If you are looking for a capital investment in the current low interest rates, you have the opportunity to use a property as a capital investment in addition to investing in shares. Houses and apartments are generally considered to be very stable in value, but they also offer potentially high returns. However, if you are considering investing in real estate as an investment, there are a number of aspects to consider, which are presented in the following article.
Buying property as an investment at a good price
In order to use a house as a capital investment, a very high investment sum is usually required, which often cannot be raised completely. A property is therefore usually financed to a large extent by a loan, which is paid off in the following years. This enables sellers to offer the property as a capital investment to a larger circle of interested parties and achieve a higher sales price. In return, they promise stable rental income, which pays off the cost of the loan after a few years.
However, the mortgage interest rate of building loans should be taken into account here. If the yield is higher than the mortgage interest rate, a high yield is possible with a construction loan, as the buyer pays less for the loan taken out than he earns by buying the property. However, if the yield is below the mortgage rate, the financing costs exceed the possible yield, which makes a property unattractive as an investment.
Location of the property is decisive
If you are considering buying a property as a capital investment at a low price, you should also pay attention to the location. Since the purchase prices are highest in Manchester and many other large cities, you should avoid buying a property as an investment. Especially in smaller, however, it is advisable to use a property as a capital investment, since in addition to relatively low purchase prices a high return is expected by 2030.
Real estate as a financial investment – calculation of the return
Many estate agents quote a yield of 4 to 6 percent if a property is used as a financial investment. To calculate the expected return, you need to ask yourself the following questions:
- Is the purchase price of the property in a favourable ratio to the annual rent?
- How high is the achievable rental income?
- What are the costs for estate agent, notary and land transfer tax?
- How long should the property be held as a capital investment?
- How high are the costs for administration and possible renovation?
- Are there any risks regarding the future performance?
If you are unsure whether a property is suitable for you as a capital investment, you should consult a seller or advisor. He or she can make a concrete return calculation based on the above questions, so that you can see whether your assumptions are realistic.
Forms of financing real estate as a financial investment
In order to finance a property as a financial investment, a distinction is made between equity and debt capital. However, most people will not be able to do without at least a proportionate debt financing. With the banks you will find many different interest rates and conditions, so that a comparison can be very difficult. In addition to your own research, it is a good idea to hire an expert here, as the banks usually only look at their own returns and do not suggest the most favourable offer for the customer.
In order to use a property as a capital investment, however, it is also recommended to have an equity capital of at least 20 to 30 percent in order to somewhat alleviate the burden of the loan. A second borrower is also recommended here. By the way, this also makes it easier to negotiate a loan with the bank. However, real estate financing without equity capital is also possible, although you can expect higher interest charges here.
Calculation of the real estate tax
In the case of real estate as a capital investment, taxes must also be taken into account. For the calculation of the marginal tax rate, depreciation is included, which reduces the basis of assessment for the tax calculation. The legislator provides for a depreciation of just under 2 percent p.a. over a period of 50 years. However, this is only applied to the costs for the building. Therefore, when you purchase an investment property, you must differentiate between the land value and the building value.
Possible risks when buying a house as a financial investment
However, if you decide to use a property as an investment, you should also consider the numerous risks involved. For example, it may happen that tenants are unable to pay or can no longer pay or that expensive repairs are necessary. The risk of a low sales price is particularly high, so that there is even the risk of a negative return. So when choosing a location, make sure that the demand for apartments will remain high so that a property is worthwhile as an investment.
However, the development of an investment property is not predictable, so that even with a careful selection there is always a certain risk. In contrast to an investment in a fund or ETF, the risk of an investment property cannot be spread.
What you should be aware of when buying a property as an investment
Using a property as a capital investment is not always a sensible option. The expected return basically depends on the future performance. In addition to this financial aspect, you also have to consider the behaviour of tenants. Some people pay rent very unreliably or treat a rented apartment as if it were their own. However, real estate is worthwhile as a capital investment if you choose a location that promises a significant increase in the value of the apartments in the coming decades. At the moment, this is especially true for the smaller cities in UK. However, you should avoid an investment in the metropolitan areas, as a purchase at the present time is unlikely to yield a positive return.