Real estate as an investment: Buy or invest yourself?

“Betongold” has lived up to its name for decades. Real estate prices in Germany are rising steadily and underline the image of real estate as a reliable and lucrative source of income. For example, the Construction price index for residential real estatethat prices for residential buildings across Germany rose by 29% in the period 2010 to 2020. Prices for building land rose by 102% within ten years. In popular metropolises Real estate prices such as Frankfurt, Munich and Berlin rose significantly more.

Even the Forecast up to 2030 speaks for concrete gold in the portfolio — especially when the investment properties are located in sought-after major cities: Germany's most expensive city Munich will experience by far the strongest price increase among the so-called “Big Seven”, the largest German metropolises: Experts predict an annual increase of 1.99% in real terms by 2030. Düsseldorf followed in second and third places with an average growth rate of 1.09% and Berlin with 1.07%. Prices in Frankfurt am Main are expected to rise by 1.02% annually until 2030.

Despite attractive market opportunities, currently only use 26% of German real estate as an investment, although the percentage has remained relatively stable over the past ten years.

Benefits of real estate as a form of investment

Condominiums, houses, office or commercial properties are a stable or high-yield asset class for several reasons:

• Real estate is physically tangible and has a high intrinsic and idealistic value.
  
• Investors are benefiting twice as much from the ongoing low interest rate environment. First, the average return on a property, i.e. the ratio between income and expenditure, has been significantly higher than the return on interest-bearing forms of investment for decades. Second, interest rates on real estate loans are at historically low levels, which makes financing easier.
  
• However, due to the low interest rate environment, more and more banks are charging penalty interest on balances — in some cases starting at just 5,000 euros. In order to protect their capital from penalty interest rates and the current rising inflation, customers are looking for lucrative alternatives and are finding what they are looking for on the real estate market.
  
• In times of inflation, real estate is an attractive and secure investment that enables long-term asset preservation or accumulation. This is because the real estate market price rises with inflation, but the loan amount is constantly declining and even falls as a percentage of the market price.
  
• Leased properties can generate passive income for the owner. Property owners also benefit from tax benefits. For example, you can deduct the purchase and production costs for your property from tax over many years.

All of the above arguments speak in favour of the real estate asset class. However, investors should ask themselves how they want to use real estate as a capital investment.

Which type of investor are you?

1. The real estate buyer

You already own a property or are about to make a purchase decision.

Equity is the most important criterion for deciding to buy your own property. As a rule of thumb, at least 20 to 30 percent of the total costs of purchasing your property should be covered by your own capital. Better even more. Because the higher the equity ratio, the less financing costs.

But even with the necessary capital, it is not always easy to find the right property and not every property generates high returns. That is why it is important to prepare the purchase and financing carefully. To ensure that your real estate investment does not turn out to be a capital swallow, you should consider the following tips:

• Choose the right location for your investment property
• Pay attention to a solid building structure, energy efficiency class and additional costs
• Calculate Make the return realistic
• Set aside money each month for unexpected expenses such as renovations

If you choose a home that you live in or rent out yourself, you bear all costs and the full risk — but you also receive the full return or rent.

2. The real estate investor

You have assets and would like to benefit from the opportunities offered by the real estate market.

Instead of buying real estate directly, indirect participation via real estate bonds or real estate funds can also be interesting. But most of these real estate investments involve risks. In addition, investors cannot specifically select the projects in which they invest themselves.

• Real estate bonds

The term “real estate bond” is not legally protected. A real estate bond is usually based on a specific real estate portfolio, which is financed by the issuer and is intended to generate interest for the investor. However, companies are not required by law to actually invest bond money in real estate in any form.

In addition, real estate bonds often only suggest false security through collateral in the land register, as they do not offer any top-level credit collateral. Due to the complexity and low transparency of the securities, it is often not easy for investors to correctly assess the risks of real estate bonds.

• real estate funds

Real estate funds usually finance large real estate projects such as hotels or shopping centers with investors' money. Rental income and the increase in value when sold form the return. This requires between open and closed real estate funds be differentiated. Open-ended real estate funds offer the advantage that the risk of loss due to investments in several projects is minimized. However, these are subject to a minimum legal holding period of two years and a one-year notice period. The exit from an open-ended real estate fund therefore needs to be planned. There are also fees for both fund management and purchase.

Closed-end real estate funds As a rule, only invest in one real estate project. If enough capital is available for financing, investors can no longer buy any more shares. Closed-end real estate funds have two disadvantages: On the one hand, the minimum investment is relatively high, usually between 5,000 euros and 10,000 euros. On the other hand, the offers often have a very long duration. This real estate investment is therefore only suitable for investors who own a lot of wealth and do not need the invested money in the next 10 to 30 years.

3. The real estate prospective buyer

You would like to benefit from real estate market opportunities, but you lack financial resources, time and/or expertise.

Multi-asset investment platforms are recommended for investors who have little time, know-how and equity but still want to invest specifically in the real estate market and keep an eye on costs. Enable by tokenizing tangible assets specialized providers Even investors with low capital investment make targeted real estate investments. Tokenization meansthat real estate objects are divided into smaller trading units, each represented by a so-called security token and represented on a blockchain.

The blockchain stores a digital image of the property and stores details such as ownership rights in a smart contract. In this way, investors can retain control over their costs, asset allocation and diversification while benefiting from returns on appreciation, rental income, or sales revenue.