Which property should I invest in?
Real estate as an investment: 10 traps that investors find themselves in
Valeria Nickel, January 7th, 2021
Real estate as a capital investment is booming - it is not for nothing that people speak of “concrete gold” here. According to the Federal Statistical Office, the ownership rate in Germany is around 46.5% on average. Buying apartments or houses directly and benefiting from the rental yield as an owner or living rent-free is the most common way of using real estate as an investment.
The reason for the boom is the loose monetary policy of the European Central Bank. Startled by the low interest rates for the classic savings book - which, by the way, is still the most popular investment among Germans - many savers are redeploying. They follow the motto "Only cash, concrete and gold is true". For them, protection against times of crisis or old age is more important than building up assets, as a survey by Deutsche Börse Commodities shows.
The trend towards real estate investment is favored by the low mortgage rates. According to FMH, a mortgage loan with a ten-year fixed interest rate currently costs an average of 0.66% compared to 3.85% 10 years ago (as of January 7, 2021). Financing a loan for the purchase of a property is therefore an easy game.
In addition, high increases in value rule the real estate market in metropolitan regions and large cities. As a result, a constant increase in rental income for owners in these regions can be expected.
The advantages of real estate as an investment are obvious. However, investors should not rush into anything, because real estate as an investment also carries a certain risk.
1 | Lump risk
If you put all your assets on just one project, there is a so-called “cluster risk” - in the case of a losing business there is no risk distribution and the investor loses all of his investment.
2 | Capital commitment
When buying a house or apartment, you usually have to raise all of your savings and take out a loan. This means that a lot of the saver's money is tied up in a real estate investment. He cannot dispose of it for a long time - if not for the rest of his life.
3 | operating cost
The annual cold rents that a property owner receives are by no means equal to the return on real estate capital investments. In order to calculate the net return, taxes and costs caused by the property must be deducted from the profit (annual cold rents). In doing so, homebuyers should consider the high administrative expenses Do not underestimate the building fabric. Also through Maintenance measures high costs can arise. For landlords in particular, they are a real return killer.
4 | Caught up, hung up
If you only buy an apartment within a house, you have to consider that with your capital investment you will become part of the home ownership community. This brings with it obligations, because the apartment owners share, for example, the hallway or the roof of the house in which their real estate investments are located. So they can only decide about certain things together. Here you can Problems with the community of owners arise, because cost-intensive improvements are often decided that hardly increase the value of the residential complex. Conversely, it can also happen that the home owner community decides against measures that could increase the value of the investment.
5 | No guaranteed growth
Many investors rave about the appreciation of real estate in metropolitan areas. But real estate prices in big cities are already very high due to the big boom - no one can guarantee that they will continue to rise. In addition, the demand and thus also the net rents develop differently depending on the city and the location of the property.
6 | time is money
If you want to buy a property, you have to have enough time for your capital investment - on the one hand to find the right property, on the other hand to manage it. The investment must be carefully considered for a long time. If you also decide to rent the property without intervening a property management company, you also have to plan time for inquiries from tenants.
7 | Additional purchase costs
When buying a house, in addition to the actual property price, the additional costs also have to be taken into account. Future property owners should definitely include them in their overall planning when buying a property. These include between three and six percent of the purchase price for the broker, the fees for the notary and land registry as well as the real estate transfer tax, which is between 3.5% and 6.5% of the purchase price. All of these expenses ultimately reduce the return on real estate investments.
8 | Long-term investment horizon
You should also be aware that buying a property only makes sense in the long term. In the short term, it is usually not worthwhile because the property's value growth is slow. Therefore, this type of capital investment is only for the long-term investment horizon.
Prevention is better than aftercare: With a power of attorney, you can insure what happens to your property should you be unable to act for any reason. This is how you can protect yourself against misuse.
9 | Hidden flaws
Annoying when you have paid a high purchase price: There may be defects in the property that only become visible afterwards. You may then have to invest additional money that was not previously taken into account. Large reserves are particularly important when investing in real estate.
10 | Landlord risk
Being a landlord has it all: Trouble with late rent payments, costs for changing tenants and vacancies as well as the associated loss of rent reduce the rental yield or cannot be covered at all by the rental income. They represent a great risk for real estate as an investment. A study by the Institut der Deutschen Wirtschaft (IW) from 2017 found that a total of 7.4% of private landlords generate losses with their investment property instead of generating substantial rental returns.
Vacancy periods are particularly risky for owners who finance the purchase or new construction of the property with a loan beyond the existing equity. If the expected rents fail to come, for example because the demand is not as great as expected due to the location of the property, the loan may not be repaid as planned. The original calculation of the financing plan no longer works.
Alternative: real estate crowdinvesting
Compared to people who rent out single-family houses or condominiums, investors who invest money in multi-family houses and apartment buildings or who own several properties receive a higher return: more brings more. To invest in larger projects, however, you need a lot of capital. Investing in the so-called mezzanine capital was therefore previously reserved for large investors. Real estate crowdinvesting offers an alternative form of investment: Here investors can benefit from the advantages of investing in real estate and at the same time reduce the risks of investing.
This involves joining forces with other investors via an internet platform such as BERGFÜRST and raising the necessary amount together. This so-called swarm financing therefore already works for the individual small sums. So you can invest in several real estate projects at the same time without having to raise a lot of money.
This is also favored by relative short terms and trading options, which means that the investor's capital is not tied up for a long time and remains flexible. In addition, thanks to the lean online structures, there is one fast flow of information: On the crowdinvesting platform, you can find out everything you need for your investment decision and, if you have any questions, you can communicate directly and easily with the real estate company via the website.
After the investment, you don't have to worry about the administration or argue with the tenants of the property - this maximizes the already high interest rate for the investor. Due to the low minimum participation, similar to real estate funds, a good risk diversification is possible: the investor does not have to put everything on one card as with an individual property. Crowdinvesting is therefore a new, exciting investment alternative for self-determined investors who use real estate as a capital investment and at the same time want to free themselves from the disadvantages of buying real estate.
Image copyright: Fer Gregory / Shutterstock.com
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