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This Is How Real Estate Investments Work

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If you want to invest in real estate, you can compare various pros and cons.

Understanding how real estate investments work is the basis for making a good purchase decision. We have therefore summarized the most important information about real estate as assets.

Define investment goal

At the beginning there is the consideration of which goal should be achieved with the capital investment. Is it about rapid capital growth? Long term security? When defining your own investment goal, the question always arises as to what time horizon is being considered and what return is expected. These two factors influence how high the risk is that must be taken in order to achieve the desired capital growth in the planned time.

The following considerations must be made:

  • How much equity is there?
  • How much outside capital can and do I want to raise?
  • What time horizon do I consider for my investment?
  • What return do I expect?
  • How much working time do I want to invest in order to achieve this return?

The next paragraphs, with which we examine whether a real estate investment is the right choice, revolve around these questions.

Optimize capital structure

Anyone who deals with investments knows that it is crucial to achieve the most attractive possible return on the equity invested.

This is also one of the biggest advantages that real estate investments have over other forms of investment. The physical property as collateral enables banks to be willing to provide outside capital for the investment. The total capital employed thus increases significantly.

The leverage effect

If the return on the property is higher than the interest costs of the borrowed capital, then – to put it simply – cash is also earned with borrowed capital. This approach is known as the leverage effect. A simple example shows this benefit most clearly:

Tim saved 30,000 euros. If he invests in ETFs, he can invest 30,000 euros. In our example, he achieves a return of 4 percent per year. His alternative: Tim could borrow an additional 100,000 euros and buy a condominium. In our example, the interest is 1.8 percent, but the apartment offers a return of 3 percent. So Tim not only earns with his own equity, but also with the borrowed capital used.

No bank will provide a private investor with capital to invest in the stock market. In real estate, things are different. This results in a great advantage that must be included in every investment decision.

Contra debt capital

In order not to leave the leverage effect unreflected, we would also like to point out the disadvantages of a loan. Not all people are comfortable with owing a significant sum to a bank. Not even if the property provides a certain level of security. Borrowed capital can therefore be unsuitable for some people if risk aversion is particularly high. What can be done about it is that the equity share is increased and fixed interest phases are agreed. This gives planning security and reduces the risk.

Another point is that personal creditworthiness affects the cost of borrowing. Debt capital is more interesting for people whose credit rating is very good. Accordingly, the interest costs are lower and thus the return increases.

It is also easier to sleep with borrowed capital if real estate investments are not the only financial investment. Broad diversification is always an important aspect of any portfolio.

Real estate investment process

Once the decision has been made to invest in real estate, the next step is to actually process the investment. The first decision that needs to be made is: fix and flip or buy and hold?

Define goals

Specifically: Should a property be bought, renovated and resold? Or is a property bought that is rented out on a long-term basis?

Refurbishments can be a major challenge and should only be considered if you have the appropriate expertise and personal contacts with reliable tradespeople. In most cases, the decision will probably be to buy an apartment that is to be rented out for the long term.

The personal time commitment must also be taken into account. Organizing a renovation means a lot of effort, even if you don’t work personally. This time must be taken into account as an expense in the calculation.

Housing and financing

The topic of financing should also be clarified during the apartment search. Having a firm financing commitment from a bank in your pocket is important. This is the only way that very quick purchase decisions can be made with cheap real estate. Therefore, the following applies: have your own finances under control, draw up a solid household account and hold talks with banks.

In the meantime, you can already search for suitable objects. The ideal property should be in the desired search region and bring the corresponding gross return. The on-site visits, on the other hand, have to be carried out by yourself. Here it is important to appear professional, ask specific questions and compare properties in order to get a clear picture of which property is really the right choice.

Make decision

A clear warning at this point: Many people prepare themselves down to the smallest detail and make countless viewings, but do not dare to make the final purchase decision.

Every property always has certain disadvantages and risks. The perfect object does not exist. It is important to be aware of this and at a certain point to make the decision which apartment fits best so far. This is a big challenge, especially when buying a home for the first time.

Handle the purchase process

The purchasing process itself is clearly structured. In most cases, there will be a broker who will guide you through the process step by step anyway. It is important to always collect all documents, regardless of whether banks or brokers are transmitting documents.

A structured approach is important in order not to lose track of investments. The financing bank will communicate which documents are required for the property anyway. In this phase there are no major sources of error, even if it is the first real estate investment.

The professionals involved in the transaction guide you through the entire process, which can take a few weeks in total.

Tax optimization

A tax advisor should also be consulted at an early stage to clarify whether tax advantages can be used in the course of the investment. This also applies if small renovations to the property are necessary or external financing is required. The details of this are quite individual and should definitely be clarified. This ensures that, on the one hand, all legal opportunities to reduce the tax burden are used. On the other hand, it is important to correctly tax the income from renting out the property.

The constant exchange with a tax consultant is therefore an important point. The costs for this should be taken into account when calculating the return on real estate investments. Typically, this consulting effort pays for itself anyway, since the corresponding tax savings are the output of the consulting.

Handover of the property

Once the entire bureaucracy of the real estate purchase has been dealt with, the physical handover of the apartment also takes place. The keys will be handed over.

In the case of a property that has already been rented out, it is advisable to talk to the current tenants in order to get to know them personally. The direct contact gives them the certainty that there will be no personal need for the time being. In addition, this personal connection reduces the risk that the rent will not be paid. Establishing a good relationship with your own tenants is only beneficial for both sides.

After the handover, the administration of the building must be informed that there will be a new contact person for the property in the future. It must be ensured that all the bureaucracy that arises has been completely dealt with. Once that’s done, the nice part of real estate investments begins: the tenants are informed of the new account details for paying the rent and regular payments begin to come in.

It is important that all expenses and income are clearly tracked. Correct bookkeeping is essential, whether for the tax office or the financing bank. In addition, the occasional exchange with the tenants and the financing bank should be maintained. After all, it is quite possible that the next property will be bought soon.

In order to create the best conditions for this, communication is the most important basis. Anyone who shows the bank that the installments are paid on time and can present good calculations that have been adhered to secures a good negotiating position for the next real estate loan.

Conclusion

The first step is to decide whether to invest in real estate. The big advantage is that apartments can be bought with borrowed capital. The low lending rates currently ensure that the leverage effect can be used comparatively easily. In this way, returns are not only achieved with one’s own savings, but also with the borrowed capital provided.

If the decision is made to buy a property as an investment property, a further distinction must be made. Should an apartment be bought, renovated and sold? Or is the plan that a property is acquired and rented out for the long term? Refurbishments should only be carried out if a corresponding amount of time can be invested or good contact with reliable craftsmen is available.

The subsequent real estate investment process is clearly structured. Some preparatory work is essential, for example when it comes to talking to banks and preparing a clear overview of your own financial situation. Thanks to ThinkImmo, you can easily search for suitable properties with a corresponding gross return online. Personal viewings are the next important step. At the same time, talks are being held with banks and a tax consultant. The necessary preparatory work for the transaction is taking place at the same time as the property search. This makes it possible to buy quickly when a suitable property comes onto the market and is found.

A decision should not be made in haste, but should be made quickly. This is how the first real estate investment is put into action and the rents soon begin to flow. When taking over the property, personal discussions with existing tenants should be sought in order to establish a good relationship. As a further consequence, the occasional exchange with the lender is to be sought. In this way, trust is also built up here in order to secure further financing.

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