Real estate purchase

Real estate as capital investment

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16.

March 2022

Buying real estate is rightly considered to be the best way to provide for your pension. Low-risk and stable in value, real estate as an investment not only secures one's own assets in the long term, but also guarantees financial freedom following retirement. Whether owner-occupied or rented, a decent and, above all, low-risk return is guaranteed. But when does it make sense to buy real estate and what needs to be considered? Which advantages and disadvantages should be weighed up? An overview of the most important aspects.

When which type of investment makes sense

Whether you already own real estate or not, investing in property should always be considered if you have the financial flexibility to do so. Especially in times of comparatively low interest rates and high inflation, investing in real estate makes sense for people aiming for financial independence. There are many ways to use real estate as a capital investment. The most popular and widespread option is still owner-occupied housing. Many people fulfill their dream of owning their own four walls in the course of their lives and benefit from a large housing cost advantage in the long term. However, there is also the option of investing in real estate and not occupying it yourself. The classic form of investment is the direct investment, in which a freehold apartment is purchased and rented out. For investors who do not have sufficient equity, there is also the option of investing in real estate funds or real estate shares. No matter which type of investment you choose, a low-risk return is guaranteed.   

Capital investment in real estate brings many advantages

Numerous reasons speak for the investment in real estate. As a long-term investment with stable value, investing in real estate not only ensures that your own assets are secure and protected against fluctuations in value and inflation, but also makes a decisive contribution to asset accumulation. Also due to the permanently low interest rates, other forms of investment such as bonds cannot compete with the return on a property. In addition to the long-term increase in value and the passive income that can be generated through rental revenue, factors that receive less public attention also play an important role. Above all, the major disciplining effect of non-liquid property is often underestimated in practice.

In order to pay off financial debts as quickly as possible and still build up savings for repairs and larger purchases, property owners save significantly more money than tenants. Especially with regard to the retirement plan, owning a property can thus contribute enormously to financial freedom in retirement. As debt repayments increase, the financial leeway becomes greater and greater due to rent-free living when the property is owner-occupied or rental income when the property is rented out. According to calculations of the market research institute empirica, people who buy real estate are on average five times wealthier than tenants when they retire.

Opportunities continue to outweigh risks in the long term

For years, if not decades, there have been repeated warnings of price bubbles in the German real estate market. For capital investors, sudden, large losses in value can become a problem. Although real estate prices in Germany have indeed been rising sharply for years, especially in metropolitan areas, there is no reason to worry. Compared to other real estate markets, participants in the German market tend to behave conservatively when buying and financing a property. Normally, buyers bring along a proportionate amount of equity capital. A recent study by Interhyp recently confirmed that buyers today are paying more attention to solid and future-oriented financing.

An accumulation of speculative transactions, which would indicate a price bubble, cannot be observed. The risk of weakening demand for rented and owner-occupied apartments is also purely theoretical. In large German cities such as Berlin in particular, demand for housing is not expected to weaken in the future. For young people in particular, the cities remain highly attractive due to numerous economic and cultural opportunities. Overall, all parameters point to a continuous and sustained rise in prices. Real estate will remain a low-risk and stable-value investment in the future.

An overview of the advantages and disadvantages of real estate as a capital investment

Advantages

Disadvantages

Long-term increase in valueMaintenance and operating costs
Passive income through rental revenuePayment of lending rates
Lasting valueLong-term fixed capital
Inflation protection"
Asset accumulation for retirement provision"
Owner occupancy possibleAdministrative expense
Tax benefitsSpeculation tax on early sale

Owner-occupancy or monetary investment - these influencing factors must be taken into account

Once the decision has been made to purchase a freehold apartment as an investment, there are numerous influencing factors and criteria that need to be taken into account. First of all, interested parties should be aware of whether they want to use the apartment as a home or see it purely as a financial investment. The central influencing factors such as the location, size and condition of an apartment play an important role in both cases, but when it comes to a non-self-occupied apartment, the focus should be less on emotional factors and more on criteria such as re-rentability, financeability and return on investment. In any case, it is advisable to prepare a detailed financing plan in advance. Buyers should make early arrangements for a loan and possible terms - including equity, interest rates and repayment.

In addition to the usual incidental expenses such as estate agent, notary and land registry entry, taxes should also be taken into account when calculating. Capital investors can cut back on numerous expenses, such as operating costs, interest on loans and maintenance costs, for tax purposes. In addition, a speculation tax is due if a property is sold at a profit but was not owner-occupied and was owned by the seller for less than ten years. Read more about the actual process of buying real estate by clicking here.

It is crucial that you rely on a reliable and experienced provider like ACCENTRO to assist you throughout the decision-making process. Especially in tight markets, there is a high risk of getting involved with dubious sellers who put potential buyers under pressure and demand exaggerated prices.

Market potential in Berlin continues to be high

Especially in the major German cities, there seems to be no sign of an end to the rise in both rental prices and purchase prices for real estate, as recently confirmed by a market report by ImmoScout24. Berlin in particular continues to be attractive and there is no end in sight to the strong population influx. Not only does the capital city offer a wide range of cultural attractions, but also a variety of economic opportunities, making it a major draw for young people and families from Germany, Europe and all over the world. Demand for living space in Berlin therefore remains high - despite a comparatively scarce supply.

Due to a permanent surplus in demand - with regard to both rental and owner-occupied apartments - investors even benefit from the development in two ways: In addition to continuously rising rental income, they can also look forward to rising real estate prices. Regardless of whether they are owner-occupiers or landlords - the prospects for property owners remain good, particularly in Berlin. And for people who still want to fulfill their dream of owning their own property, the general conditions are also attractive, not only because of low interest rates. Whether you are looking for a residential property or a capital investment, ACCENTRO will be happy to advise you and find the right property to suit your needs.

Further readings

Real estate purchase

What is a land charge?

18. August 2022

If you take out a loan to buy an apartment, you will inevitably come across this term: the land charge. Here we explain everything you need to know about it.
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The purchase of real estate and going to the notary

12. August 2022

If you want to buy real estate, there's no getting around going to a notary - in Germany, a sale only becomes legally binding once it has been notarized. Here we explain what you need to bear in mind.
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