Is owning real estate an investment?
Four ways to make money in real estate
Lana Iliev, April 20, 2021
Making money from real estate is especially tempting in times of low interest rates. Low mortgage rates not only make it easier to buy a house or apartment. The real asset is also considered to be relatively inflation-proof and promises high returns that savings deposits have long been unable to keep up with.
Read here what options there are to invest in real estate and why buying a property is not always the best choice.
1 | The classic - buying a property
Purchasing your own real estate property requires first Equity. Once you have saved this up, you have a whole range of options:
Opportunities when buying property
|Buy or build your own home|
Cheaper living by saving rental costs
|Buy or build a rental property|
Rental income of a single or multi-family house
|Real estate trading|
Profits through appreciation and resale
|Divide apartment building into condominiums|
Increase in profits through the sale of individual apartments
|Acquire and renovate a renovation object|
Profit-increasing sale of the refurbished property
Buy cheap and make a profit through rental income or resale
Increase returns by owning several real estate objects
Real estate ownership becomes particularly attractive if you rent out not just one property, but several at the same time, because this way the profits can be multiplied and the cluster risk reduced.
Further properties can be financed in part with the profits from properties that have already been purchased, but such a project still requires one large amount of equity and often leads to one through financing high leverage.
Disadvantage of buying a property - profits are often smaller than expected
A study by the Institut der Deutschen Wirtschaft (IW) from 2017 shows that private landlords are having increasing difficulties in generating attractive returns. A total of 7.4% of all private landlords therefore generate losses with their property. The income from real estate is also quite manageable for half (53%) of all small landlords with less than € 5,000 net per year. The rental yield is reduced by high acquisition costs.
The main reasons given by the IW are increasing government regulations and building regulations such as the rent brake or the requirements for energy-efficient building renovation. Landlords have to reckon with energy-related additional costs of € 55,000 on average. In addition, there is environmental protection in metropolitan areas. In rural areas, however, landlords are struggling with the low rent index. Rental income here is around 70% lower than in urban areas.
Disadvantage of buying real estate - effort and required expertise
The management and maintenance of your own property is also complex and time-consuming. Whether a tenant change or a renovation is pending, landlords have many obligations and have to bear some costs. In addition, a property requires a certain amount of structural and legal expertise, because mistakes can cost landlords dearly. There are a number of factors to consider when buying a property alone. Rented real estate does not generate passive income. On the contrary: Being a landlord is usually a full-time job.
This can only be circumvented through the interposition of a property manager. However, this costs money and is often not prepared to manage an individual apartment in a community of owners, but would like to take over the overall management of a house if possible. If necessary, however, a property manager who has already been appointed is ready to take care of individual apartments.
Alternatives to buying real estate
But buying a property is by no means the only way to invest in property and benefit from the profits of the property market in times of low interest rates.
2 | Spread risks with real estate funds
In order to earn money with real estate, investments in real estate funds can also be acquired. Funds enable a large number of investors to invest together. This creates a large investment volume that is diversified and managed by a fund manager.
There are open real estate funds with a low minimum investment volume of € 50 or more. They are also flexible: the units purchased can be returned to the fund and paid out after a minimum holding period has expired. However, the advantages of this investment are reflected in a relatively low return. In this way, inflation can hardly be compensated for.
Closed real estate funds, on the other hand, are more profitable. For this, however, a very high minimum participation of € 10,000 or more is often required.
In addition, closed real estate funds are characterized by their long-term capital commitment. There is no way to return the participations before the end of the term. The term is usually at least ten years. Investing in closed real estate funds is therefore a lot more risky and inflexible.
3 | High interest rates with real estate crowdinvesting
A relatively new way of making money with real estate, on the other hand, is real estate crowdinvesting or crowd financing. A large group of small investors joins together as a “crowd” or “swarm” via an online platform such as BERGFÜRST and invests together in a real estate project. The investors provide mezzanine capital for professional real estate companies and their projects.
In return, investors on investment opportunities brokered by BERGFÜRST receive a fixed interest rate between 5.0% and 7.0% per year. In addition, with the investment opportunities on BERGFÜRST, you benefit from short terms (one to five years). Further flexibility arises from the possibility of being able to sell investments online at any time via a secondary market. With a low minimum investment volume (from € 10) investments can also be easily diversified and a good risk diversification achieved.
4 | Invest in real estate on the stock exchange
Real estate can also be used to earn money on the stock exchange. For example, investors can buy real estate shares and thus receive profit sharing in real estate companies. This allows you to benefit indirectly from profits from renting, leasing, increasing the value and selling real estate.
REITs (Real Estate Investment Trusts) are a special form of real estate shares. REITs are usually more profitable because they are subject to a minimum payout ratio of 90% in addition to other special regulations. In addition, investors benefit from tax privileges.
Instead of investing in individual stocks, investors also have the option of investing their money in real estate ETFs. An ETF (Exchange Traded Funds) is a passively managed fund that tracks an index. Since there is no fund manager at ETF, fees can be saved here. A real estate ETF is a good way of spreading the risk on the stock exchange - even with low investment amounts.
Be aware that investments on the stock exchange are subject to fluctuations in value. You do not receive regular interest here, but profit sharing. It is also of the utmost importance that you do not allow yourself to be unsettled by fluctuations in the stock market. If you sell stocks or funds during a market dip, you are almost certain to make losses.
Real estate funds
Real estate funds
Real estate stocks /
|Real estate ETF|
|Profit sharing||Profit sharing|
with little money
* Although it is possible to invest in individual real estate stocks with little equity, this is not advisable, as sufficient risk diversification should always be ensured.
** When investing in different products
Image Copyright: daizuoxin / Shutterstock.com
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