of retirement planning. There is, however, no additional income generated by the property and ancillary costs continue to be incurred. Aside from planning for repairs and maintenance, owner-occupiers must also set aside funds for emergencies.
Alternatives to Buying Real Estate as an Investment: Real Estate Funds and Crowd-investing
Even those who are not interested in investing large sums in real estate do not have to give up investing in real estate. Alternately, you may consider:
Crowd-investing
There are several investors participating in a real estate project. It is aimed at recouping the investment plus interest as well as sharing in the profits. Moreover, due to the low investment amounts, investors have the opportunity to invest in a variety of real estate projects. Moreover, crowd-investing does not incur any administrative expenses for the investors.
Shares in Real Estate Companies
A real estate investor acquires shares in real estate companies, such as housing associations, real estate agents, and construction engineering firms.
Real Estate ETFs
A variety of real estate stock indices are used as a basis for these investment funds.
Real Estate Fund
Investors become co-owners of real estate properties through the purchase of shares in a real estate fund. It is important to distinguish between open-end and closed-end real estate funds:
Open-end Real Estate Funds
The "pot" into which investors contribute is used to purchase a number of properties. Open-end real estate funds allow investors to purchase additional shares at any time, and the number of shares is not restricted.
Closed-end Real Estate Funds
In this case, investors usually invest in a specific property. As soon as the financing has been completed, the real estate fund will be closed. There are fixed terms associated with these funds, meaning the capital invested can only be repaid after a certain period of time has passed. While closed-end real estate funds have a higher risk than open-end real estate funds, they are also likely to yield a higher return.
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