You want to invest in real estate as a private person? There are several good reasons for this. The biggest difficulty is to find a suitable property, because not every property provides good returns. What you should consider when investing in real estate, we explain step by step in the following article.
Why should you invest in real estate?
There are many ways to invest your money wisely. But why should you invest in real estate of all things? If you take a look at the development of real estate prices in Germany up to 2022, you can see that prices will increase by an average of five to ten percent per year.
In simple terms, this means that the value of real estate is continuously increasing. This is self-explanatory a good basis to invest. According to experts, a real estate bubble is also not to be expected in the near future. This is what we talk about when sellers are willing to pay excessive prices for a property. As a result, the value would drop drastically after a peak.
In addition to the high stability of value and continuous increase in value of real estate, the return on real estate is higher compared to other forms of investment such as overnight money or savings accounts. It is an inflation-proof investment, which is likely to play a not insignificant role for investors due to current global developments.
The right mindset for success in real estate investing
Anyone who wants to invest in real estate needs the right mindset. Many property owners tend to get carried away with their emotions to be influenced. After all, for many people the purchase of a property is synonymous with the fulfillment of a lifelong dream. However, if financial freedom the goal, it may be worth your while to acquire an entrepreneurial mindset.
In concrete terms, this means: Is your investment worthwhile? Will you make a profit in the long term by purchasing your property, either as a retirement provision or through rental income? A (dilapidated) property, in which you have a Heart but which incurs high costs due to constant repairs, does not bring you one step closer to financial independence.
Financial freedom through real estate: how does it work?
If you want to invest in real estate, you have three options:
You live in the property yourself.
You rent out the property.
You're acquiring real estate funds.
All three methods will bring you closer to your goal of financial freedom closer. Provided you live in the property yourself, this is a secure retirement provision. Ideally, you will have paid for the property in full by the time you retire, so you will benefit from significantly lower housing costs in old age.
Interesting to know: the sooner, the better. According to a recent LBS study property owners already benefit in middle age.
Another option is to rent out the property. In this case, you will generate rental income, which will supplement your income. However, it is important to make sure that the maintenance costs do not exceed the rental income. In order not to make a loss, the choice of the right property is crucial.
The aim of real estate funds is to use investors' money to finance larger real estate projects such as shopping centers or hotel complexes. The rental income generated from this, as well as the increase in value when the property is sold, form your return as an investor. A distinction must be made between open-end and closed-end funds. The former invest in several projects, the latter only in one.
Investing in Real Estate: Step-by-step guide for aspiring real estate investors
1. make a decision
You have decided that you want to invest in real estate. Now you should think about in which form: Are you looking for a property to live in or rent out? Or are you more interested in real estate funds?
2. determine the order of magnitude
First of all, you should determine how much you are willing or able to invest in real estate. Keep in mind that you need to have at least 20 % to 25 % of equity to get the lowest possible interest rate on your loan. Therefore, it may be advantageous to save a certain amount first.
3. the object selection
In the course of your search for suitable properties, you will come across a wide variety of real estate. Whether it's a two-bedroom apartment, a vacation home or a listed property: Which property is right for you depends primarily on your intended use and your equity.
4. agreement of the purchase price
Once you have found a suitable property, you must secure real estate financing through your bank and negotiate the final purchase price. Then you arrange a notary appointment to be entered in the land register.
5. notary appointment and transfer of ownership
After the conclusion of the notarized purchase contract, which includes the purchase price and the payment period, as well as the entry in the land register, the property is officially transferred to your ownership. If you want to rent out the property, you can already start looking for suitable tenants.
Tip: Before the property is handed over by the previous owner, it is worth checking that it is in perfect condition: Have the rooms been cleared and cleaned? Have any existing defects been remedied as agreed?
6. appreciation of the property
In many cases, it is worthwhile to invest in refurbishment or renovation measures to add value to the property. If you want to rent out the property, this can be crucial to increasing its attractiveness for potential tenants and charging a higher rent.
7. future perspective
Now it's done: You are the proud owner of your own property. You may be working towards paying it off as quickly as possible so that you can live cheaply in retirement and leave something valuable to your children. Or maybe you want to sell your property for a profit in a few years. After ten years, there will no longer be any speculation tax.
Investing in real estate: 5 tips for choosing the right properties
Investing in real estate can be financially rewarding, as long as you choose the right property. However, there are a number of things to consider. The following tips can support you in your choice.
1. personal inspection
Before you buy a property, you should always take a look at it in person! Just looking at the descriptions on the real estate portal trustis not recommended. Also, ask to see the minutes of the last owners' meetings to get a comprehensive overview of the condition of the property.
Before you buy, make sure you know how much you have in reserves for repairs and maintenance. This way you can better plan your future expenses.
3. check the land register entry
Be sure to ask to see the land register entry to rule out the existence of other residential rights or life annuities. This will save you from nerve-racking disputes.
Especially if you want to rent out the object, it should be within reach. It is not very practical if you live in Hamburg and rent out a property in Munich. As a landlord, you need to be able to be on site quickly if there is a need for clarification.
5. compare the purchase price
Don't be seduced by the first impulse to buy, but take the Timeto compare the purchase prices of different properties with each other. If a property is offered significantly above or below the average market price, skepticism is appropriate.
The importance of site selection
We have already touched on this briefly, but now we would like to take another closer look at the important topic of location selection. Those who want to invest in real estate usually start by looking around in the big cities. The fact that this is not always the best option is confirmed by a Study of Landesbank Baden-Württemberg (LBBW).
In major German cities such as Berlin, Stuttgart, Hamburg and Munich, the real estate market is repeatedly experiencing significant overvaluations. Double-digit numbers of interested parties at open viewings are not uncommon. As a result, there is a real competition among bidders, which drives the prices of individual properties even higher.
Before buying real estate, it can therefore be advisable to take a closer look at the price development in the cities and possibly consider smaller regions. An overview based on the results of the Postbank study "Wohnatlas" can be found here. here.
How to secure financing for real estate
Only very few people can pay for a property immediately in cash out of their own pocket. Most interested parties are dependent on financing agreements, which are processed via credit institutions such as their own house bank or via building societies.
The golden rule here is to check and compare offers before you decide. Be skeptical of offers, no matter how attractive they may seem at first glance. Building and loan associations in particular are interested in commission payments and high interest income.
Risk management in the real estate sector
If you want to invest in real estate, you should keep in mind that the purchase price alone is not enough. Plan at least 10 % of the purchase price for renovation and refurbishment.
Furthermore, there is the possibility to take out a so-called residual debt insurance, which takes effect in case of death, unemployment or other serious creditworthiness problems. The costs amount to around 10 % of the loan amount.
Real estate investment and taxes: What you need to know
The private purchase of a property is not tax deductible. In order to save taxes nevertheless, it can make sense to purchase the house and the land separately in order to keep the so-called real estate transfer tax lower.
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