Why is real estate profitable

Real estate as a capital investment: this is how it pays off

What investment strategy do you pursue with real estate as a capital investment?

There are good reasons to buy a property - such as a rented apartment - as an investment. Sometimes a tax saving is in the foreground. Other buyers focus on increasing their capital investment or just want a short-term investment and are planning to sell the investment property again quickly. Still others want to use the property for their retirement and plan for the long term.

But how do you finance this investment? What should you look out for when investing in a property as a capital investment? What risks do you have to consider when investing in real estate? And how much return should a property bring so that it is worthwhile?

Whatever your plans, with our help you will develop the perfect individual investment strategy for you. Here we go!

Strategy 1: You want to use real estate as a safe and profitable form of investment

The current low interest rates make it difficult to invest money profitably. Call money and fixed-term deposits offer a high level of security, but a low return. In addition to stock portfolios, ETFs and crowd investing, rented properties are therefore becoming increasingly attractive as investment properties. A property is a valuable asset, the value of which usually increases over a longer period of time. However, this has its price: very few can buy the property for capital investment from their own budget, but finance it with a building loan. Even building financing without equity is possible, in which you only pay the incidental purchase costs from your own funds.

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Either way, with an investment of this size, you should be aware of the risks involved in real estate investments:

  • Don't underestimate the maintenance needs of a home or condo as an investment. As a rule, you can only maintain the value of a property and, at best, increase it through regular maintenance and modernization measures. Large sums of money have to be budgeted for this: the roof renovation of a single-family house costs 15,000 - 25,000 €, a new bathroom at least 10,000 € and the replacement of windows starts at 8,000 €.
  • Regardless of the condition of the property itself, its value is also determined by the popularity of the location. In the worst case, it can happen that real estate prices develop differently than you calculated. Then you may find it harder to resell or rent the property than planned.
  • Even large real estate companies have repeatedly had bad experiences with rent nomads, outstanding rent payments or tenants who let the building fabric deteriorate - for example, by hardly heating and ventilating and thus causing moisture damage. Loss of rent, however, is hardly included in the calculation when financing banks.

Danger: Avoid the so-called lump risk! Do not invest all of your capital in one form of investment. By buying an investment property, it is tied for the long term. Don't rely solely on property returns. Spread risks and invest in several forms of investment.

Strategy 2: You want to save taxes with the investment property

In addition to the return, the depreciation options are also interesting for real estate as a capital investment. You can deduct part of the purchase price or construction costs from tax: For properties that are older than 1924, over 40 years of age at 2.5% of the costs, and for younger ones over 50 years of age with 2% per year.

The greatest tax advantage concerns the rental income: You do not pay taxes on this directly, but can deduct everything that you have spent on the property in the same year. These include:

  • Repair and renovation work
  • Interest costs for the building loan - buyers who are primarily concerned with tax depreciation therefore usually choose the lowest possible equity share and a low repayment in order to keep the interest share high.
  • Broker and advertising costs
  • ride costs
  • Listed buildings can be of particular interest because they offer additional opportunities, for example for modernization or restoration measures

Strategy 3: You want to achieve high returns with real estate in the short term

Are you familiar with property prices, can you analyze which locations will gain in value in the future? Do you have an information advantage? Maybe because only you know that the transport links will improve in the foreseeable future and that an unattractive location will therefore be sought after? Well then, go ahead: Turn your knowledge into money by financing the right income property for your strategy. Of course, there is no such thing as speculating without risk. It is therefore better to consult a real estate specialist.

And think of the speculative tax that is levied on property sales profits. It corresponds to the personal tax rate that you pay on your income. You can only avoid speculation tax if you have only used the property yourself or at least in the year of sale and the 2 previous years or if you have owned the property for at least 10 years.

Strategy 4: You want to use investment properties as a retirement provision

If you want to finance a condominium or a larger property as a capital investment for retirement benefits, you should make sure that it is paid off by the time you retire. Longer financing with a fixed interest rate of 15-30 years provides security, and the highest possible repayment rate makes sense. With this strategy, you should also bring in a higher equity ratio.

These factors affect the return on your property

Always calculate the return on your property yourself - and do not naively rely on the return promises made by brokers or property developers. These are mostly based on very optimistic premises.

These are the most important points that determine the level of the return:

  • The purchase price affects the rental yield

    When it comes to the purchase price, you should not only pay attention to the standard land values, but also what the relationship between the purchase price and the rental income that can be achieved per year is. If the ratio is 1 to 20, you can assume a good purchase (for example, if the monthly rental income is € 800 and the property cost € 192,000), a factor of 25 is often the normal case (e.g. with monthly rental income of € 800 and a purchase price of € 240,000). If the factor is even higher, it is rather unfavorable for the return (i.e. if the property is more expensive than € 250,000 with monthly rental income of € 800).

    Example: good return, poor return on rented properties

     good returnaverage returnbad return
    Rental income800 €800 €800 €
    Purchase price of the property192.000 €240.000 €more expensive than € 250,000
  • Keep administrative costs as low as possible

    Will you manage the property yourself and will you be responsible for the tenants? Or is there a property management company or an owner association of apartment owners that has hired an administrator? How high are the corresponding administrative costs?

  • Include the additional purchase costs in your calculation

    When purchasing a property, there are incidental purchase costs such as real estate transfer tax, notary fees, broker's commission and costs for the entry in the land register. You should take this into account when financing the real estate investment.

  • What is the year of construction of your investment property?

    The age of the property determines the tax depreciation options: With regard to the building, the acquisition costs are deductible for 40 years at 2.5% (for buildings older than 1924) or 50 years at 2%. There are additional options for listed properties.

  • Consider property maintenance costs

    What are the costs that you will have to invest in maintaining your investment property in the coming years? In the case of condominiums, you should also include the running ancillary costs. For example, how much is the house money to maintain the communal property?

  • How long do you want to keep the property as an investment?

    What investment strategy are you pursuing with your real estate investment? Do you want to resell the property? If so, in what period? What statements can be made with regard to the performance?

  • Think about follow-up financing

    For how long have you fixed the fixed interest rate when financing your investment? Bear in mind that interest rates can change and, in the event of follow-up financing, a lower interest rate could reduce the return.

How much return should a property bring as an investment?

It depends on what you expect from your real estate investment. If you take into account the effort and risks involved in investing in real estate, your rental return should be at least 4%.

To calculate the rental yield, compare the expenses and income.

  • In the first step, you calculate the total purchase price by adding the additional costs for the property purchase to the purchase price.
  • In the second step you calculate the net rent without any heating. This corresponds to the annual basic rent, from which you deduct the non-apportionable costs such as the house money (as this expense reduces your income).
  • In the third step you divide the net rent without the total purchase price. The result corresponds to the net rental return. You can use this value to compare the potential of several properties with one another.

Sample calculation of the net rental return for a real estate investment

Total purchase priceNet rentNet rental return
€ 320,000 purchase price + € 48,000 ancillary costs = € 368,00016,800 € basic rent - 2,640 € non-apportionable costs = 14,160 €14.160 € / 368.000 € = 0,0384 * 100 = 3,84 %

Do not rely on the glossy prospectus of a realtor or property developer when calculating the return. Often these simply leave out the ancillary purchase costs and costs for property management or use the warm rent as rental income. Check their assumptions and take a close look at how they are calculated. If there is a point that you cannot understand, have it explained to you.

Who would like to continue calculating:

In order to determine your individual real estate return in addition to the rental return - i.e. the actual increase in value of your investment - you have to go one step further. You can calculate the net result of your property by deducting the non-apportionable costs as well as the interest costs for your building loan and the taxes on your rental income from the basic rent. By dividing this net result by the equity you invested, you get the return on equity. It decreases over time, as the repayment installments allow you to put more equity into the financing month after month.

Tips on the return on your property

  • The rental income should largely support the monthly interest and repayment installments. But do not calculate with the full rental income. Consider possible loss of rent and the need for maintenance on the rental property. For maintenance purposes, banks usually set lower values ​​than you should do in your return calculation. Assume that you have to invest around 1% of the purchase price in maintenance measures every year. Also consider: The costs for property management cannot be passed on to the tenants and therefore reduce the rental return.
  • After a modernization, you can in many cases increase the rent and pass 8% of the construction costs on to the tenant annually. Once the modernization has been paid off, the higher rent remains. As a landlord, however, you must first advance the funds.
  • Resale value: The condition of the property at the time of resale is decisive for the price development, as is the regional apartment or house market.

Which properties are suitable for capital investment?

Apartments, tenement houses, single-family houses or commercial real estate - what are the possible options for private investors?

In the case of a condominium, it depends on the community of owners

In comparison, a condominium is the cheapest property to buy for an investment. It should be noted, however, that you will become a member of an owner association. If this is divided, you are - whether you like it or not - a participant. Before buying, take a look at the minutes of the owners' meeting: is there a lot of argument? Are beautification measures planned that do not have a positive impact on the achievable rent and that reduce your return accordingly? Are sufficient reserves set up for renovation work, for example on the roof or the replacement of a heating system? Is there a renovation backlog?

A complete rental house can save you trouble

Anyone who can afford to buy an entire apartment building does not have to coordinate with other owners. Above all, nobody can put a tenant in it that has an adverse effect on the peace of the house.

In a single-family house or terraced house with a garden, you have to separate the building from the property

It should be noted here that only the costs for the construction or acquisition of the building are tax-deductible. So you have to separate the cost of buying a building and buying land. However, a garden can have a very positive effect on rentability or resale value.

Commercial real estate is more suitable for professionals

The risks associated with commercial real estate as a capital investment can hardly be calculated for private investors with no experience. If you are not familiar with commercial leasing law, you better stay away from it.

What alternatives do investors have who want a high return?

Few products promise a good return at the current level of interest rates.

  • Anyone who does not want to bear the risk of real estate as a capital investment alone or is afraid of the expense can rely on crowd investment. You invest small amounts in a project together with other private investors. You can find offers for crowd investing in our crowd investing comparison.
  • Another alternative for investors are ETFs. These are listed funds that are based on stock indices such as the Dax and mean little effort for the investor. You can find offers for ETFs in our ETF comparison.
  • Real estate funds: As the capital of many investors is bundled in real estate, the individual investor has to invest comparatively little. However, he has hardly any influence on the fund's actions.

Whether rented real estate makes sense for you as an investment does not only depend on your financial resources. It is also important whether you accept that you may also be asked after work: As a landlord, as a contact person for property management or as a co-owner of a community of apartment owners who make decisions together.