Real estate as a capital investment
Real estate is still very popular with many investors, whether as a retirement provision or with the aim of building up assets. Particularly in times of low interest rates, many are turning to so-called “concrete gold”, as comparatively safe forms of investment offer no or only minimal returns. At the same time, however, property prices are rising, especially in major cities and their surrounding areas, which in turn can have a negative impact on the return on investment.
Is a property worthwhile as an investment?
Whether investing in real estate is worthwhile depends on:
- Location of the property
- Substance of the property
- Long-term development of the property
- Rent multiplier
In addition, the goals you are pursuing with the investment in real estate are important, e.g. whether you want to achieve a return on the property by selling it later or whether your focus is on permanent rental income.
Location of the property
The location of the property is basically the most important criterion, as the location has the greatest influence on whether the investment pays off, i.e. whether it increases in value in the long term. The following aspects in particular play a major role here:
- Transport links
- Doctors
- Schools
- Daycare centers
- Shopping facilities in the surrounding area
However, you should also consider the so-called macro situation, i.e. the prospects of the region, when investing in a property. This includes the following factors, among others:
- Economic perspective
- Population development
- Vacancy rate for rental apartments
Building fabric
Assessing the condition of a property correctly, and therefore the price, requires specialist knowledge.
When buying an old building in particular, a surveyor should therefore always value the property in order to determine whether the purchase price is reasonable and to better estimate possible renovation costs.
Return and risk when buying real estate
Whether real estate is worthwhile as a capital investment naturally also depends on the expected return. Particularly in prime locations, it is becoming more difficult to achieve the desired return due to the sharp rise in purchase prices combined with rents that are not rising to the same extent. At the same time, you must bear in mind that prime locations entail a lower investment risk, which is more or less 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. And bear in mind that renovation costs and vacancies can significantly reduce the return on the property.
Consider ancillary purchase costs when buying real estate
The property price is only part of the costs to be paid by investors when purchasing a property. The following one-off costs must also be taken into account:
- Broker commission
- Transfer tax
- Notary fees
- Land register fees
- Debenture bond levies
Real estate as an investment – advantages and disadvantages
The purchase of a property is associated with a high investment sum and should therefore be well thought out and examined. And as with most capital investments, investing in real estate also has advantages and disadvantages:
Advantages of real estate investment
- Tax return: Many costs can be claimed, e.g. maintenance costs, depreciation
- Good addition to an investor portfolio, as living space is always in demand and real estate is less volatile than share prices
- High value stability, provided the location and furnishings are right, possibly also value appreciation
Disadvantages of real estate investment
- Letting can involve a lot of effort, e.g. with frequent tenant changes
- running costs in the course of letting for administration and maintenance – reserves are required
- Cluster risk if real estate accounts for a high proportion of the investment – of course always dependent on the investor’s assets and the scope of other investments
Rent out a property or use it yourself
Rented properties are generally a better investment than owner-occupied properties – thanks to rental income and tax benefits. Although owner-occupied properties save on rental payments, this is only an advantage if you have invested a lot of equity in the purchase of the property and the monthly costs are low.
Many people see owner-occupied property as a retirement provision. However, you should bear in mind that the property does not generate any additional income and ancillary costs will continue to be incurred. In addition, owner-occupiers must plan reserves for repairs and maintenance.
Alternatives to buying real estate as an investment: real estate funds and crowdinvesting
If you don’t want to invest large sums in real estate, you don’t have to give up investing in real estate altogether. There are also the following alternatives:
Crowdinvesting
Several investors participate in a real estate project. The aim is to get back the investment plus interest and to share in the profits from the property. Due to the low investment amounts, investors also have the opportunity to invest in several real estate projects. In addition, crowd investing does not involve any administrative costs for investors.
Shares in real estate companies
By purchasing these shares, investors acquire shares in real estate companies, e.g. housing associations, real estate agents or construction engineering firms.
Real estateETFs
These investment funds are based on the performance of various real estate share indices.
Real estate funds
Through shares in a real estate fund, investors become co-owners of one or more properties. A distinction is made between open-end and closed-end real estate funds:
Open-ended real estate funds
In these funds, several properties are purchased from the “pot” into which investors pay. Investors can purchase additional units at any time; the amount of units in an open-ended real estate fund is not limited.
Closed-end real estate funds
Here, investors generally invest in a specific property. Once the financing has been completed, the real estate fund is also closed. These funds have fixed terms, i.e. the capital invested can only be repaid after a certain period of time. With the higher risk compared to open-end funds, a higher return is also possible with closed-end real estate funds.