Buying a condominium is not only possible for personal use. If you are looking for an investment property, you could make good profits over time by buying a condominium in an attractive location. For several years now, traditional investments have hardly yielded any profits due to the European Central Bank’s low interest rate policy. As a result, the rate of inflation is no longer covered by interest rates. Real estate is a popular alternative to traditional investments. They have always been sought-after investment properties. Demand has increased due to the disappearance of attractive alternatives on the money market. The low interest rates for financing, which are also a consequence of the interest rate policy, have also contributed to the current boom on the real estate market.
Stable value when investing in real estate
If you decide to invest in real estate, you will benefit from a stable value that transforms into value growth over the years. This distinguishes real estate from traditional investments, which are based on interest rates or the economy. These include investments in the stock market, for example. In addition, real estate is considered inflation-proof: if inflation occurs, the value of a property often increases. And even if the value falls, for example because the property is located in a less sought-after region, a total loss is almost impossible. As the real estate market has also increased in value since the start of the coronavirus crisis, experts believe that real estate is crisis-proof. It is a tangible asset that is also booming in times of crisis.
Condominium as a capital investment is popular
If you want to make a crisis-proof investment in real estate, buying a condominium is an option. Find out how a condominium works as an investment and what you need to bear in mind to minimize potential risks.
Why is a condominium an investment?
Is the purchase of a condominium considered a capital investment and can you claim tax benefits? The answer to both is yes, if you bear a few things in mind. Real estate is considered a tangible asset. The investment always makes sense if you want to diversify your investments. Once you have bought a property, you decide how you want to use it. In any case, you are investing in a long-term capital investment:
– If you rent out the property, you will benefit from additional income in the long term.
– If you live in the property yourself, you save on rental costs. If you have paid off the financing by the time you retire, you will live rent-free in old age. This means you can provide for your old age by buying a condominium.
– As a rule, real estate increases in value over the years. You therefore benefit from capital growth due to the increase in value.
The increase in value not only affects houses, but also condominiums. If the apartment is in a good location and has an advantageous layout, you can consider selling it after a while. You can make an interesting profit from this sale.
Tax benefits in connection with the purchase and sale of a condominium
If you decide to buy a condominium, you can take advantage of tax benefits. As a capital investment, you can write off the investment costs against tax. If you are considering selling because the condominium has increased in value, you should first wait for the speculation period of ten years. This means that you must own the apartment for this long, otherwise speculation tax will be due. After ten years, this speculation tax no longer applies. For you, this means that you benefit from a tax-free profit when you sell.
Inflation protection and protection against total loss
The other advantages of investing in a property are that it is a safe investment. A total loss is almost impossible and a severe loss of value is extremely rare. Above all, real estate is safe from inflation.
Are you specifically looking for a capital investment? This is where a condominium offers you the best conditions. If you rent out the condominium after buying it, you will generate regular income. This is the focus of this article.
How can a condominium be used to generate rental income?
If you buy an apartment and rent it out, you can create a long-term capital investment. You benefit from the regular rental income. You can achieve this goal in various ways.
Purchase of a rented condominium
This is a good option for many property buyers: they buy a condominium that is already rented out. The advantages are obvious: you don’t have to worry about renting it out yourself. You can also obtain information about the tenant from the previous owner. For example, you can find out whether they are reliable. Please note that the current tenancy is not affected by the sale. This is an advantage with reliable tenants. However, if it turns out that there are problems with the tenant, you will not be able to terminate the tenancy so easily. This is usually only possible if you register your own requirements. Another advantage of buying a rented condominium is the lower price: you can save up to 30 percent of the purchase price, as rented condominiums are less popular on the market than detached properties. The reason for this is that these apartments are generally only of interest to capital investors.
Note these constellations
If you would like to buy a condominium for the purpose of renting it out, these constellations are particularly recommended because they are easy to rent out:
+ Care properties
+ Micro apartments
+ Student apartments
+ Listed properties
+ Holiday properties
You can assume that these properties will attract a high level of interest from customers even if they are vacant.
How do you calculate the return on a rented condominium?
You are thinking about buying an apartment as an investment and would like to calculate the potential return in advance. This is possible with a yield calculator. It is highly recommended that you find out about the possible return in advance. The return should be right for the purchase to be worthwhile.
Formula for calculating the yield when renting out a condominium:
Yield = (annual net rent/purchase price) x 100
The result is a percentage value.
There are forms of investment that generate a higher return. These include investments on the stock market, for example. However, you take a certain risk here, which in the worst case can lead to a total loss. You are safe from this when buying a property. You also benefit from an increase in value in the medium term and have less work involved in managing the investment than is the case with a share portfolio.
Realistically estimate the annual net rent
Please note that you should not set the annual net rent too high. Use the average rents in the region as a guide and deduct the costs of administration and renovation, as well as possible loss of rent, for example if the tenant gives notice and the property is then vacant. Don’t forget to factor in the ancillary purchase costs.
Purchase price factor: When is the condominium overvalued?
If an apartment is purchased as an investment, it may be overvalued if the purchase price factor is set too high. Set the purchase price factor at a maximum value of 25. If the condominium is located in a large city, a factor of 30 is also appropriate. The purchase price factor indicates after how many years you can generate a profit from the rental income. To do this, divide the purchase price by the annual net rent. With a high initial investment, it will therefore take considerably longer for you to generate a return. When buying apartments located in a trendy district in a large city, bear in mind that they are often overvalued. If you buy such an apartment, you will have to reckon with a longer period of time until you generate a return.
Investing in a condominium as an investment property: what you need to consider
You want to buy an apartment with the aim of generating an investment. You can achieve this if you keep a few things in mind.
Assumption of the duties of a landlord
You must be aware that when you buy an apartment for the purpose of renting it out, you not only earn money, but also have obligations. As a landlord, you are the contact person for the tenant if there are any problems. In addition, you should not underestimate the administrative work involved in renting out an apartment. This includes maintaining the apartment by carrying out major repairs or modernizations. If the apartment is vacant, it is your job to find a tenant. You will also be responsible for monitoring rent payments and billing as well as solving problems, for example with other tenants or with the apartment manager.
Buying real estate is a long-term investment
Please note that when you buy a property, you are making a long-term commitment to the investment. This means that you should only invest money that you will not need for another investment for a period of at least ten years. Short-term investments are subject to speculation tax. You pay this on any profit you make when you sell the property. If you have owned the property for a period of ten years, speculation tax does not apply. You should therefore ensure that you do not find yourself in financial difficulties as a result of the often high investment in a property. You should also be able to cope with a prolonged loss of rent. Only if you meet these requirements should you consider investing in a property.
Profit-risk balance factor: Is the ratio of return prospects and investment risk right?
Before you decide to buy a condominium as an investment, you should weigh up the return prospects against the investment risk.
These four criteria are important for a real assessment:
1. the condominium should not be overvalued. The purchase price factor should not exceed 25.
2. Based on the market situation, you assume that the value of the apartment will increase
3. The building fabric is good. You do not expect any major investments for refurbishment or renovation in the next ten years.
4. You expect rents to rise.
Not all four criteria always yield a positive result. It is important to weigh them up. The criteria under points one and three can be determined very well. The criteria under two and four are speculations that are not very reliable. However, you can make fairly good predictions based on the rent level and rent index.
Location factor: Where is an apartment worth investing in?
Many people ask themselves to what extent the location of the property is important if the investment is to be a good one. If you want to buy a property as an investment, the location plays an important role. You should also consider the rentability of the apartment as another important factor. There are criteria that have a fundamental influence on the medium-term rentability of the apartment.
These include:
+ The location of the apartment
+ The population development in the region
+ The infrastructure around the location of the apartment
The location of the apartment
If you decide to buy a condominium in an expensive city center location, you will initially pay a high purchase price and thus have a negative impact on the purchase price factor. You cannot necessarily assume that these apartments promise a high return. It is better to opt for a central or peripheral location with a lower purchase price. In this context, however, please note that apartments in a very unfavorable location or in an unattractive environment can be difficult to let.
Population development in the region
Find out about population trends before buying a home. In this context, find out what the situation is with people moving in and moving out. Is there a healthy relationship between the two? There is statistical data that is publicly available and provides you with important information on this. If your research shows that the number of people moving out exceeds the number moving in, it is advisable to refrain from buying. Such a development often results in a vacant apartment.
The infrastructure around the location of the apartment
A good infrastructure is important to many tenants. In the course of climate protection, there are more and more people who do not want to be dependent on a car for their mobility. Optimal transport connections are therefore very important. Medical care and the number of stores nearby are also key factors that make up a good infrastructure.
Condominium as an investment: How does financing work?
To buy a condominium as an investment, you usually need financing from a bank. It is important to note that you must have the necessary creditworthiness. In addition, the rental income should at least cover the costs of financing. In principle, however, financing is always a very individual matter. If you are unable to finance the purchase of the condominium entirely from your own funds, you should bear the following things in mind:
– Choose the loan installments in such a way that repayment is possible at any time. This should also be the case if you have a temporary loss of rent and cannot pay the installments from this income.
– Pay attention to a positive leverage effect. This occurs when your return after deduction of taxes is higher than the borrowing rate you have to pay for the borrowed capital.
– The bank usually requires collateral to borrow capital. You provide this security by the bank entering the loan as a land charge in the land register. However, it is important that the actual value of the property is not less than the financing requirement and that the rental income is secure.
Complete financing of a condominium with borrowed capital
In principle, it is possible to finance a condominium without equity using only a loan. If you are planning such financing, you must meet certain requirements:
+ A very good credit rating, certified by the Schufa score
+ An above-average salary
+ A secure job
If you would like to find out more about financing a real estate loan without equity, we recommend the article “Real estate loan without equity”. Here you can find out everything you need to know about fully financing a property.
Condominium as an investment: what are the risks?
By now, you have become familiar with the advantages of buying a condominium as an investment. However, there are also some disadvantages that you should be aware of before deciding to make this investment. After all, it is a long-term investment that requires a high capital outlay. Only if you are aware of the risks will you have considered all the factors and be able to make a free decision.
We have summarized the most common risks when buying a condominium as an investment for you:
Prices collapse as the boom in real estate purchases comes to an end
It always happens that prices fall. The reasons for this can be very complex. It is therefore important that you only invest money that you will not need in the medium term.
A rent cap is decided by the government
In this case, you do not have the option of increasing the rent within a certain period. This may have a negative impact on your return.
Greater supply through residential construction
If there is sufficient supply, demand decreases and prices fall.
Rent arrears and legal disputes
It can happen that tenants do not pay or that you have to invest in a legal dispute. Even in this case, the return is not as high as expected.
Vacancy
You cannot re-let the apartment at short notice after a tenant moves out and have to contend with loss of rent, although you still have to bear the costs.
Repairs and modernizations
You have to make unplanned investments to renovate or refurbish the apartment. A planned refurbishment may also be more expensive or take longer to complete, and by now you have seen the advantages of buying a condominium as an investment. However, there are also some disadvantages that you should be aware of before deciding to make this investment. After all, it is a long-term investment that requires a high capital outlay. Only if you are aware of the risks will you have considered all the factors and be able to make a free decision.
We have summarized the most common risks when buying a condominium as an investment for you:
Prices collapse as the boom in real estate purchases comes to an end
It always happens that prices fall. The reasons for this can be very complex. It is therefore important that you only invest money that you will not need in the medium term.
A rent cap is decided by the government
In this case, you do not have the option of increasing the rent within a certain period. This may have a negative impact on your return.
Greater supply through residential construction
If there is sufficient supply, demand decreases and prices fall.
Rent arrears and legal disputes
It can happen that tenants do not pay or that you have to invest in a legal dispute. Even in this case, the return is not as high as expected.
Vacancy
You cannot re-let the apartment at short notice after a tenant moves out and have to contend with loss of rent, although you still have to bear the costs.
Repairs and modernizations
You have to make unplanned investments to renovate or refurbish the apartment. A planned refurbishment may also be more expensive or take longer to complete, and by now you have seen the advantages of buying a condominium as an investment. However, there are also some disadvantages that you should be aware of before deciding to make this investment. After all, it is a long-term investment that requires a high capital outlay. Only if you are aware of the risks will you have considered all the factors and be able to make a free decision.
We have summarized the most common risks when buying a condominium as an investment for you:
Prices collapse as the boom in real estate purchases comes to an end
It always happens that prices fall. The reasons for this can be very complex. It is therefore important that you only invest money that you will not need in the medium term.
A rent cap is decided by the government
In this case, you do not have the option of increasing the rent within a certain period. This may have a negative impact on your return.
Greater supply through residential construction
If there is sufficient supply, demand decreases and prices fall.
Rent arrears and legal disputes
It can happen that tenants do not pay or that you have to invest in a legal dispute. Even in this case, the return is not as high as expected.
Vacancy
You cannot re-let the apartment at short notice after a tenant moves out and have to contend with loss of rent, although you still have to bear the costs.
Repairs and modernizations
You have to make unplanned investments to renovate or refurbish the home. A planned renovation may also be more expensive or take longer.
Conclusion
An apartment as a capital investment promises a good return in the medium or long term and is worthwhile. However, you should pay attention to these components if you want to invest in a worthwhile property:
– The property is not overvalued.
– The building is in good condition
– You generate secure rental income
– The property is in a good location
– The prospects for a good return are promising.
– The financing of the property is on a secure footing
In summary, it can be said that rented condominiums represent a good capital investment and can promise a secure return, especially if the positive leverage has a good effect.
