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Especially in economically difficult times, real estate proves to be a crisis-proof and stable investment. Investment properties are one of the most popular forms of investment. Ongoing rental income and the rising value of the properties enable investors to realise long-term profits. But what criteria should investors consider when buying an investment property? What factors influence rentability and resale value? In a guest article on finanzwelt.de, Engel & Völkers board member Kai Enders explains the four important aspects.
The strong demand for residential space and positive price development of real estate in recent years can be attributed to population growth and the continuing influx into the metropolitan regions. The strong excess demand is particularly noticeable in Germany's Big Seven cities. These include Berlin, Munich, Hamburg, Frankfurt, Düsseldorf, Cologne and Stuttgart. Those who own residential property in the best locations of these major cities can let at good prices while benefiting from a low vacancy rate and low risk. Interested parties can find out how purchase and rental prices are developing at these locations in the current market analyses by Engel & Völkers.
University towns such as Münster, Braunschweig or Jena have also been experiencing rising rents for several years and are thus becoming interesting as investment locations. The advantage of smaller cities: Investors can buy properties here at comparatively moderate prices and still obtain good rents. In Germany's conurbations and university locations, returns of between 3 and 4 percent are realistic. Higher returns of up to 6 percent can be achieved in cities such as Duisburg, Wuppertal or Chemnitz. However, investors must bear in mind that the investment risk may be higher in these locations, as the demand for residential space is comparatively lower there and this could result in temporary vacancies.
Thanks to the ongoing phase of low interest rates, the conditions for financing real estate remain favourable. When purchasing investment properties, the same recommendation applies as for residential properties: Ideally, investors should pay 20 percent of the purchase price as well as the incidental acquisition costs from equity capital. In order to obtain favourable financing, it is advisable to have the low interest rates fixed for as long a period as possible. At the same time, the relatively low burden of the monthly interest payments should be used to set a higher repayment in order to be able to pay off the investment property as quickly as possible after the end of the fixed interest period. Finally, investors should ensure that the ongoing rental income not only covers the loan, but also generates a surplus. The additional income allows owners to create a reserve to cover ongoing management fees, maintenance of the property or unforeseen costs.
In the course of urbanisation, micro apartments in particular have become an especially popular asset class among investors in this country. These are partially or fully furnished one-room apartments in residential complexes with 100 to 300 units and a minimum rental period of six to twelve months. Demand for this special type of property is based on the growing number of single households, which account for about half of all household types in Germany's major cities. Micro apartments also meet the population's increasing need for flexibility and mobility. Target groups such as students, young urban professionals and business people who regularly commute to the cities for business appointments are increasingly interested in modern and high-quality furnished apartments. Senior citizens who are interested in a wide range of cultural and leisure activities are also increasingly moving into the city centres and prefer small residential units. The stable demand for one-room apartments from these target groups ensures that investors can enjoy above-average rents. In addition, micro apartments convince through manageable entry-level prices and represent a comparatively low-risk and profitable investment with attractive yield prospects for investors.
Owners must regularly carry out maintenance and modernisation measures to ensure that the value of the properties improves and that a good return can be realised at the time of sale. A real increase in value is ultimately only achieved if the rental income is higher than the acquisition and maintenance costs or if the sales proceeds exceed the invested capital. External factors, such as the location, the infrastructure or the standard land value, cannot be directly influenced here. However, it is important that owners have the investment property regularly checked for defects. Investors are therefore advised to set aside approximately one euro per square meter of living space per month as a maintenance reserve. Additional modernisation work can have a further positive effect on the resale value. This includes, among other things, the energetic refurbishment of the property, the installation of high-quality floors, new bathrooms and modern kitchens or measures for barrier-free access. An upscale interior and a well-kept exterior façade can additionally valorise the property. In addition to the quality of the construction, the materials used also play a decisive role.
Those who take these factors into account when investing can diversify their investment portfolio with investment properties. Because hardly any other investment offers as much security in the long term as real estate in high-quality locations.
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