What is a Mortgage?

Mortgage is a key component of any property investment. No matter the wealth or region, you’re gonna have to confront the facts about mortgage, the amount you’ll have to pay in total, and the interest. To pick the right mortgage you will need to be informed about everything there is to know about mortgages. All this and more below. If you want to save money on your mortgage, and you already know about saving money on real estate taxes, you should understsand it in detail. We begin with the definition of mortgage.

Mortgage Definition & Explanation

A mortgage is a type of loan. That means it is a sum of money which a lender pays on behalf of a borrower. A mortgage is a loan which is used to pay off property. The borrower is required to pay the money which they borrowed back, but not as a lump sum, but rather in rates. This means that e.g. as opposed to paying 1 mil. in one transaction, the borrower can pay 10.000 every month for 100 months. On top of this though, the lender typically requires interest, which is a percentage of the total loan which the borrower must pay on top of the rates.

What are All the Things you Pay in a Mortgage?

In a mortgage you pay more than just the amount which you borrowed. You pay additional fees at the point of closing the mortgage, you may have to pay a private mortgage insurance, and you will have to pay mortgage interest. The amounts you pay on these usually follow a formula where the more you pay at the closing of the sale, i.e. the more you pay up front on your mortgage, the less you pay later on or annually.

These are just some of the additional costs you pay when closing the purchase of property. This and many more closing costs for house purchases are detailed in our article on

• All additional Costs and Hidden Fees when Buying a House

The Loan – Ending a Mortgage

Of course, you are required to pay back the amount which you borrowed. If you borrow $500.000, you will need to pay this back in full at the conclusion of your mortgage. This is the simplest and most overseeable part of your mortgage, as well as the most substantial sum.

Mortgage Closing Costs – Upfront Payments

These are costs which must be paid up front when closing the mortgage. They pay for things like title insurance, application fees, etc. Mortgage closing costs are of course paid by the buyer of a property at the point at which the property is purchased. There’s too many to list, and these vary and depend on many things, but below some of the common ones.

• Loan origination fee: up to 1% of total loan
• Escrow fees: $350 – $1,000 but can be much more
• Appraisal: $500-$1,000 but can be much more
• Prepaid taxes and insurance: $1,000-$4,500 but can be much more

These typically range around 2%-5% of the total loan amount. So for a $750.000 loan you can pay an additional $37.500 in mortgage closing fees. They should not be confused with purchase closing costs, such as the taxes you pay when buying a house.

Discount Points: How to Reduce your Mortgage

Discount points are points which you pay at the beginning of your loan. The more you pay here, the more discount you receive on your mortgage. If you ‘buy’ 2 discount points, you receive a discount of 2% on your mortgage.

Mortgage Interest Lowest Mortgage Interest

Interest is a price which you pay for the service and risk of someone loaning you money. Mortgage interest rates are expressed as annual payments, and are e.g. 5%. That means that every year you will pay an additional 5% of the total loan amount to the mortgage lender.

Our article covers everything you need to know about the topic

• Mortgage Interest – How Countries Compare

Who is the Lender for a Mortgage?

Mortgages are most often loaned by independent mortgage companies. That means organisations who are specialized in lending mortgages. Although financial institution such as a bank or credit unions. In the USA, banks make up 32.4% of mortgages, credit unions make up 8.8%, with mortgage companies making up 54.4% of the market. These are not all the types of lenders though. Below is a list of all types of lenders in the USA.

What’s Better, Mortgage Companies or Banks?

It’s not difficult to save on real estate taxes generally, but you don’t want to spend more than necessary on your mortgage. Typically mortgage companies (or mortgage lenders) are more flexible. That means they can customize your loan, close your loan faster, and more open to negotiation. They also, because they are specialized in loans, typically have more expertise.

• Mortgage companies (e.g. Quicken Loans)
• Banks (e.g. Wells Fargo)
• Savings associations/loan associations (e.g. Mortgage Bankers Association)
• Online lenders (e.g. GuaranteedRate)
• Credit unions (e.g. Connexus)
• Private individuals (e.g. Family Friend)

What are the Most Popular Lenders?

The top lenders in the USA are Quicken Loans, United Wholesale Mortgage, and Wells Fargo. You can see quickly that specialized mortgage lending companies are the most popular choice at the moment. Here a list of the most used lenders in the USA for mortgages.

1. Quicken Loans – 541,000 loans
2. United Wholesale Mortgage – 339,000 loans
3. Wells Fargo – 232,000 loans
4. JPMorgan Chase – 186,000 loans
5. Fairway Independent Mortgage – 147,000 loans
6. LoanDepot – 146,000 loans
7. Caliber Home Loans – 136,000 loans
8. Bank of America – 134,000 loans
9. Freedom Mortgage – 110,000 loans
10. U.S. Bank – 94,000 loans

Should You use a Mortgage Broker?

What are the advantages of mortgage broker versus a direct lender? A direct lender is an entity (e.g. a bank or credit union) which provides you funds, and to which you in turn pay interest. A mortgage broker is a middle man who is an expert in finding the best mortgage loan. In other words, a mortgage broker takes care of contacting and researching a direct lender.

• Direct Lender: Banks, Credit Unions, etc.
• Mortgage Broker: Middle man who finds the best deal

Mortgage brokers are advantageous if you have difficulties finding a loan. This can be down to low credit scores, or an income which makes lending to you unattractive. Mortgage brokers also often have access to mortgage lending programs unavailable to the typical citizen. Though you will have to pay an extra fee of course to pay the broker for their services.

• Brokers good for low credit scores or low income

Direct lenders such as banks are advantageous because you cut out a middle man. In this case you only have to pay a commission fee to the loan officer (the individual overseeing your loan at the institution). This also has the advantage that the broker is not acting in his own interest, e.g. choosing the institution which pays the highest broker fees.

• Direct Lenders allow to avoid broker fees

What are the Different Types of Mortgages?

There are a few different types of mortgage loans. These differ on three important variables. In other words when shopping for a mortgage loan, you must decide beforehand in which category you fall for each of the following three variables.

Type of Loan: Conforming vs. Non-Conforming Loans

The U.S. government has set certain guidelines delineating ‘conforming’ and ‘non-conforming’ loans. These loans differ in the amount which you can borrow. This limit (as of 2020) is $510.000. That means when you receive a loan for more than this amount, you are receiving a non-conforming loan. Non-conforming loans have worse interest rates and fees than conforming loans. Within non-conforming loans the most popular is the ‘jumbo loan’.

Type of Loan: Fixed Rate vs. Adjustable Rate

Fixed-rate loans and adjustable rate loans (also called adjustable rate mortgages) differ in the variability of interest rate, as the name states. That means fixed-rate loans incur the same interest over the whole period of the loan, while adjustable rate loans incur a rate which is set to change across the lifespan of the loan.

The first, fixed rate loans are attractive because there is safety. The interest rate will not change, and therefore budgeting and planning is easy. Typically fixed rate loans are more expensive at the outset than adjustable rates. Additionally, fixed rate loans are designated by time period. The most popular time frame is a 15-year fixed rate loan. That means the borrower pays back the loan and the same interest rate over 15 years.

Second, adjustable rate loans, are attractive to start with, because the rates are lower. Yet, because they can change, borrowers can be surprised that the interest rate increases over time. These also usually begin with e.g. 5 years of a fixed rate, after which the rate begins to vary.

• Fixed-rate = Same rate for full term
• Adjustable Rate (ARM) = Variable rate

Type of Loan: Conventional vs. Government Backed

Government backed loans are loans which are insured or guaranteed by the government. Examples are Federal Housing Association (FHA) loans or Veterans Administration (VA) loans. If you have a non-conforming loan it is impossible to receive government backed loans. The main differences between conventional loans and government loans are that conventional loans have stricter requirements (e.g. better credit score and higher income), are insured privately, and the guidelines are more relaxed, meaning less paperwork.

Mortgage Terminology Explained

There are many words unique to the real estate loan market which are not used in every day life, making the understanding of mortgages more complicated for the layman. These words are explained below, with definition and explanation

Escrow – Meaning

An escrow or escrow account is a savings account where funds are placed. This account is managed by your servicer, who deposits a portion of each mortgage payment into your escrow account to cover your estimated property taxes and insurance premiums. Not all mortgages come with escrows.

What is a Mortgage Principal?

Mortgage principal, also called loan principal is the amount outstanding on your loan. In other words, the amount left to be paid from the amount you borrowed. E.g. if you borrowed $400.000, and have paid $320.000, your loan principal is $80.000.

Down Payment – First Mortgage Payment

A down payment is a sort of deposit. It is the money you pay in advance to buy a house. You almost always have to pay a down payment to receive a mortgage. A larger down payment generally means better credit terms and a cheaper monthly payment.

Take for example a 5% down payment on your $1 mil. house. You only pay $50.000 at the point of purchase, but will pay a monthly private mortgage insurance, and likely higher interest rates. You can also receive discount points when paying more on your down payment, which reduces the interest rate. If you pay a 25% down payment, you’ll pay $250.000 at the point of purchase, but you will not have to pay private mortgage insurance, as well as receive a better interest rate.

• Larger down payment = lower interest

Mortgage Term – Length of a Mortgage

This is the period of time in which you pay off your loan. E.g. the fixed rate 15 year loan, has a mortgage term of 15 years. The longer the mortgage term, the higher the interest rates, and the longer the loan will be following you. Yet you will have to pay less each month.

Want to learn more about the many additional, and often hidden costs of buying a home? Our article covers everything you need to know

• All Additional Costs of Buying a Home Explained

Additional Fees When Buying a House?

Everyone knows that you will pay money to another homeowner when you purchase your house, and for a long time as part of your mortgage interest. You will likely be aware that there are some fees that you will pay to a realtor in case you have hired one. Yet there’s many additional fees you can expect on top of that. In general, a rough estimate is that these costs are usually between 3 and 6 percent of the total purchase price of the home.

• Additional 3-6% of total purchase price

That means a $1 mil. home can incur $60.000 additional costs on top of the purchasing price.

$1 mil. House = $60.000 Additional Costs

People like to call all these costs closing costs, yet taken strictly, closing costs are all costs which occur at a point of sale of real estate, which are not the basic value of the real estate. This does not include e.g. furnishings or mortgage insurances though. Below all additional closing costs as well as additional fees which you may incur when buying a home.

All Fees – List

Below we shed some light on what the fees are which a buyer will have to deal with, who pays these, and why these are paid. Here we list the most important ones:

Earnest Money – Real Estate Deposit

The first expense you will incur when buying a home is called “earnest money”. It is a form of downpayment, a deposit paid by a future buyer which demonstrates the seriousness of his or her intentions to purchase a property. It is usually paid to a broker or agent, and held in an escrow account until the purchase is completed. It is later used to pay for the down payment or closing costs.

That is, unless the deal fails and it is found to be your failt. If this is not the case, and the deal falls through for reasons out of the buyer’s control, he or she will be refunded the money. Typical ‘earnest money’ deposits in the USA range from $500 to $2,000.

• Between $500 and $2,000

Down Payment – Beginning Mortgage

Everyone’s heard of down payments, and they’re vital to understand. A down payment is a portion of the total price of the home which you pay at the point of sale. As most people cannot pay the full sum of the real estate at the point of sale. It typically works as follows: an individual pays a downpayment to the seller of a piece of real estate. A financial institution, such as a bank, will pay the seller the remaining amount, and receive scheduled payments from the buyer. These scheduled payments form part of a mortgage, read more in our article

• Mortgage Explained – Easy, How-to, Definition, More

How much is a Down Payment?

In the U.S., the rates vary, but the typical rate is 20%, with 5% or less being rare, but still possible. The higher this percentage is, the less an individual is typically going to borrow from the bank, and therefore the lower the interest rates will be on the money needed to pay back. Additionally, the more that is paid, the lower the amount on which interest is collected. E.g. if the rate is 20%, you pay less if this is 20% of $200.000 than if it is 20% of $800.000.

• 5%-20% of Purchase Price

Taxes you Have to Pay Buying Real Estate

There are a few taxes which you need to pay when purchasing a home. These include mortgage taxes, property taxes, and transfer taxes. These are not universal across states, and need to be regarded as a critical part of the additional costs you pay when buying a home. We have a full article on the matter giving simple details

All Taxes You Have to Pay when Buying a Home

Mortgage Insurance – Real Estate Safety Net

Mortgage insurance, not to be confused with mortgage tax, is an insurance on being able to pay your mortgage. Typically this is only required if you make a down payment less than 20% of the original purchase price. Also called private mortgage insurance or mortgage insurance premium (the same thing, but when you receive a mortgage through the Federal Housing Authority). Additionally, those receiving a loan over the department of veteran affairs are not required to pay mortgage insurance of any kind.

How much is Mortgage Insurance?

The rates of mortgage insurance are typically between 0.55% to 2.25%. This percentage is calculated as a proportion of your loan. For example, a loan totalling 2 mil. with a mortgage insurance rate of 2% will be $40.000. Additionally, these are typically paid annually.

• 0.55% to 2.25% of total Mortgage

Furnishing – Critically Underestimated

Actually putting your furniture is an often underestimated part of buying a new house. Although irrelevant for those merely seeking to spread investments, for home owners, these can be substantial sums. The costs of moving into a new house can be on average up to $35.000. Moving costs on average between $1.100-$5.630 for the average homeowner, and for those buying properties in the millions, this sum is substantially larger. These include a thorough professional cleaning of the new house, hiring movers, which can costs up to 50$/hour adding up to thousands. Then supplies to move such as a blankets, or paint to paint walls, as well as hired painters. The list goes on.

• Up to $35.000

For property investors looking to rent out their property, even more significant costs can be expected. With sums of $10.000 to be expected for an unfurnished house, homebuyers often do not calculate this into their expected costs.

Discount Points: How to Reduce your Mortgage Payment

Discount points are also called mortgage points, upfront points, or just points. These are not mandatory, but if paid offer considerable advantages, given that there is not a low loan rate. The buyer pays a certain amount to the seller, which then enables the buyer to lower the interest rate on their mortgage. These can be used similarly on conventional or government loans. If you invest in one discount point, you are able to reduce your interest rate by 1%.

• 1 discount point = 1% less interest

When to Buy Discount Points

It is advantageous for a buyer to invest in discount points when two factors come true

1. The buyer intends to own the property for a long time, which means that the interest will be paid for a long time. A discount point would then mean leass dollars paid each month, and over many years this would be worth it.
2. If you plan on paying your mortgaeg off in the designated time period or longer. For persons who intend to pay an e.g. 10 year mortgage off in 5 years, a discount point would be worth it.

What is an Escrow Fee?

This is a fee which is paid to the title company, escrow company, attorney, etc. who helped the buyer close the sale. Like most other closing costs, these are a percentage of the sales price. Often teh value of which is split between the buyer and the seller.

This fee goes to the escrow agent who helps you close. It can vary based on the purchase price of the home, but it is paid to the party who handles the closing: the title company, escrow company or an attorney, depending on state law.

Title Search Fee – Paid to Title Company

The title search fee is another closing cost. It pays for the work which the title company (an organisation which typically the buyer has hired) does in ensuring that there are no issues in ownership or past disputes. This is an aspect of closing costs in which it is quite simple to reduce costs by investing time to identify high quality and low-cost companies.

Survey/Appraisal Fees – Land Inspection

You will need to be have an official and registered survey and appraisal of a property for the lender. If an existing survey of the land you wish to purchase cannot be procured, a new survey must be carried out to determine the exact boundaries of the land. These usually cost about $500. For the appraisal, you pay a certified appraiser to determine the value of the house. Most lenders require this, this usually costs between $300 and $400.

• Between $300-$400

Property Tax – Pro Rata at Purchase

Property taxes must be paid pro rata at the point of sale. This means it is included in closing costs. For a full overview about this and other taxes, such as the recording tax (also called recording fee or notarization fee) refer to the full article

• All Taxes you Pay when Buying a Home

Origination Fee/Loan Origination Fee

Part of the mortgage closing costs, this fee covers administrative costs for processing a loan, and is usually 1% of the loan amount. Some lenders do not charge this, and instead have a higher interest rate. It is important to know that, often, these fees can be itemized in your final statement.

• Cost about 1%

Homeowners Insurance – Extra Security for Home

Just like with property taxes, when buying a home, you are required to pay a pro-rated share of the homeowners insurance. That means you need to pay ahead for a given time period. This time period is generally one year. Because you pay the insurance premium, the cost depends on the insurance of the house

• One year Insurance Premium

Attorney Fees – Should I get an Attorney?

These won’t be necessary everywhere, or with every purchase. Some states require an attorney to oversee the purchase of the house, and in some situations the buyer may want an attorney for other reasons. These attorneys take fees of course, and when purchasing a property, you will need to pay them. Attorneys are actually mandatory when buying property in New York.

Title Insurance – Protecting Against Claims

Title insurance is intended to protect both the lender and buyer from claims. These claims may be against the house in the case of the lender, and for the buyer prootection against past contractors making claims.

Lender’s Title Insurance

The lender title insurance is a one time fee paid at time of closing. It is paid to the title company, to protect in the case of an ownership dispute, e.g. when a lien arises that was not identified in the title search. This fee is usually betweeen 0.5 to 1% of the loan amount

• One-time fee, up to 1% of loan amount

Owner’s Title Insurance

This is an optional fee. Although you may come to regret it heavily in the case that someone does challenge the ownership. Therefore, while it is not mandatory, it is done by almost everyone, and highly recommended in any case.

Broker Fees – Commissions for Real Estate Sale

Broker fees are probably the first thing people think of when thinking about closing costs. These are also called agent comissions or real estate commissions. These are often paid by the seller, but are also usually part of the negotiations, and in a sense therefore also paid by the buyer. They are the fees which are paid to the brokers of a real estate purchase. These brokers are usually the listing agent (i.e. the seller’s agent who offers the property) and the buyer’s agent (who finds the property for the buyer, organizes, etc.). The fee is usually between 5-6% of the purchase price, meaning an additional cost of up to $60.000 if you are buying a property worth $1 mil.

• 5-6% of Purchase Price

Additionally, in the following there may be slight grammatical errors, as this article was written by a German tax expert. This does not detract from the quality of information.

Grundwerbsteuer Explained: Purchase of Land or Property

As described in the introduction: Whenever a property or part of a property is purchased, land transfer tax is incurred in Germany. The tax is levied on the basis of the Land Transfer Tax Act (GrEStG). The amount of the real estate transfer tax is determined by the federal states. It is therefore a state tax. The respective federal state can therefore decide for itself whether it passes on the tax levied to its local authorities. But first we look at what a Grunderwerbsteuer really even is.

Are you looking at investing in German real estate? Don’t miss our article

• How to Save on Real Estate Taxes in Germany

Grunderwerbsteuer Meaning

Grunderwerbsteuer is a tax on the purchase of real estate. The translation of Grunderwerbsteuer is real estate transfer tax or land transfer tax. Note, in the USA, this concept has different meanings depending on the state (more on that in our article on Real Estate Transfer Tax in the US). How the Grunderwerbsteuer works is explained further below.

Who pays the Real Estate Transfer Tax?

After you have bought your property, the purchase must still be notarized. The purchase contract states who has to pay the land transfer tax: buyer or seller. Without this additional agreement, the law (§13 No. 2 GrEStG) states that first of all the previous owner and the purchaser are tax debtors, i.e. both together, buyer and seller.

After notarization, the notary sends the signed purchase contract to the responsible tax office, which then writes to the party to be charged with the real estate transfer tax assessment. The tax is due one month after notification of the tax assessment. However, the tax office may set a longer payment deadline if necessary (see Grunderwerbsteuergesetz (GrEStG) §15 Due date of the tax).

Grundwerbsteuergesetz (GrEStG): § 13 Tax debtor

Here is a short look at the legal text on real esate purchases according to §13 No. 2 GrEStG. This is our best attempt at a translation, these terms are as similar as possible to the original meaning.

Tax debtors are:

• By Default: the persons involved in a purchase transaction as contractual parties;
• In case of acquisition by operation of law: the previous owner and the acquirer;
• In the case of acquisition in expropriation proceedings: the acquirer;
• In the case of the highest bid in compulsory auction proceedings: the highest bidder;
• In the case of the merger of at least 95 per cent of the shares in a company in the hands of the acquirer: the acquirer;
• In case of acquisition by several companies or persons: these parties;
• In the event of a change in the membership of a partnership: the partnership;
• In the case of an economic interest of at least 95 per cent in a company: the legal entity which holds the economic interest.

Source: Federal Ministry of Justice (as of 09/2020).

Cost table: Tax According to Purchase Price

Status: 09/2020

Tax Rate by State: Amount

• Bavaria – 3,50%
• Berlin – 6,0%
• Bremen – 5.0%
• Hessen – 6.0%
• Lower Saxony – 5.0%
• Rhineland-Palatinate – 5.0%
• Saarland – 6.50% li>
• Saxony – 3,50%
• Saxony-Anhalt – 5.0%

Property Tax Compared to Trade Tax, Income Tax and Sales Tax

Real estate tax is levied on land, but also on hereditary building rights to land, the so-called substance tax. The assessment basis for the land tax is usually the value of the land plot. The tax rate is usually set at the municipal level.

This infographic below shows the tax revenue of German municipalities according to tax types (in billions of Euros). Please note that an English translation was not available. Blue denotes income tax, green is trade tax, purple is property tax, and orange is goods-and-services tax.

Purchase Price – 1.000.000 Euro

Below a graph for the amount of taxes you will pay based on what state you are buying the property in. The basis is a purchase price of 1 million Euro.

Purchase Price – 1.200.000 Euro

Below a graph for the amount of taxes you will pay based on what state you are buying the property in. The basis is a purchase price of 1.2 million euros.

Purchase Price – 1.500.000 Euro

Below a graph for the amount of taxes you will pay based on what state you are buying the property in. The basis is a purchase price of 1.5 million euros.

Purchase Price – 2.000.000 Euro

Below a graph for the amount of taxes you will pay based on what state you are buying the property in. The basis is a purchase price of 2 million euros.

Purchase Price – 2.500.000 Euro

Below a graph for the amount of taxes you will pay based on what state you are buying the property in. The basis is a purchase price of 2.5 million euros.

Purchase Price – 5.000.000 Euro

Below a graph for the amount of taxes you will pay based on what state you are buying the property in. The basis is a purchase price of 5 million euros.

Plots, apartments & house in Germany. Classical or exotic: Which property is suitable as an investment? The interview: Real estate as a capital investment. In our city analysis you will find clues as well (see below).

Tip from the real estate agent: You want a purchase price for comparison? Before you evaluate your real estate , use apps from real estate portals. Here you can simply track your location with GPS and the app will show you purchase prices and comparison offers in your area. The fast way to a first, rough evaluation of your property.

Price: Rent, buy, living

Renting, buying, living. Here you will find more information about the population, rental prices and purchase prices in the individual cities:

• Buy and rent: Berlin
• Buy and rent: Düsseldorf
• Buy and rent: Frankfurt
• Buy and rent: Cologne
• Buy and rent: Hamburg
• Buy and rent: Hanover
• Buy and rent: Munich
• Buy and rent: Stuttgart

Tax optimization: Procedure and Knowledge Build-Up

Topic Taxes. This brings us directly to the topic of optimizing taxes. Knowledge about finances and taxes is absolutely essential when buying your first property. Understanding taxes is important, because this is how you can convert taxes into private assets.

How does it Work? An Example for Real Estate Investors

In the case of real estate, for example, this involves lifting platforms for duplex parking spaces. So lifting platforms, where you get e.g. two cars on one parking space. They have a shorter depreciation period. Here, depreciation for wear and tear applies, distributed over the actual useful life, deductible according to the official lists of the Ministry of Finance. Exception expenses up to 800 Euro – without VAT – can be deducted immediately in the year of purchase.

You will of course no longer get such knowledge from your tax consultant. Why should he or she, if he or she knew about it, your tax advisor* would be a millionaire* himself.

Details

More details on optimizing your tax sheet for your real estate can be found in our article on the matter

• German Real Estate Taxes – Saving on your Property Investment

Which system is right for me? Definition and meaning

Through company profits, a good salary, an inheritance or winning the lottery: when it comes to large sums that need to be set aside (invested), the question arises: what can I do with this capital to make it grow without having to do anything myself? There is a real wealth of investment opportunities on the German and international markets. But which of the investments suits my wishes and me? There is no “right” way through the jungle of investments.

A guide through the investment jungle

Call money, savings accounts, crowd investing, gold bars or real estate (!!) – anyone who opens the product pages of banks and other investment brokers quickly loses track. When reading the first few sentences, it often becomes clear that most advisors only have their own product range in mind.

It is therefore a real challenge to find a guide through the investment jungle. You will certainly find the “right” thread for you personally once you have clarified your own investment goals.

Is there a “best investment in the world”?

It is not a sign of ignorance or megalomania to ask about the best investment in the world! However, the answer depends on who you ask and, above all, what the investor himself wants. A serious investor should not expect objectivity in the strict sense. It is therefore important first and foremost to consider your own objectives with regard to the investment.

Five questions for serious investors

1. How much capital do I have available?
2. How long can I do without my capital?
3. How much time do I have to look after my investment?
4. What risk am I prepared to take?
5. How much experience do I have with investments?

The answers to these questions ultimately determine your personal investment type. What sounds like “pigeonholing” has been a legally effective basis for serious investment advice in the investment business for some years now. The main purpose of these questions is to ensure that the investor is sure whether the product on offer meets his or her requirements. This provides better protection against unpleasant surprises. After all, it’s about money and therefore a significant part of your own existence. By no means every investor is a multi-millionaire and can cope with the possible losses that even the supposedly best investment in the world entails.

Everyone wants risk-free investments!

According to official estimates, around 150 billion euros are currently lying dormant as cash in German households. The total assets in German households are in the region of several trillion euros. There are many reasons for this. Essentially, this “bunker method” is based on the fear of losing money if it is not kept – often literally – under the pillow. But perhaps there is also a good deal of disorientation behind it in view of the many and varied investment opportunities. True to the lyrics of Nina Hagen’s song “I can’t make up my mind, it’s all so colorful here”!

It is not only beginners in the investment business who dream of THE investment without risk, with maximum returns – i.e. the profits that their own money generates through the form of investment. However, this should be pointed out at this point: There is no such thing as a capital investment without risk! Because even the classic savings account or even the “pillow method” carry the uncertainty of the creeping devaluation of money – known as inflation. Put simply: Anyone who has €10,000 under their pillow or “in the bank” (meaning a savings account) today will be able to do less with it in ten or more years’ time in terms of its value (or purchasing power).

In Germany, this has been between 0.3% and 2.6% over the past ten years (Statista). With current interest rates on savings – including overnight deposits – of 0.2% to 0.5%, the loss in value is lower, but still there.

Your personal investment type

This already makes it clear that simply doing nothing with your capital – no matter how big it is – cannot be the solution. It can and should be fun to look at your “personal investment type”. Investors can also make an initial assessment of their investment type outside of discussions with investment advisors. This does not mean that a decision is made about the type and content of the future investment.

Basically, it can be said that the greater your willingness to take risks and your ability to deal intensively with your investment, the greater your chances of a return. But beware: where there is a lot of light, there is also a lot of shadow! Because the opportunity for a return is also the risk of a return, i.e. a loss! It’s a good thing that there are often even several offers for every type of investment – meaning people.

The classics: the good old bank account and interest

Anyone who remembers World Savings Day will also remember that even the small pennies paid in at the time – now called cents – actually earned interest in total. In the 1970s and 1980s, savers received between 4% and 5% interest. This has been going downhill for many years. Today, savings accounts only earn 0.02% interest. In some cases, penalty fees are even charged for savings deposits. Nevertheless, the classics among German savings forms are here to stay. So here is a brief overview.

1. Savings book
2. Call money
3. Fixed-term deposit
4. Savings bond
5. Capital payment plan
6. Fund

Savings book

The good old savings book. Virtually 100% security; no fees, withdrawal limit usually limited; very low interest rate; notice required; very low return.

What does security mean? A total amount of 100,000 euros per account according to the German government’s deposit protection scheme.

Call money

Call money is virtually 100% security; no fees, unlimited withdrawal limit; low interest rate (slightly better than savings account); can be terminated at any time without notice; very low yield.

Looking for favorable conditions?

• Overnight money comparison

Fixed-term deposit (and savings bond)

Fixed-term deposits are virtually 100% secure; no fees; no availability during the agreed term; therefore higher interest rate than savings accounts or call money; fixed interest rate for the entire term; contract expires automatically; very low return.

Looking for favorable conditions?

• Fixed-term deposit comparison

Capital payment plan

Special form of (pension) insurance; the “saver” receives monthly payments from the lump sum paid in; minimum interest rate guaranteed (but currently very low); if “capital depletion” is agreed, payments are made until the capital (including interest) is used up, making higher payouts possible; without “capital depletion”, the monthly payouts are lower, but payments are made for life; low return; very low risk; very low return.

Funds: Several shares “in one”

The best way to think of a fund is as a “pot” into which many savers put money. The pot is managed by fund managers who invest the money collected in shares, bonds, real estate and other securities. There are different types of funds: equity funds invest their capital mainly in shares, bond funds buy fixed-interest securities. Mixed funds, for example, consist of shares and fixed-interest securities.

The top sellers: Shares & Co.

At the latest with the issue of Deutsche Telekom’s so-called “T-share”, savers and investors alike have realized that buying shares in companies can be worthwhile. And since the last financial crisis in 2008 at the latest, many investors have been putting their money into precious metals – preferably gold. What are the advantages? What is against it?

Reading tip:

• Trade shares, ETFs, foreign exchange, crypto & co.

Trading shares on the stock exchange

While shares used to be regarded merely as a speculative investment, today they are seen as an alternative capital investment. Especially in times of low interest rates, shares are becoming increasingly popular.

Investors can earn money by investing in shares in two different ways. On the one hand, investors participate in the company’s profits by the company paying out a dividend, and on the other hand, investors can benefit from increases in value by trading shares. However, the latter reason also involves risks, as it is not uncommon for shares to lose value, which can lead to a lower selling price.

Total loss of capital is also possible!

This is why investing in shares can involve a considerable amount of work for the investor. They must keep a constant eye on the price performance of their investment in order to be able to react quickly in the event of a “crash”. It is even better to act before impending price falls and to shift your assets into other shares. This requires a great deal of knowledge about capital markets and the internal relationships between companies and their markets. There are also fees for the share portfolio and much more. However, as mentioned above, there are numerous investors who have significantly increased their wealth through shares.

Gold and other precious metals on the stock market

There are various ways to invest in gold or other precious metals. The most common is the “physical investment” – i.e. the purchase of the precious metal itself, for example in the form of bars or coins. So-called “exchange-traded gold products” ultimately involve securities that are based on the price of gold. And finally, you can also choose to invest in gold mines.

Anyone who invests their money in gold bears the risk of the development of the gold price. In contrast to a share, gold/precious metal does not develop its value on its own like a company. The price of the precious metal depends solely on supply and demand. There is also a currency risk with gold investments, as the gold price is quoted in dollars and the exchange rate between the euro and the dollar must be taken into account when buying and selling. In the opinion of many experts, precious metals are rather unsuitable as a capital investment from a pure return perspective.

In the long term, the price fluctuations for gold are even much higher than for shares.

Gold is particularly suitable as an investment for investors who are afraid of a currency crash, i.e. fear of the massive and rapid loss in value of their own money.

In this respect, it makes perfect sense to speak of “concrete gold” when referring to real estate as a capital investment. However, the returns on proper real estate investments are higher than those on gold and at least as secure.

• Tip: Recommended book on investing in real estate

The exotics: Green investments, hedge funds and “rare earths”

If this is all too conventional for you, there are also numerous opportunities on the investment market that traditional German savers would describe as “exotic”. Investments in alternative forms of energy are another option that can be understood with a little financial savvy. But what about highly speculative funds or investments in food? Even raw materials such as rare earths are offered and used as investments.

Green investments

Available both as direct company investments (shares) or in fund form; energy producers, food producers, etc. are on offer; fund management is often based on ethical criteria (no arms industry or suppliers, sustainable agricultural projects, forestry, etc.); return opportunities and risks as well as costs comparable with traditional investments and funds.

Hedge funds: betting on negative prices

Investment form for large amounts (usually six-part amounts or more); closed fund (the money is not available for a longer period of time); hedge funds usually speculate on the negative development of market values; high-risk investment form for investors with large assets; sometimes also institutional investors (banks, insurance companies).

Winebank: Investing in wine

In real wine cellars (usually located in the capitals of wine-growing regions), wines from particularly well-known and good locations from selected winegrowers are stored; investors either buy the wines themselves and store them in the winebank’s vaults; the return is realized through sales; there are now also fund investments in wines; The fund manager is an employee of the wine bank; funds are intended for wine investors who do not necessarily want to deal with the “real” wines themselves; returns can be in the double-digit range; however, the investment risk is very high, as wine as a foodstuff is subject to quality fluctuations and its value is also extremely dependent on demand. Only luxury watches are even more popular as an investment.

Rare earths

Investments are made in raw materials (earths or metals) for industrial production, usually of electronic products; less interesting for small investments of a few €10,000; long capital commitment period; highly risky due to sometimes severe fluctuations in value; artificially produced substitutes can make these natural raw materials superfluous; then there is a risk of total loss of capital.

Conclusion: Capital investment – what makes sense?

The more unusual the form of investment, the more familiar the investor should be with the market.

Especially if you are dependent on your money for a pension, for example. It may sound a bit “bourgeois” to your friends if you don’t invest in wine or indium (raw material for the production of flat screens). However, conventional investments (and now certainly also green investments) offer a high degree of stability and security. If you invest your money in real estate, you can even see your investment in real life and show it to other people.

Real estate is becoming increasingly popular as an investment

The term “concrete gold” for a property as an investment has already been used above. In fact, it is not far-fetched to compare the purchase of an apartment or house as an investment with the popular precious metal. Real estate as an investment is also about security and good returns in equal measure. Real estate certainly won’t take you to the proverbial yield heaven, but it does offer a high degree of security in terms of performance and two sources of return on your invested capital.

Capital payment plan

The latter always works if the investor does not live in the purchased property themselves. This is because, in addition to the increase in the value of the property, there is also the monthly rental income. As with a capital payment plan, buyers of rental apartments or houses receive money from the capital investment month after month in this way. The return from the increase in value as such can only be realized when the property is sold.

Net annual rent

As with all investments, there are a few things to consider in the real estate business: The yield. First of all, it is important to pay a reasonable purchase price in view of the expected rental income.

When buying, 20 times the net annual rent is a good benchmark(purchase price factor).

However, due to the current low level of interest rates, there are also offers in attractive regions of Germany where the purchase price is 25 to 30 times the net annual rent. You can easily calculate this with my real estate calculators, specifically the yield calculator and the purchase price factor calculator.

This is already the second exclamation mark:

The location of the apartment or house plays a central role in real estate as an investment.

Consistently high or even rising rental income can only be achieved in sought-after residential locations and regions. In addition to job offers and leisure opportunities for tenants, micro-locations close to shopping facilities, schools, etc. also play an important role. The best basis for a high rental yield is a very low purchase price with a high rental income. However, this is rather rare in the current market situation.

Security of the investment

The type of property also has an important influence on the security of a real estate investment! In view of the increase in single households, investing in single apartments (so-called micro-apartments) initially appears attractive. For students or senior citizens, for example. However, with this form of housing, a higher tenant turnover and thus higher interim costs for finding a tenant etc. must be expected. Short-term loss of rent must also be taken into account.

Minimum return on a property

Nevertheless, anyone who invests their capital in a property – apartment building or apartment – in a good to very good location does not need to worry about secure performance and returns from rents. Realistically, they are 5% yields and more.

• 2% amortization
• X% interest
• 2% maintenance reserve

So that’s the minimum return you need.

5 forms of real estate investment

The purchase of a property as a capital investment is quite classic. However, there are also real estate investments that function like funds or shares. In this case, the investor is not the sole owner of a property, which he can also enter himself.

Real estate shares

The capital is invested in real estate companies by purchasing shares; currently very high returns; but also high entry prices; further performance very uncertain in the long term; high price fluctuation risk; management fees, etc. Here you will find all current daily prices of the top 20 real estate shares.

Real estate bonds

Here, the capital invested is secured by an entry in the land register; the capital can therefore be repaid in full or at least in part by selling the property; however, the land register entry is usually not first-ranking, so that a complete loss of capital can occur even if the property is sold; only for experienced investors; high returns possible

Real estate funds

The capital invested in the fund is spread across many real estate investments; risk diversification offers security; this results in management costs; risk of poor real estate values in the fund reduces returns; “closed-end real estate funds” are very risky and only make sense for long-term investors

Crowd investing

A very popular form of investment in real estate for some years now; “crowd funding” is also possible with very small amounts from €10; investors can choose the properties for their investment themselves and are therefore their own fund managers; risk of total loss is limited with broad diversification; risk due to lack of say in the development of the investment properties; the projects offered are often second-rate because banks did not want to finance them; in the event of insolvency, crowd investors are served last and are usually left empty-handed

• Real estate crowd investment
• Crowd investment calculator

Real estate purchase

Real ownership of a property is considered the safest form of capital investment in the real estate sector; stable and secure value growth when purchase price and location criteria are taken into account; no additional capital required if the property is in good condition; own time required to manage the capital investment, but rather low; double yield payments from rental yield and sales yield; profit from sale of the property tax-free from ten years after purchase(speculation period).

• Buying a property

Conclusion: The “best investment in the world”?

The “best investment in the world” is therefore the one that best suits you as an investment type. If you are looking for security and returns in equal measure and have “staying power”, you should think about buying a property. There is something on the market to suit every budget. As with all investments, you should make sure that the risk is spread as widely as possible. So why not just buy a decent apartment and rent it out first, but then put the remaining capital into another – perhaps short-term or more speculative – investment? In any case, you should seek good advice and be aware of the opportunities and risks to the best of your ability.

2 more little tips!

“Richer than the Geissens” – now free of charge

Bestseller! The book “Reicher als die Geissens” by Alex Fischer is an inspiring guide for anyone who wants to achieve financial freedom and build their wealth through real estate investment. With over two decades of experience as a successful real estate investor, Fischer shares his extensive knowledge, proven strategies and valuable experience to help readers achieve their financial goals â¡ï¸ “Richer than the Geissens” free.

• “Richer than the Geissens” – now free of charge

My (new) real estate children’s books: Timmy’s adventures

Would you like to read your children an exciting bedtime story and let them learn about real estate and investments in a fun way at the same time? Then my new Timmy, Lea and Finn stories are just the thing! You can read all the books and stories online for free or download them as ebooks.

• Real estate children’s books: Timmy’s adventures