Have you been wanting to add a real estate investment to your portfolio for a while, but are looking for a flexible option that doesn't require a large upfront investment? Going forward, quirion will also offer real estate investments!
To this day, real estate remains one of Germans' most popular ways to invest. No wonder: after all, it promises stability, especially in times of crisis. But the devil is often in the details, and direct investments aren't the right choice for everyone. They require a lot of capital and a long-term commitment.
Of course, there are also plenty of other ways to invest in real estate, such as closed-end or open-ended funds, REITs and crowdinvesting. But here, too, private investors often have to make compromises: on flexibility, on minimum investment amounts, or on their choice of target properties. On top of that, many of the options accessible to private investors frequently offer only average-quality target investments.
What makes a good real estate investment
But what determines whether an investment succeeds? The real estate mantra that the three most important factors are location, location and location can probably be considered outdated. With direct investments and funds in particular, many factors come into play. Among them: the location, the purchase price factor, the type of use, existing leases and the condition of the property.
That said, location remains one of the most relevant criteria here! Because, as the word "immobile" suggests: real estate can't be moved. But what actually counts as a prime location? The key criteria distinguished by the Fraunhofer MOEZ can offer good guidance here:
- Population: How has the number of residents developed? Is there an influx of new residents?
- Traffic connections of the property: links to local public transport
- Infrastructure: housing, hospitals, educational and cultural institutions, the surrounding landscape and environment
- Image: cities and neighborhoods each have a more or less positive or negative image.
But the appeal of a real estate investment isn't as easy to assess in every location as it is in the very center of one of Germany's five largest cities. Why, for example, is Leipzig's Grafisches Viertel a prime location for office properties? Because the demand for modern office space is higher than the supply, and the trend points to a further rise in demand. Making this assessment, however, requires detailed analysis and expertise in valuing office properties.
So to decide whether a property is suitable for a real estate investment, various aspects need to be considered: the location is central, demand is high, the population continues to grow, the condition of the property is good — but is the price reasonable?
The first step in answering this is the so-called purchase price factor. It indicates the ratio between the investment and the expected income. Put simply: how many years' worth of rent does the purchase price correspond to? (Purchase price / net annual rent excluding utilities = purchase price factor) The result is always a number. For a 60 m² apartment, the average purchase price factor across Germany's 20 largest cities in 2020 was around 26.58.
Returns: which vehicle is the best fit for me?
The aspects described above are always relevant for real estate investments, because they determine the potential return. It's also crucial that the particular vehicle for a real estate investment suits the investor. After all, every type of investment has its pros and cons. Owning a condominium is great, but buying one is only possible with the corresponding equity, and the purchase price often amounts to a multiple of your available income or wealth. There's also the rule "don't put all your eggs in one basket" to follow. Because spreading your money across different asset classes reduces the risks. That's why a direct investment isn't ideal for everyone — real estate stocks, open-ended real estate funds or digital securities, for example, can be acquired with far less capital and still make it possible to invest in real estate. However, stocks are often far more volatile than real estate itself, meaning their value fluctuates more than the property does. And with both stocks and open-ended real estate funds, you're usually investing in a portfolio, so you at least can't influence the exact target investment. Often it isn't even known in detail, or the portfolio is so large that a genuine assessment is more than difficult.
