Determine maximum purchase price: Important factors

One of the most important steps in the purchase of a property, which is often underestimated, is the determination of the maximum purchase price of the property. In order to avoid unwanted surprises here, it is important to determine this before you start looking for a property. This usually involves sitting down with your bank advisor and going over your finances. You then show a certain amount of equity and the bank then gives you a corresponding loan. The amount of this loan depends on your creditworthiness (for this you have to submit a self-disclosure ), as well as on your equity to be presented. The loan-to-value ratio of the property and the monthly charge are also taken into account.

Equity X + Bank loan Y

These are the factors that matter:

• Credit rating
• Mortgage lending value of the object
• Available equity
• Monthly load

Let’s now go through the individual factors in a little more detail:

Credit rating: assets vs. liabilities

When your credit rating is checked, your assets and liabilities are mentioned and compared. If the balance is positive, i.e. your assets outweigh your expenses and liabilities, your chances of getting a loan are very good. And the higher this credit rating, the lower your equity investment. After all, the bank also wants your money back as soon as possible and wants to be sure to get it.

Assets are matched with liabilities

Mortgage lending value of the property: market value & fair market value

The mortgage lending value of the property is generally lower than the market value. The market value is the selling price of the house or apartment if it were sold at the present time. Therefore, the market value is also called ‘theoretical market value’. The mortgage lending value is on average 20% below this. In order to minimize the risk of loan default, banks base their lending decisions on the mortgage lending value and not on the market value.

Mortgage lending value = market value – 20%

Available equity: Dependence on the balance sheet

As a general rule, 20% equity capital is needed. As mentioned before, the exact amount of equity ultimately depends on your credit rating. The more positive your balance sheet, the less equity you have to show. So you can also invest with an equity of 10% or 15% already in a property.

The better the credit rating, the less equity capital

Monthly load: income & expenses

The last important factor that influences the financing and thus the maximum purchase price is your monthly burden. Similar to the credit check, income and expenses are compared here. This is important for the bank, as it allows them to set the conditions for repayment, interest and redemption.

Conclusion: Determine maximum purchase price & financing

So, in addition to your credit rating and available equity, your monthly financing and loan-to-value also matter. This way, you can not only determine the maximum purchase price before you start looking for real estate, but also determine the terms for repaying your loan.

Buying real estate: Learning from A-Z

If you want to learn even more about the maximum purchase price, stop by our guide:

• Purchase price height (external)

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Different layer types explained: A, B & C layer

In principle, a distinction is made between three types of location when searching for real estate:

• A-location (metropolis)
• B-location (large city / city with positive development)
• C-location (small town / city with stagnant development)

Why are location types important? It’s simple: As a real estate buyer, you have ideally thought about your goals before buying the property. Do you want to buy the property for personal use or as an investment? Is this a yield or investment property? Depending on the answer to this question, the location you should look at also differs.

So now let’s look at the different definitions.

A-location: coveted metropolises, such as Berlin and Hamburg

As a rule, metropolises and capitals are considered A-locations. They are sought-after places to live, as they are often home to internationally based companies. The economy is thriving, the education system has a lot to offer and life is never boring. Germany’s metropolises are also home to the most beautiful and historic neighborhoods. If you buy a property here, you can expect a high purchase price but a low return.

Typical for A-locations: expensive purchase price & low yields

Investment property purchase: Low risk & high purchase price

Due to the high purchase price and the low return, we advise you to look for investment properties in A-locations. After all, the high prices per square meter are hardly covered by rental income. In other words, due to the coveted demand in metropolitan areas, you can enjoy an increase in the value of your property at a low risk. Why low risk? The popularity of locations such as Munich, Berlin and Hamburg is highly unlikely to wane in the next few years – after all, more and more young people are drawn to these very cities.

Aim of a property in A-location: Later & profitable resale

If you do not expect a direct cash flow shortly after the purchase of the property, then real estate in an A-location is exactly the right thing for you. Yielding properties, on the other hand, are less likely to be found here. So here is a brief summary:

• Purchase price: High
• Yield: Low
• Advantage: Low risk
• Property type: Investment property
• Goal: Later, profitable resale

A-location in Germany: Examples

Which cities generally count as A-locations? Here according to population:

• Berlin
• Hamburg
• Munich
• Cologne
• Frankfurt on the Main
• Stuttgart
• Düsseldorf

B-location: economically strong major cities, such as Nuremberg and Leipzig

Properties in B locations, on the other hand, are characterized by their high returns. After all, B locations are close to popular metropolitan areas and are thus also considered popular places to live.

Typical for B-location: moderate purchase price & high returns

Yield property purchase: Moderate purchase prices & cost-covering rent

While the high price per square meter in A locations means that rents cannot cover these costs, this problem does not exist for properties in B and C locations. Thus, properties in B-locations are considered perfect yield properties.

Here are the advantages at a glance:

• Purchase price: Moderate
• Yield: High
• Advantage: Cost-covering rent
• Property type: Yield property
• Goal: Immediate cash flow

B-location in Germany: Examples

B locations include:

• Leipzig
• Dortmund
• Food
• Bremen
• Hanover
• Nuremberg
• Wuppertal

Somewhat outside the major metropolises are sought-after B locations:

C-location: Low-cost real estate with high risk

C locations are therefore also suitable for investment properties. These are locations with weak infrastructure and only low or moderate economic strength. Here you can enjoy a lower purchase price, but must also expect higher risks, such as vacancy, rent arrears & Co. The yield properties here are therefore characterized by a high risk.

Real estate in C location briefly summarized:

• Purchase price: Low
• Advantage: Real estate bargain
• Property type: High risk return property
• Goal: Immediate cash flow

Here a typical prefabricated building in C-location:

Conclusion: Decide depending on the type of property

While A-locations are sought-after metropolitan areas, B-locations are characterized by their economic strength. C-locations are less desirable and have a weak infrastructure, but even here it can be worthwhile to invest in an investment property. It is best to consider in advance what goal you are pursuing with your property purchase and what type of property you are interested in. Then the choice of location will be much easier for you. Once you have decided on an A, B or C location, the second step is to analyze the macro, meso and micro location.

Learn more here: Macro, Meso & Microlocation

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• Property location: A-, B-, C-location – external

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• Return vs. real estate investment

Definition: Investment property or yield property?

So what is an investment property? And what is an investment property? Very important here is the objective. Do you want to generate a direct income through yield or rent? Or is a long-term increase in value more important to you?

Investment real estate: value enhancement over the long term

With an investment property, the aim is to achieve an increase in value over the long term. This also means that you first invest and only then sell your property at a profit and thus capitalize on it. It is not about an immediate return or renting.

The location of the apartment or house is the most important factor for the value of the property. Redevelopment and renovation also have a value-increasing effect on your property.

Here is an overview of the goals of an investment property:

• Primary: Increase in value of the property, profit from sale
• Real estate with corresponding A-location

Return on investment in real estate: Direct cash flow through letting

The primary goal of a yield property is the immediate profit after the acquisition of such a property. Ideally, these properties generate a rental return. Properties in good C-locations carry higher risks than properties in very good B-locations.

Here is an overview of all destinations:

• Primary: profit from renting
• Real estate with a rental yield of over 6%
• Real estate in C+ to B+ location

Tip: Yield real estate – advantages & disadvantages

Both the yield real estate and the investment real estate bring both their individual advantages and disadvantages. While the investment property requires a particularly large amount of capital, a yield property provides a direct income. Therefore, we recommend investing in a yield property especially in the beginning.

Advantages: Direct income & surpluses

The most obvious advantage of a yield property is the immediate income from renting it out. In addition, if there are any surpluses left over, they can be used to cover other properties in the portfolio.

• Instant cash flow
• Surpluses can offset other properties with shortfalls

Disadvantages: Higher taxes & temporary in B locations.

However, there are also two disadvantages that bring a return real estate. The first is taxes. Thus, the tax burden increases due to the additional surpluses. On the other hand, yield properties can be found only very rarely in A-locations.

• Tax burden increases
• Property rarely found in A-locations

Conclusion: Tips for beginners & advanced users

So if this is one of the first investments in real estate, we recommend a yield property. Once a solid real estate profile has been established, a combination of investment and return is recommended later.

For advanced investors: A mix of both types of investment