How To Invest In Real Estate? Property Investment For Beginners

Real Estate Investing

In recent decades capital has increasingly been invested in real estate. Investing in real estate offers profound ways to make money. But on the con site, the acquisition and possession of multi-family apartment, tenements and land is much more labour-intensive than investing in Stocks, Bonds or REIT (Real Estate Investment Trust).

The issue of real estate buying can be very emotionally occupied. Some real estate buyers dream of their own house, and want to pay off as quickly as possible.

In particular, if a construction project with little equity and much sweat was built with their own efforts, one would not want to hear anything negative about their house construction.

This may be the case with real estate investors who are already financing a multi-family home, have the commercial real estate or see real estate more than one form of investment. The prerequisites to earn money with real estate have probably never been as good as today.

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In Switzerland, bonds and mutual funds with all maturities have negative interest rates at the beginning of 2017. In Germany, you will certainly lose money (even without inflation) for all government bonds with a maturity of fewer than 8 years.

Because of the low interest rates may seem tempting to invest in real estate, even if the yield calculation yields only a 2% or 3% return on equity.

Real estate investment is regarded as an inflation-proof investment, and an additional value can be generated by letting the property increase in price.

But we have to question ourself, if these rules are still valid after years of money creation, declining population and massive construction projects. Many investors simply do not remember the times of 8% or even 14% interest.

Even if you have real estate finance project for the next 20 years think about if you will find a buyer for a 2 Mio. CHF family flat in Zürich, if the interest rate is at 8% in 20 years again. The buyer would have to pay 160,000 CHF in interest, alone a year (assuming 8% interest) in addition to other costs associated with a flat in Zürich.

Probably it will not be enough for future yield calculations, simply to calculate the returns with a real estate yield calculator and thus obtain a meaningful number.

Real estate is built in Switzerland and Germany as well as in other Central European cities made of stones, bricks and mortar. In cities such as Basel and Zurich or Vienna, you can still admire the buildings from 15th and 16th centuries.

In cities such as Frankfurt, Duesseldorf, Cologne or Berlin, it is rather the 70's buildings that partially shape the cityscape but are still in best condition. The longevity of European buildings can be a significant problem for real estate investment, which we will discuss later in this article.

In contrast to the construction in Central Europe, paper, cardboard and wood are often made in combination with insulation wool in the US. The problems of a real estate bubble thus disappear much faster than in Europe.

For example, if you travel approximately 300 miles from Detroit to Chicago, you will see thousands of ruined houses from the 2008-09 real estate crisis. Unlike in Europe, where stone houses may be of 100 years old and the tax-depreciation or tax-deduction of the residential real estate.

In many European countries, tax-depreciation is over 100 years or 1% per year; while USA's tax-depreciation is only over 40 years, the houses in the real estate bubble are already decayed and uninhabitable after a few years and can be rebuilt.

Similar architectural styles as in US have also prevailed in UK, where you can see many decayed wooden houses when you leave London, in the direction of Leicester, Nottingham, Sheffield and Leeds.

What is Rental Investment?

A man buys a rental property and charges a predicted amount for a regular time interval. It can be defined as a property in which the landlord gets rent from the renter on a monthly basis. The property could be located in commercial or residential area.

The proprietor, the landowner, is in charge of paying the home loan, maintenance, cost of sustentation, stamp duty, taxes and everything related to the property. In the real world, the house-owner charges enough amounts which cover all these expenses.

Why do people prefer investing in rental properties?

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Nowadays, the trend of investing in rental property has become very popular. Property Investments is substantially emancipating and quite visceral. One can find many financing strategies related to real estate investment.

People prefer to spend their money on some sort of rental property, because they think it can save their time and efforts.

In order to shield themselves from the heavy taxes, people consider it as an excellent approach to invest their money.

If you are new to investment, and do not have much information, then you might be unaware of why people prefer to invest in real estate.

To break things down for you, following are few reasons investors prefers real estate over other forms of investment:

Good Cash Flow:

There is no single investor who is not fond of good cash flow, which is why investing in real estate is their safest bet. Once you have bought a property, the next thing that you need to do is to rent it out.

You can either use your social circle to find a tenant or can hire a real estate broker. Once you found a suitable tenant, you can enjoy the revenue generated in form of rental income every month.

You do not have to worry about the prices of real estate commodities going up or down since it is not going to change your cash flow.

Inflation and Real Estate:

Currently, Real Estate is still labour intensive if labour cost increases, i.e., if the price of real estate goes up. This is the reason why during inflation, the prices of the property keep on going up even if the property market gets slow.

Negative interest rates and money printed out of nothing like ever seen before in history has triggered massive property development activities around the world.

In many industrial countries, the population is decreasing. An oversupply of property combined with decreasing population could be a disaster for real estate price on the one hand - but on the other hand, inflation, increasing labour cost and low interest can keep the property price high.

Inflation Rate Real Estate Price today 5 years later 10 years later 20 years later 30 years later
3% $100,000 $115,927 $134,392 $180,611 $242,726
2% $100,000 $110,408 $121,899 $148,595 $181,139
1% $100,000 $105,101 $110,426 $122,019 $134,785
0% $100,000 100,000 $100,000 100,000 100,000

Presence of Hard Asset:

When it comes to the presence of hard asset, real estate investment is one of the few, that qualify in this category.

Buying a piece of property is the physical asset that an investor holds. He knows the value of the property, how much income he can generate out of it, or even can use himself to live. The presence of hard asset is a great charm in itself for an investor.

Estimating ROI:

Calculating the ROI (Returns on Investment) might seem to be an easy thing to do for the financial advisor, since they are the professional of this field. However, when it comes to a non-professional, this particular calculation can be bit confusing.

So, How to Calculate ROI for Real Estate?

If a property was bought for 20,000€, and after 3 years it was sold for 25,000€, then the profit earned would be 5000€.

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Gain from Investment - Cost of Investment = 25,000 - 20,000 = 5000

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Thus, the ROI would be 25%

Equity ≠ Cash:

Before you calculate the ROI using the above-mentioned formula, you need to make sure that you have already sold the property.

There are a lot of chances that your property might not sell at the market value you thought of.

Moreover, there are different types of costs that are linked with selling of the property which includes repairing, cost acquisition on advertisement and commission that you pay to the broker.

You can negotiate on advertising cost as well as the brokerage; however, they are still going to leave a huge impact on your expenses.

Re-Financed Property:

One of the major complications that arise during calculations of ROI is due to the re-financed property, or they buy to let mortgage taken out.

The interest can be increased on the refinanced or second mortgage and you might be charged with the loan fees.

These both things can end up decreasing the ROI.

Property Maintenance:

If you are an owner of a commercial or residential property, you are obliged to pay the tax. Yes, the renter is responsible for paying all the taxes on the property he owns. The huge percentage of money that goes in the name of property tax, also leaves a huge impact on the ROI.

Investment in any real estate property is not as easy as it sounds. You cannot simply choose a piece of property randomly and go for it. There are a lot of factors that you need to consider while buying any property.

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Factors you should consider while buying property:

Location:

The first thing people check is the location, while buying a house for their family to live in, or just for sake of investment. The main purpose of buying any property is to earn profit out of it.

For that purpose, you need to make sure that you are investing in property which is at perfect location.

If you are buying a residential house, then you need to check if it is in some peaceful conforming place, there is a nice neighbourhood, and you get all the major necessities of life nearby.

However, if you are going for some commercial place, you need to check its value and resale value along with the presence of transport hubs, warehouses and freeways.

One of the biggest problems while choosing the correct location is that you might not get everything what you desire. You will have to compromise on a thing or two which can be a setback when it comes to resale of that property.

State:

Finding a decent location is not the end of hassles, the state of property is of equal importance. You will come across a wide range of properties that look just fine but have serious issues.

Most often, a layman cannot easily point out the problems in the state of the property, which is why it is wise to take real estate expert with you.

An expert in this field can point out all the hidden defects, which will make it easy for you know if it's worth buying.

Going in blind can cause you a huge amount of money.

Now people might get tangled up trying to figure out "what’s the difference between the state of the property and its condition".

The state of the property is basically its structure and the material used for it, while on the other hand condition means that if the property is useful or not.

For example, if you are buying a house solely for the purpose of renting it out, then you need to make sure that the house is in good condition.

It should be in perfect condition for the people to live in. Moreover, it should also have basic water, electricity and gas supply. It is near to impossible to rent out a house that has broken ceiling or floors.

The Ugly Side of Real Estate Investment:

If you are thinking to invest in real estate then chances are that you are lured into this idea by telling all the positives of it.

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How about to take a step back and look at the ugly side that comes with real estate investing? Yes, your idea of real estate investment might turn around by looking at everything that comes with it.

Hidden Costs:

Made the decision to invest in real estate, found the right house to buy, paid for it and you are done, do you really think that it's that easy?

rhttps://en.samt.ag/portals/4/Images/ee_.png?ver=2017-05-10-102158-947eal-estate-investment

Well, sorry to break your happinness bubble, but investing in real estate is much more complex than this.

The first thing that comes as a shock to you is the hidden costs, when you invest in real estate.

Let’s discuss the hidden costs that comes while investing in real estate:

    Property dealer’s commission:

    • It is a whole other story whether you end up buying a house or eventually change your mind, in either case, you need to hire a property dealer for his professional advice. Well, you think paying property dealer is a one-time thing?
    • Think again! Yes, you basically pay your property dealer twice. First, when you hire him to find you your desired piece of property and then you pay a percentage of property price as a brokerage while closing the deal.
    • In order to determine the property dealer commission, you can use this formula: Commission Charges (in %) X Property Price = Payable Property Commission.
    • Commission rate is usually predefined between the investor and broker.

    Closing cost:

    • You cannot seal a deal without paying the closing cost. Some people usually mix closing cost with the down payment, when in fact these two are different terms.
    • Closing cost is to be paid to everyone that was involved in the sale of the property, which includes company cost, who is handling all the legal paperwork, government offices that are recording deeds, etc.
    • It’s driven by: Closing Cost = 2% - 5% x Purchase Price.
    • Closing cost is the true example of hidden costs that comes as a shock.

    Renovation:

    • It is a very rare case that an investor ends up getting each and everything he desire. In most cases, he has to do renovation to give it his desired face.
    • After buying any property, the first thing you need to do is, check how much renovation it needs. Yes, it's rare to see a property little altered.
    • You will have to spend further money in order to fix so that you can finally rent it out.
    • The renovation sometimes takes a huge chunk of money out of your pocket while you still haven’t enjoyed any single benefit by investing into it.
    • The renovation cost can be frustrating and can turn down the entire excitement.

    Maintenance:

    • Once you have bought a house or an apartment, the first maintenance is not the only time you are going to pay.
    • Since you are the owner of the house, every time the house or building needs any sort of repairing, you will be the one paying for it. Yes, it doesn't matter if you have rented it out; the maintenance of the house is always on the owner.
    • Yes, it doesn't matter if you have rented it out; the maintenance of the house is always on the owner.
    • Sometimes maintenance of more than one house makes everything a lot of hassle. You instead of lying back while enjoying rent, end up going back and forth for the maintenance issues.

    Insurance:

    real-estate-investment                                                                                                                                                                

    • Just when you thought that you are done with paying all the hidden costs, the insurance snaps it.
    • You spent a big sum that is worth a fortune in real estate, so it is natural that you want it to stay forever with you.
    • For this purpose, you need to get the property to be insured, in order to get through natural disaster or criminal acts.
    • There are different charges for an insurance; however, on a national level, it usually costs 1000€ per year.
    • Even if your real estate investment isn't bringing you any good, you have to pay insurance every year.

To understand the major risks involved in buying property, read our next article on "Things that nobody told you about Investing in Real Estate", it will also let you know "what should you prefer over real estate investments & why?"

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