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For many people, real estate is the dream of living in their own four walls. But it is also suitable for capital investment – if the conditions are right.
In addition to stocks, bonds or fixed-term deposits, real estate also plays an important role as an investment for many German citizens. It promises value retention over a long period of time and the prospect of profits through rental income or resale.
Anyone who is currently planning to buy a property will find conditions that are somewhat more favorable than they were a year or two ago. On the one hand, building interest rates have fallen slightly again: banks currently charge between 3.3 and 3.5 percent annual interest for a standard mortgage loan with a fixed interest rate of ten years. This is significantly lower than around a year ago, when property buyers faced an interest burden of up to four percent.
Prices are even cheaper than one or two years ago
Even if the prices for apartments or houses seem very high to many consumers, the price level has fallen in the last two years. While the prices for apartments and houses, especially in large cities, more than doubled between 2010 and 2022, they then fell. In the second quarter of 2024, prices for residential properties were still 2.6 percent below those in the same quarter of the previous year, according to the “House Price Index” of the Federal Statistical Office. However, they have already increased by 1.3 percent compared to the first quarter of 2024 (see our graphic).
So a good time to enter the real estate market? This is how Tobias Just, professor of real estate economics at the University of Regensburg and head of the IREBS Real Estate Academy, sees it. However, it is important to take various factors into account when looking for a suitable property: “One is, in which city is the property located? The large cities including their surrounding areas, but also university towns, continue to be the attractive regions,” he says Just. “Currently more people are looking for something outside the city than in the city. But that doesn't mean that the city centers are unattractive.” Rather, this is a sign that there is still a shortage of properties there.
Smaller apartment attractive for many
Just sees the type of property as the second success factor in real estate investment. Smaller properties are currently most suitable. They are interesting for both young people and older people. Both in the city and in the “bacon belts” around metropolitan areas.
The rent multiplier is often used to estimate whether the purchase price for an apartment or house is cheap. It says that many annual net rents have to be paid for the purchase. The lower this multiplier, the cheaper, according to real estate expert Just: “The multipliers for apartments are often around 25 times in attractive locations. They can also fall below 20 times in simple locations.” The multiplier also signals how good a situation is. “A few years ago, even multipliers over 30 were possible, but that is no longer the case today,” says Just.
Location as a decisive return factor
If you want to use a property as an investment, you should also look at the potential returns. This primarily includes stable rental income. But also the chance of the highest possible resale value. And that depends above all on one factor, says Ralf Scherfling, financial expert at the North Rhine-Westphalia Consumer Center: “The location is very important. It should be a property that is in a place where I will be in 10, 20 or 30 years can still ideally achieve a reasonable selling price,” says Scherfling. But the quality of the property is also important, “what condition it is in, whether it is flawless, so to speak, or whether there is a great need for renovation that still needs to be addressed.”
Before making a purchase decision, Scherfling recommends consulting an expert who can best identify possible defects and hidden costs. In order to estimate the potential return of a property, it is also worth doing a yield calculation; a number of internet portals and Stiftung Warentest offer appropriate calculators for this purpose.
Enough equity for the loan?
Anyone who has found a suitable investment property usually finances a large part of the purchase price with a building loan. In order for the purchase to be easily financed by a bank, the buyer should be able to use their own capital, says Scherfling: “You should definitely be able to cover the additional purchase costs yourself, so that's up to 15 percent. And ideally, you have to You also save around 20 percent of the purchase price.”
An important advantage of a rented property is taxation. The rental income must be declared as income in the tax return. The interest payments on the mortgage loan can be claimed for tax purposes. And through the AfA regulation, abbreviation for “deduction for wear and tear”, the purchase price, including a large part of the additional costs, can be deducted from taxes – but over a long period of time. The AfA regulation allows two percent per year to be claimed for tax purposes over 50 years for properties that are not older than 100 years.
New buildings with tax advantages
For new buildings from 2023 onwards, three percent can be deducted from the tax annually. The federal government wants to reward the creation of living space. “This is of course still a valid and important argument for builders who want to create new apartments, because you can get your investment back more quickly through depreciation,” says real estate expert Tobias Just.
Last but not least, potential buyers should be aware that a property as an investment also entails a certain “cluster risk”. Because a lot of money is concentrated on one type of investment and one object. The location, purchase price and loan interest rate should also be correct. And there should also be sufficient financial cushion so that the dream of owning your own home as an investment can come true.
Andreas Braun, HR, tagesschau, November 12, 2024 8:18 a.m