Real Estate as Capital Investment: What do I have to Pay Attention to? – Interview with the Lukinski Expert

Real estate as a capital investment – what do I have to pay attention to? In an interview with our investment experts we discuss all important investment options in comparison. Which investment does well, which bears risks and which investment brings the most profit? Have you ever thought of real estate as a capital investment?

  • Part 1: Classical or exotic investment – Which real estate is suitable as capital investment?
  • Part 2: Real estate as a capital investment – What do I have to pay attention to?

Investments: The Most Popular Investments

Question: You have gained a lot of experience with different capital investments! Please give us a pro and contra for each of the most popular capital investments in terms of value and success.

Then let’s start with this: What are the most popular capital investments at the moment? I can think of stocks, government bonds, all of this is also funds, then also precious metals and even commodities. As a real estate expert, I naturally think of the so-called “concrete gold”, houses and apartments.

Let’s start with shares as a capital investment. The big chances for big capital yields certainly speak for it. Especially if you are not urgently dependent on the invested money in your everyday life and possibly have a little more time to “give away” your money. And there also already the CONTRA lights up: Who invests its money in shares, must have either very much knowledge and time, in order to react to the occasionally strong price fluctuations with shares. The higher the chances of winning with share prices are, the more largely is also the risk to lose its money. Under no circumstances should you invest your entire capital in shares, and certainly not just in one “title”, i.e. shares of just one company! A distribution over several companies or better investment forms is in every respect the safest way to avoid defaults.

Want to invest? Tip: Buy shares cheaper via direct bank.

Funds do not Provide Any Investment Security

We get right into funds: Here, the large advantage is that the investor sets with the purchase of so-called fund portions immediately on a larger range of enterprise bonds. Simplified this means: if a share in the “pot” (i.e. the fund) is doing badly, the other share values can compensate. Advantage with the fund: a fund manager takes care of the stability and the best possible composition of the securities. Disadvantages: The fund manager wants to be paid. Therefore the capital yields with funds are usually not as high as with the direct investment. Also with funds there is no certainty that the investment income and the value of my fund shares will always develop only upwards. If several shares in a fund are quoted poorly because the companies issuing the shares are not doing well, the value of a fund will also show a downward trend.

Question: But there are these so-called “annuity bonds”. They are very safe!

That is true in principle, but for a long time now, the returns on investment with this form of investment have been very poor. Why? Well because bonds or also called government bonds are nothing more than a kind of savings book. You lend money to a state and the state gives interest. Since the interest rate level is very low, however, a state also gives little or even no interest on the money it lends. By the way, there are also funds that mix the bonds of different states. Here it is important to look closely at which securities are mixed there. Who wants to have a healthy mixture of risk and security, should deal with so-called mixed funds. There stocks and “bonds” are mixed in different proportions.

Disadvantage here – as everywhere in the securities business: fees for the purchase of the shares and a usually very long “investment horizon”. So the period of time in which I should not have to dispose of my money. Otherwise the return on investment often becomes quite “meagre”. And another thing: I often only get the increase in value of shares and their funds if I sell the securities again and then feel a hopefully registered increase in value in my cash box. If I am lucky, the company pays so-called dividends on my shares. But you have to have a lot of shares in the company to get rich.

And finally: always remember that you have to pay taxes on the investment income!

Gold or “Concrete-Gold” – Where is my Money Safe?
Briefly, I will now turn to investments in precious metals and commodities:

Precious metals, especially gold, are rightly considered a safe investment. But: the increase in value is only very high in times of crisis. Otherwise one enters at present on a high price level and has only a small, however safe, value development. Raw materials (e.g. lithium) are a very complicated story. Much more applies here than to shares: this is something exclusively for experts with a broad market overview and expertise. The risk of losing your money is particularly high here.

Question: Is there such a thing as a “really safe investment”? What is the situation in terms of security, for example when comparing shares and real estate?

Basically, the rule is: the higher the security of the investment, the lower the chance of making “the big money”. Security reduces the chance of making a profit. In fact, real estate as a capital investment is already a very safe thing, if you consider some basic things. These include, for example, whether the property in which you want to invest your capital is located in a region with a large increase in value. In addition the purchase price must fit and the condition of the real estate should be in such a way that one does not have to put still “without end” money into the modernization.

As with the share, one should also assume that one should have a long investment period in mind for the achievement of capital yields. But after all, profits that you make when selling a property after ten years are tax-free! With a property – if I rent it out – I get my rental income. I have to pay tax on that too, but I can reduce the tax burden if I count expenses for modernization etc. against it. Roughly speaking, this means: the state supports me in maintaining and increasing the value of my capital investment.

Measure the value of a property correctly

Question: Certainly one needs some basic knowledge, in order to gain profits with investment – all the same which -. How do you appraise a property?

There are several possibilities. I’ll make it short and simple here: The value of the property plays a role (mostly in € per square meter). Then there is the size of the house, how old it is and in what condition the house is. The age of the technical installations (heating, water and electricity pipes) also plays a role. Very important: the location! It makes a big difference whether the house is located near popular cities or far away from them. In relation to the Rhine-Main area, for example, this means that a house in the middle of the Hunsrück is significantly cheaper than one near Mainz or Wiesbaden, while being the same size and with the same features.

If you want to buy a condominium as a capital investment, pretty much the same applies. It is somewhat different with real estate that the capital investor does not live in himself. In the case of a rented apartment or even an apartment building, the so-called capitalized earnings value is added as a basis for valuation. This to calculate is in any case thing of real estate experts.

Profitable real estate investment

Question: What makes a profitable real estate investment? Which factors should one pay attention to?

No matter whether you want to live in the property itself or rent it out: Whoever invests in a property should make sure that it has an optimal location for its purpose. This usually includes the proximity to stores for daily needs and to public facilities such as schools, etc.

Secondly, the location should be such that it will be in constant or even increasing demand over many years. Even if in – let’s say – 25 years time there will still be a move into the region of my property, this will ensure a decent increase in value and easy sale.

After all, the purchase price and the condition of the property must match. So I deliberately do not say that a property always has to be particularly cheap or expensive to get something for your money. For example, I can compensate for disadvantages in the location or condition of the property with a lower purchase price. A particularly expensive real estate however must already have a quantity of advantages, so that I get a lucrative investment in it.

This also applies to real estate that is not used by myself – and this is what you usually mean when you talk about real estate as a capital investment. Here one should look above all on the so-called “renting loss risk” The investor should let itself be shown, how frequently tenants in the house/the dwelling change and whether there are apprenticeships. Because only a rented object is suitable as capital investment.

Crisis Times and Gold

Question: In times of crisis gold is always recommended as a safe investment. What are your experiences? How do you evaluate the risk and the chances of making profits with gold investments?

I have already hinted at this above: I think very little to nothing of gold as an investment. There are very meaningful statistics that show that the value development of gold is significantly weaker compared to real estate for the same investment period. But perhaps the biggest difference is that I only make the profit from an investment in gold when I sell the gold again. Otherwise the gold is in the vault and does not yield any money during this time. The “concrete gold” on the other hand, i.e. a (rental) property, brings me money even if I don’t sell it. Month after month I get rent. That is, if you like, the interest rate for my invested capital. If I have chosen the right property, then I get a tidy profit on top – often even tax-free.

Question: Many Germans now like to invest in funds. How does such a fund work? How does a real estate fund work?

A fund is to be understood like a pot, in which many shares in companies or also real estate are gathered together. These shares remain in this pot as long as they have a positive performance or a correspondingly secure prospect of it. If at any time there is a “rotten egg” among these shares, it is removed and replaced by a new, better one. This is done by a fund manager who checks every day how the individual values in the fund are performing.

Now there are open and closed systems – both for shares and for real estate funds. The difference is that in a “closed fund” the number of issued share certificates or the amount of capital raised is limited. When the desired number is reached, the fund is closed. This becomes problematic when the companies or properties whose values make up the fund get into economic difficulties. So when the companies no longer make a profit or the properties no longer have any rental income. Since no more new capital can be added to the fund, the originally stored money – i.e. the investors’ capital – is used to pay the costs of the companies/properties. In the worst case the money is then simply lost.

Profits from Capital Investments: Levies and Returns

Question: What happens to the profit that my investment brings? What tax and legal issues do I have to consider? How is the return calculated and what remains of my profit?

Again a simple answer: Profits from capital investments must be taxed in Germany. How and in what amount a tax consultant knows best. Basically, there are allowances, i.e. parts of the profit from capital investments which I do not have to tax. But if you invest larger amounts and get noticeable profits from it, you can’t avoid taxation.

In the case of real estate that I buy in order to rent out, there is at least the possibility to offset the achieved rental income against investments in the property. This has the advantage that I maintain the value of the property, maybe even increase it. The actual profit is generated when I sell the property again after a period of at least ten years and the property has experienced an increase in value. The difference between the purchase and sales price flows tax-free into my pocket. In the case of a self-inhabited real estate independent of the period between purchase and sale, in the case of a rented real estate after ten years.

Finally, the yield is the return that my capital brings in a certain period. All income and costs I have to pay for my capital investment are used for the calculation. A very simple calculation for real estate is the gross rental return. Here is the formula:

100 x annual net cold rent / purchase price of the property = gross rental return in %

Net rental returns and returns on equity are also common measures for determining the value of a property as an investment. I always recommend to have your real estate agent calculate the corresponding values and thus compare different properties in their quality as capital investment. That is very exciting!

Yes or No? Real estate as Capital Investment

Question: Once I have decided on a property as a capital investment – and this is becoming increasingly popular in Germany – where should I look for a suitable property? The big cities in the Rhine-Main area have already become very expensive due to the great demand, haven’t they?

That is unfortunately – from the buyers’ point of view – true. Of course there are always bargains in the direct conurbation. But for this you either have to have the “right nose” yourself, or a real estate agent who is very closely networked in the market.

But there are enough good and very good alternatives in the Rhine-Main area. Thus real estates are for instance in Bingen at the Rhine or environment in the relationship clearly more favorably. Since meanwhile also distances of 40 kilometers and more from the large center – thus Frankfurt, Mainz, Wiesbaden – are added to the conurbation, real estates here are really good capital investments. Whoever is interested in a house or apartment somewhat away from the centers should always make sure, however, that the transport connections are good and that there is a good infrastructure of schools, stores etc. in the town itself. In the long run, people will continue to live there and want to buy real estate. That again means rising prices and thus a good increase in value of the real estate as a capital investment.