Real estate as capital investment – Whether in or multi-family house, apartment or warehouse, student apartment or nursing home: The offers for capital investment in the real estate market are manifold. Who would like to invest its money in real estate, the correct object for its investment goals should find. Classic or exotic: Which property is suitable as a capital investment?
Please note, this article is written with a focus toward the German market, but very similar rules apply everywhere.
Real estate as capital investment: Special
- Part: Classic or exotic investment – Which real estate is suitable as a capital investment?
- Part: Real estate as capital investment – What do I have to pay attention to?
Question: The topic of care is increasingly moving people. There is a lack of personnel, but also the nursing homes that are to be built. On the market there are increasingly offers, which offer the building of such houses as single participation or even as real estate fund for several Pfelgeheie. How will this development continue and how do you evaluate this form of investment?
Anyone who is well acquainted with nursing homes and the whole subject of care can seriously consider such investments. But this really does require a great deal of specialist knowledge, because nursing homes have a very special risk: with these so-called management properties, the qualification of the operator is crucial. If he does not manage carefully, there is no income – neither for the home nor for the investor. In the worst case, insolvency threatens and the money is gone.
And this has nothing to do with the fact that nursing homes are usually very well utilized. This is what the developers of nursing homes advertise. It is rather about the high costs of a proper care. And these are only partially paid by state institutions. The rest has to be paid by the residents or their relatives. If this does not succeed, many things are saved in the home. This again has a negative effect on the reputation of the home, which in turn means fewer residents. This increases the deficit because of the loss of rent.
Clearly: there are also funds that consist exclusively of nursing home shares. The risk is, as with most fund constructions, already somewhat lower. But the return is also significantly lower. If you really want to invest in real estate, you should not buy management real estate.
Purchase of Real Estate: All-Round Carefree Package
Question: What are the general requirements for a developer to be successful? And what is particularly important in the planning and construction of care properties?
First of all, I can briefly explain what a property developer actually is. From the buyer’s point of view, a property developer is something like the “all-round carefree package” for everyone who wants to buy a property. After all, the property developer takes care of everything that has to do with the purchase of land, planning and construction of the property. Even the later purchase contract is very often made through the notary public, which the developer organizes. The buyer takes the key of his finished property, packs his furniture in and can enjoy his new home.
But for all this to work as smoothly as I just said, the developer needs many good connections to authorities, construction companies etc. In addition, he must have a “good nose” where free plots of land or even existing houses are sold. This means that a good property developer has to be very well networked regionally. So if you want to buy a property from a property developer, you can easily fall back on smaller local or regional companies.
And there is another thing a property developer must know and be able to do: he needs to have very good knowledge of land and property prices. This helps him to purchase the land and buildings and forms the basis for negotiations with the construction companies. After all, the developer wants and needs to earn money with his projects himself. Only then can the developer borrow money from banks at good conditions. Money with which he usually pre-finances the purchase and construction of his projects. You already suspect thereby that a builder usually moves very large sums of money.
What is important when planning and building nursing homes is, in my experience, especially the view of the need for such a house in the area where it is built! This sounds rather banal, but not everywhere where homes are built, they are needed. If you invest in such a house, you will not enjoy your investment. Therefore, the planner of a home, just like the investor, should coordinate very closely with the respective community to determine whether there is an exact demand planning for nursing homes and to what result it will come.
Everything else that has to do with planning and construction is laid down in the state building code and many other standards. Of course, a developer of nursing homes must take these into account, otherwise he will not get any residents.
A Special Path: Investing in a Student Residence
Question: Up to now, it has been rather exotic to invest in special real estate such as retirement and nursing homes. On the other hand, student residences are already more in the eye of investors. Which chances do you have with this form of the investment?
Quite clearly: the devil is again in many details. I’ll stick with the principle for now: there are “thick” and “thin” solutions for the construction of student housing. What is meant here is not the size of the rooms or apartments, but the proportion of common property in the house. A house that includes common rooms, a fitness center, a barbecue terrace, etc. – the “thick” solution – will generate higher rental income (because you are not bound by the rent brake), but the maintenance costs to be paid by the owner are also significantly higher. If the house is not fully rented, these costs eat up the rental income.
As with all real estate, the location of the student house is particularly important. The mere existence of a university does not mean that the apartment has to be rented permanently. If the study offer is not attractive enough, or if there are many affordable “normal” apartments in the area, there is nothing to be gained from the capital investment.
Therefore I rather advise to invest in objects that are not fixed to a single target group of tenants. So that in the apartment beside students also the normal tenant can live. If then the entire living environment is considered additionally as particularly attractive – for instance because of proximity to purchase possibilities, recreation areas etc. – the topic “loss of rent” hardly plays a role anymore.
Question: Quite classical is the investment by buying a condominium. What has to be considered and how is the best way to finance such an investment?
We are always talking about apartments that the investor does not live in himself, but rents out. Because then I have my regular rental income as a yield in addition to the proceeds from later sales.
But to ensure that this income flows as smoothly and uninterruptedly as possible, the apartment must be located in an attractive environment. That starts with the house itself. Is there a garden? Is there an elevator? What about parking facilities? Incidence of light, outdoor seating and much more also play a decisive role in ensuring good rentability. I don’t need to mention that the building condition of the house should be perfect. In the apartment itself, the tenant is responsible for maintaining the substance, but in the communal facilities it is always the owners who are responsible. Especially when buying an apartment in older houses, the condition of the cellar, roof, hallway, windows etc. shows whether the owners are investing or not.
When it comes to financing, it is best to ask your bank and tax consultant. With a capital investment it can be a matter of using existing capital for the purchase or borrowing money for the purchase. With the current favorable interest rate level everyone can create his investment also with little available own capital. But beware: many offers on the market are considered overpriced because the seller has included the low interest rate in his sales price.
Do not worry! Also middle apartment sizes can be rented well.
Question: The demand for living space is increasing. Especially in the large cities of Frankfurt, Berlin, Munich, etc. What does this development mean for the market? Should one rather buy a small or better a large apartment? Is the condominium suitable as a capital investment at all?
To the second question I expressly say “yes”! Not everyone wants to or can live in a single-family house. That is why condominiums are in high demand today and in the distant future. Whoever then still pays attention to the suitable basic conditions with location and equipment, does everything right!
Large or small apartments also depend on the consideration whether I want to live in my apartment myself at some point in time. The housing market is currently looking for small and very large units. If you want to live in your own capital investment later on and don’t want to have “dance halls” for it, you should rather go for the medium size, say 70 square meters. And don’t worry! You can also get them well rented.
Question: The new construction of apartment buildings with condominiums or rental apartments is politically desired. What are the differences in the demand for existing and new buildings in this sector?
Actually no differences! There are enough property developers and investors interested in multi-family houses and housing developments. I speak for myself in this respect. Our company buys both existing real estate and land for the construction of new housing estates. The offer is limited for both forms. At least if you are interested in attractive sites. We are therefore constantly looking for apartment buildings or plots of land, which we then develop further and sell again.
From small apartment to Real Estate Empire – the Leverage Effect!
Question: Who wants to earn his money with real estates, can trade with houses, build new or simply in the large scale dwellings letting. What are the biggest differences compared to managing a simple condominium or a single-family home?
This question is already quite extensive to answer here. To be a real estate agent and to want to earn big money means: to acquire a lot of knowledge in the real estate market and to invest even more work. Because most of the time the necessary work is done at the same time. For example new construction: whoever starts the construction of a plant must immediately start the next project to secure capital flows, to service credit lines, etc. He has to find and serve the buyers or tenants of his properties at the same time, in addition to the many discussions with authorities and banks. The management of the finished objects is usually included if you remain the owner of the plant.
On the other hand, the management and maintenance of his apartment or small home is absolutely manageable. Owners’ meeting, service charge accounts, checking investments in multi-family houses and occasionally holding a tenant meeting: that’s it.
And yet the small rented condominium can be the entry into a larger real estate empire. This is where the so-called leverage effect helps. In short, this is the effect I achieve when I borrow from the bank after a few years to buy a new apartment. The increase in value of the original apartment helps me to increase my equity capital arithmetically and thus to be able to take out a higher loan for a larger and more expensive apartment. This game can be repeated as often as you like, if you do it right.
Experts’ Advice: Plan the Digital Living World of Tomorrow Today
Question: What changes has digitization brought about for the real estate industry? How does this affect investors?
Let me start with a very simple example: Anyone who wants to sell or buy their real estate today no longer looks at the newspaper. Real estate portals with great photos or videos are inconceivable without digitization. For both sides, however, this also means that digitalization skills are needed to separate the wheat from the chaff when it comes to offers as buyers. The seller should know which portal is the right one for his buyer target group.
In real estate management, so-called facility management, digitization is only just beginning. The collection of consumption values for the creation of accurate utility bills is a very simple example. It gets exciting when, for example, access to real estate is to be controlled electronically. Since people’s need for security is growing, many things can be controlled remotely via digitization. An electronic consierge, so to speak. Or in property maintenance: how can robots be used there to save on personnel costs?
Anyone planning apartments and houses today must have the “smart-home” theme clearly on their screen! If it is to be the case that in the future, living, working and consuming will increasingly take place in one’s own home, then the infrastructures for digitizing the home must also be planned. And I’m not just talking about laying any cables or invisibly installing entertainment electronics. Rather, it must be possible to change apartment floor plans flexibly, the use of the rooms must be changeable and the use of electronics must ultimately be possible everywhere. Here, too, there are interesting perspectives for planners and investors alike.
And that means for the investor in the real estate world: checking whether the investment is also future-proof with regard to these developments. Anyone who wants to have solvent buyers and permanently living tenants in the future must invest in the digitalization of their property. Especially as we cannot yet imagine the possibilities of this development in its entirety today.
Secret tip: Where the Investment Really Pays Off
Question: Do you have an insider’s tip in store for me where I can invest in real estate in the Rhine-Main region well and inexpensively?
Of course: My hometown Bingen am Rhein with its immediate surroundings is at the forefront. And that for many reasons! Here, the ratio of the purchase price of the property to the amount of the expected rental income is very good. The prices are significantly lower than in Mainz, Wiesbaden or Frankfurt. The rent level, on the other hand, is not so much lower than in the centers. So I have a high return on investment.
And that’s for sure in the long term, because the location on the Rhine has a high recreational value, and the transport connections, even with public transport, are very good. In addition, the city has a decent commercial infrastructure, including the necessary schools and even a university of applied sciences. This means that no one actually has to move away and can stay here until they reach retirement age.
Interesting investment alternatives are also refugee accommodation.