Interest rates are rising, less and less equity is available, and the purchase price expectations of the low-interest phase are still echoing in the minds of potential buyers—that is the summary of the real estate market situation in recent months. The desire for financial security is now preoccupying most investors even more: whether it is money inherited or hard-earned savings, they do not know whether they should invest it in fixed-term deposits, call money, stocks, or funds given the current market situation. The following still applies: if you want to invest for the long term and avoid the volatility of the stock market, investing in real estate may still be a good choice in 2024.
How to make a decision
A thorough analysis of the location, the property itself, and the financial aspects is crucial to making an informed decision:
Location:
Location is crucial for long-term value appreciation and stable rental income. Both the immediate surroundings and the region should be attractive in order to avoid vacancies. Factors such as proximity to shopping, medical care, public transportation, and the general environment should be taken into account. The macro location concerns economic prospects, population development, and vacancy rates. Locations with strong economic growth often offer better opportunities for value appreciation and quick re-letting.
Condition of the property:
The property itself should also be carefully examined. Investing in a property as a capital investment makes sense if it can be rented out at attractive rental terms over the long term at a reasonable purchase price. The condition plays a decisive role here: even in the best location, you cannot justify a high rental price if the property is in need of renovation or has other defects. Consulting an expert provides security when buying and helps you estimate any additional costs you may incur.
Return, risk, and (once again) location:
When calculating the return, operating costs such as administration and renovation costs should be deducted from the annual rental income and this figure divided by the purchase price plus ancillary costs. As the rental income is lower after costs have been deducted, the return may be less than 4 to 5% in some circumstances.
The expected return should correspond to personal expectations and the risk should be appropriate. The dilemma with location is that a prime location often comes with higher purchase prices. The decision between a top location and a higher return in up-and-coming areas depends on your personal risk tolerance.
Equity capital & reserves
Financing an investment property requires careful planning, taking into account equity and potential risks. A solid financial foundation and an adequate buffer for unforeseen expenses are crucial for long-term success. We recommend up to
20% equity (but no more than 20% due to interest taxation) and a further 20% for reserves to cover any renovation or modernization costs. If a second property is available as collateral and you have a very high, secure income, financing without equity is possible in some cases.
Real estate as a capital investment: advantages and disadvantages of investing in real estate
In general, real estate is an attractive investment if the return is higher than other forms of investment. Although the return on real estate often cannot compete with that of stocks, it usually offers a safer investment compared to the stock market.
The potential advantages, such as tax benefits, inflation protection, and portfolio diversification, must be weighed against landlord obligations, ongoing maintenance costs, and cluster risk, and should be carefully considered. In detail:
Benefits
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Tax advantages: Investment properties offer tax advantages, as costs such as maintenance expenses can be claimed as tax deductions. In addition, depreciation of two percent per year on the acquisition and renovation costs provides tax relief. If the investment property is sold after at least ten years, the increase in value remains tax-free.
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Inflation protection: Real estate is generally inflation-proof, as purchase prices and rents change in line with inflation. Index-linked rental agreements allow rents to be automatically adjusted to the cost of living, providing natural protection against inflation.
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Sensible diversification of the portfolio: Real estate as a capital investment is a stable addition to a diversified asset portfolio. Since living space is always in demand, real estate can be a safe investment opportunity in the long term.
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Stable value: With the right amenities and location, real estate offers good prospects for stable value or even appreciation over time. This makes it an attractive long-term investment opportunity.
Disadvantages
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Landlord role: Renting out a property can be time-consuming, especially if there are frequent tenant changes or tenants fall behind on their rent. Selecting suitable tenants also requires time and attention.
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Maintenance costs: As a landlord, you are responsible for the regular management and maintenance of the property, including setting aside appropriate reserves for repairs and renovations.
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So-called "cluster risk": Depending on the amount of your assets, a large sum may be tied up in a single real estate investment, which can affect risk diversification. However, if your assets are sufficiently diversified, this risk can be reduced or eliminated.
Brokerage experience meets financial expertise
Our services cover a wide range of real estate aspects, including professional marketing of investment properties, advice on legal matters, and management of rental properties. We place great importance on ensuring that you feel well supported at every stage of the real estate process and are able to make informed decisions.