Real estate purchase

Maximum return: the secret of the American model's success

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April 2024

When it comes to real estate, most people in Germany seem to have two main ownership models in mind: buying a property, i.e. becoming an owner, or renting a property. Regardless of whether it is buying a house or an apartment, it is undisputed that the acquisition of residential property requires a certain amount of financial strength. However, if the financial means are available, there are many more options than buying a property and living in it yourself for a long period of time, perhaps even a lifetime: In the USA, significantly more private individuals are daring to do what real estate companies take for granted: they invest in real estate and sell it again after some time.

Model from America: Private investors pay attention to location

When private real estate buyers think like investors - as is often the case in America - this already has an impact on the choice of property. This does not necessarily have to (only) correspond to their own preferences, but should be in a location that is developing positively in demographic and economic terms - because then an increase in value can be expected. They also make sure that the property is located and laid out in such a way that it can also be used by tenants; all in all, they make a rational rather than an emotional purchase decision.

Advantages of resale: save on rental costs and benefit from value appreciation

In the USA, it is also common for private individuals to buy a property, live in it and sell it again at a profit after ten to fifteen years. In this way, they save on rent and finance the next property, which is usually of a higher standard. This approach would also make sense in Germany, where real estate is also considered a safe investment. This is particularly true for residential properties, as demand is high and there is a shortage of housing at the same time. In addition, the money is safely invested and protected from the consequences of possible inflation.

Consider the topic of ESG when selecting a property

The topic of ESG should be taken very seriously when choosing a property, as the energy class now has a major impact on the value of a property. Anyone who brings a property up to the latest energy standards, for example by insulating the exterior façade or installing a new heating system, can improve the energy balance and thus significantly increase the value of the property. The better the energy balance of a property, the higher the rent the owner can charge, as the tenants have to pay lower service charges.

Property value depends on energy efficiency class

An analysis by the real estate platform ImmoScout24 shows how asking prices for properties have developed year-on-year depending on the energy efficiency class: Properties in classes A and B have remained virtually stable in price in the independent cities. The asking prices for properties in energy efficiency classes C and D fell by 8 percent in the cities. In classes E to H, prices fell by 5 percent. Conclusion: unrenovated properties are being offered on the market at significantly lower prices than energy-efficient properties.

The Building Energy Act and the EU directives on energy efficiency in the building sector are leading to a reorientation on the real estate market. According to ImmoScout24, a recent survey conducted by ImmoScout24, immoverkauf24 and YouGov revealed that the fear of not being able to afford the high costs of complying with environmental regulations is causing almost a quarter of potential buyers to refrain from purchasing a property. This is precisely where the opportunities lie, not only for real estate companies, but also for private investors: those who are aware of the new laws can acquire unrenovated properties at a reasonable price, revitalize them and put them back on the market at a higher price.

Securing returns through (rising) rents

For traditional owner-occupiers, the conditions for acquiring residential property have generally become more difficult, but those with sufficient equity can take advantage of the negative price trends of recent months to benefit from the expected increases in value. A further rise in interest rates is unlikely, meaning that it can also be worthwhile for private individuals to purchase an apartment building or condominium, rent it out and thus make a profit over the years.

The return can be calculated in a very simplified way as follows:

Gross rental yield = annual rent / purchase price x 100

However, this calculation only serves as a rough guide, as it does not take into account all other costs, for example for maintaining the property.

Investing in a property at the right time

If you want to invest in one or more properties, you should choose the right time. According to many experts, now is the time. Property prices have fallen sharply in the wake of the interest rate turnaround. According to the Federal Statistical Office, residential property prices in Germany fell by an average of 10.2% in the third quarter of 2023 compared to the third quarter of 2022. The IW experts assume that the market has bottomed out. For this year, they expect interest rates on property loans to fall further, rents to rise and incomes to develop positively, leading to a normalization of the property purchase market.

Conclusion: America as a role model - private investors should seize market opportunities

Real estate is considered a safe investment. Private investors who want to benefit from the opportunities currently offered by the market should follow the example of the Americans. If their assets are not unlimited, private individuals should of course make their investments carefully, for example by seeking comprehensive advice on the valuation, comparing the property with similar properties and also looking at ESG criteria. All in all, however, the German market also offers great opportunities for private investors. They should not just leave it to companies to use real estate as an investment and benefit from the increase in value.

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