Investors face challenges when investing in real estate

Real estate investments: A difficult but all the more rewarding path

The idea of investing in real estate is truly nothing new. However, as demand for real estate continues to increase and prices naturally rise, more and more people want to invest and get a piece of the pie. The time to do so is better than ever; prices are only expected to rise further. The online portal “Immowelt”, for example, assumes that real estate prices in the metropolitan areas of Berlin and Munich will rise by up to 60% by 2030. The problem for many retail investors, however, is that the road to owning their own home is extremely rocky. Many challenges traditionally await you.

These are the classic challenges

Before you can even think about buying a property, you need equity, and a whole lot of that. As a rule, you must be able to finance around 10% of the total purchase price of a property with your own funds in order to be taken seriously by lenders such as banks. But since real estate prices are in the high six to seven-figure range, particularly in the most profitable A-locations in large cities, you must have at least equity in the upper five-digit range. The time factor also plays a decisive role. Just looking for a property for your investment takes several months, sometimes years. This is followed by talks with banks, notaries, investment managers, brokers and a whole host of other intermediaries. This also takes time and drives up the total cost of your investment, because of course everyone involved in the purchase process wants to have their fair share. If you have decided on a property and a financing plan, completed all purchase preparations and somehow saved hundreds of thousands of euros in equity, the market may have already changed and worsened the return prospects of your investment.

Open and closed real estate funds — often no solution

In contrast to buying real estate, open and closed real estate funds offer the opportunity to invest “indirectly” in the booming market. The closed variant issues a fixed number of shares. The aim is always to collect a predetermined sum in order to finance a real estate project. In practice, the closed-end fund therefore proves to be inflexible: They are tied up over a long period of time, the sale or exchange of shares is only possible via detours via the secondary market and entails high costs. The minimum investment amount is also extremely high. Open-ended funds, on the other hand, are more flexible. Not only are unit prices lower, but the number of shares also remains variable. You can also sell your investments on a daily basis at the current redemption price. Both variants also have the major disadvantage of sometimes high administrative and purchase costs, which reduce your return on investment. As a result, the funds are not really an ideal alternative in many scenarios.

Real estate crowdfunding: innovative but risky

Many crowdfunding platforms allow retail investors to invest smaller sums of money in a real estate project. Strictly speaking, this is a loan that is collected with your help and passed on to the project developers. In return, you receive fixed interest rates, usually in a range of 5 to 6 percent. However, there is one problem if the project developer goes bankrupt: The subordinated loans are only serviced when other parties have been paid out. Recent events demonstrate the real risk for small investors. The fixed interest rate also has little to do with real participation.

Blockchain — the potential for complete transformation is there

Blockchain technology could be the future for the real estate market. First of all, we understand this as a concept that digitally connects a wide range of players. The technology's greatest strength lies in its ability to store data securely, transparently and cost-effectively. Contracts and ownership structures could not only be digitally verified, but also lent or even transferred at the same time. A notary, broker or banker in the traditional sense would no longer be needed. For real estate investment, this means that you can directly purchase a property alone or with business partners and act as an owner or partial owner. In this way, you benefit directly from the increase in the value of the property and rental income — just like an owner and without any additional costs or intermediaries.