Euro am Sonntag, Issue No. 5 | 2018 - Rent brings returns. However, it becomes critical at under two percent because the rental yield is significantly reduced by the non-recoverable costs of the investment.
If you buy an apartment as an investment today, you can hope for an increase in value and a good overall result with gross rental returns of below two percent at the top locations, but you must forego regular income. This is because unavoidable costs include the expenses for repair and management. With sub-optimal management, these add up to 20 percent of rental income.
In other words, given the low gross yields in the top locations, owners may have to spend years contributing money and waiting for the tenant to move out, to eventually sell the apartment with an around 25 percent premium.
However, investors should not be blinded by such perspectives of a potentially attractive overall result. It may take time for a tenant to move out, and the tighter the housing markets in Berlin, Munich or Frankfurt are, the more difficult it will be to find an alternative apartment if necessary, and the longer a tenant will stay in their apartment. At the end of all this there are years of economic losses.
In addition, an investment strategy focused on the sale caricatures the preference of the rented property's assets. Ultimately, this consists of generating not only appreciation in value, but also a considerable amount of regular cash flow, therefore increasing retirement provisions after the initial asset accumulation. Ideally, the purchase of a rented apartment then works like a savings plan.
During the financing period, interest and amortisation as well as management costs are covered by rental income up to 100 to 200 euros per month. When the apartment is paid off, the focus changes. The growth-oriented investment becomes an income-generating investment that could be sold tax-free if necessary after a holding period of more than ten years, but usually serves to build a cross-generational asset.
Manageable individual investments and the associated asset diversification are also essential for the investor with an average income situation. In the case of doubt, both the better rentability of a smaller apartment and the lower risk of clustering are more likely to favour the purchase of smaller units than the concentration on a large apartment. This applies in particular to the university cities, which are highly sought after by investors, and have many one-person households and a high demand for micro-apartments.
In view of the demographic development and future smaller households, the focus should be on apartment sizes between 50 and 80 square meters. At suitable locations, such apartments are still able to achieve gross rental returns of around four percent, despite rising prices and a persistently high demand for real estate, which in Germany, however, focuses primarily on the major cities and holiday properties along the coast. In contrast, there is a sufficiently favourable supply in medium-sized German cities, whereby investors should limit themselves to locations and regions with a sustainably positive demographic development and broadly diversified economic structure.
A service provider can save work and increase returns
Another crucial point is the management costs. Rental apartments must be sustainably managed, which means rented and maintained. The costs of this can be minimised by larger providers through cumulative effects and professionalism, and the higher net proceeds can be passed on to the owners. Anyone who would like to avoid the hassle of tenant selection, payment verification, correspondence and possibly participation in the owners' meetings should resort to a service provider or a full-service provider, which calculates the costs before the sales contract is signed.
About the author:
Peter Buhrmann, COO of the Alpha Real Estate Group
Peter Buhrmann has over 25 years of experience in the real estate industry. He has been Chief Operating Officer of the Alpha Real Estate Group since the summer of 2013 and heads the Real Estate Management Services division. Prior to that, he worked as a managing partner in various real estate investment companies.