The boom on the German residential property market will continue in the current year. Property owners can look forward to a positive development in the value of their houses and apartments, as can be seen from the development of purchase prices in the current IVD housing price index 2021/2022. So it is not surprising that more and more private investors want to benefit from the growth in the real estate market. While savings investments hardly yield any interest, financing a property is cheap thanks to low interest rates. However, there are some pitfalls to be aware of when buying and renting residential property. When exactly is such a property profitable? What costs do landlords have to expect? And what should you look out for when purchasing real estate? In its new series, the Immobilienverband Deutschland IVD explains to investors how they can successfully invest in residential real estate in the current market environment.
Requirements when buying real estate
The location of the property in particular determines whether long-term increases in value and stable rental income can be expected. In addition to a good local infrastructure connection, the population development of the city or region and economic prospects should also be taken into account when purchasing. Investors should pay particular attention to the vacancy rates on site. In the worst case, a long-term vacancy of your own property amounts to a total loss. Real estate in the immediate vicinity is still more affordable than in the popular metropolises. The trend towards green living, reinforced by Corona, also ensures solid growth prospects for rents from which investors can benefit. Investors who have not yet had any experience buying real estate should tend to opt for real estate close to where they live. In this way, problems can be clarified personally on site in case of doubt and changes of tenant can be carried out more easily. It is ideal if prospective buyers know the area around the property well themselves and can therefore personally assess the growth opportunities on site.
2. Age and condition of the property
Even in attractive locations, the substance of the property in question is decisive for rental opportunities. In order to avoid paying an excessive purchase price for a house in poor condition, a certified or publicly appointed appraiser should be consulted. He can also provide information about possible renovation costs when purchasing. Typical deficiencies in older properties include, for example, an outdated heating system, outdated electrical installations, defective drinking water or sewage pipes as well as moisture and, as a result, mold.
3. Purchase price
Rental income and purchase price must be in an appropriate relationship so that the investment is worthwhile for investors in the long term. How long it takes until the purchase price of the property is amortized by the expected rental income is indicated by the so-called rental price multiplier. The purchase price including modernization and ancillary costs is divided by the annual net rent. Additional costs to be taken into account when purchasing include notary and land registry fees as well as real estate transfer tax. The comparative values for the rent are provided by the local rent index, which is available online for many cities. How high an appropriate multiplier may be depends heavily on the respective situation. While buyers in medium-sized and small cities have to reckon with values of around 20, the multiplier in the top 7 metropolises is sometimes over 30. It can therefore take several decades before the property is fully paid off. Real estate should therefore always be viewed as a long-term investment.
4. Potential returns and financing
Real estate offers significantly better opportunities for returns than the classic savings account. However, real estate should not be short-term speculative objects. Rather, they offer their owners long-term performance, stable rental income and effective protection against inflation. The expected annual return depends heavily on the property in question and therefore on its careful selection by the investor. The expected return can be calculated using a simple rule of thumb: Net rental income (annual basic rent minus management costs) / purchase price x 100 Once the desired investment property has been selected, buyers should find out about the details of the financing at an early stage. Banks no longer strictly require 20 to 30 percent equity for loan financing. Nevertheless, it is worth spending a certain amount on your own property yourself. The higher the share of equity capital used, the smaller the risks associated with any financing. Despite the current low interest rates, it is also advisable to reserve a further 20 percent equity for any repairs and maintenance measures. Alternatively, a monthly maintenance reserve of at least one euro per square meter can be taken into account.