At the beginning of the year, my wife and I were telling our family members, friends and acquaintances about our latest real estate project. It was a two-room flat near a major city. The people we told about our project reacted in one of two ways. One group was happy for us and wanted to find out how they, too, could invest in real estate. The second group reacted in fear of every single thing that could go wrong when renting out a property. Needless to say, there were only a handful of people in the first group. And if I had to count the people in the second group, I would run out of fingers on both hands.
That said, the German real estate market is a true paradise for real estate investors. In comparison to the global market, the price of real estate development in Germany is far behind. If you compare major cities such as New York, Tokyo, London and Berlin, you will conclude that real estate can still be purchased and rented at a relatively inexpensive price in Germany, in one of the most in-demand locations in Europe.
Another argument for investing in real estate is the share of renters in Germany. According to a statistic from Eurostat (the statistical office of the European Union), the share of renters in Germany is at 47 per cent. Nearly half of all Germans rent their homes. The European average is only 30 per cent. And, at around four per cent, Romania has the lowest share of renters in Europe. The conclusion here is that it is not worth buying real estate in Romania to rent, but Germany, with a 47 per cent share of renters, offers the ideal conditions for investing in property for use by third parties.
Start Small
Nor are fears of a potential loan default due to rising interest rates founded from today’s perspective. According to the German Economic Institute (IW), there is no reason for a potential real estate bubble to occur in Germany that could burst due to rising interest rates. Real estate buyers contribute equity of around 20 per cent on average, which is considered a solid amount. Repayment instalments have doubled to three per cent between 2009 and 2017. The lowest interest rates are used to pay back the loans faster. And according to IW, more than 40 per cent of the loans have a fixed interest rate over ten years.
All of these data and facts mean that real estate investments are as attractive as ever. And yet we Germans are allowing our ‘concrete gold’ to be bought out from under us, only to then have to rent it. The buyers are foreign investors. Why? Because most of us are just too plain scared to buy real estate to rent. Fears, such as delinquent tenants, landlords with no rights, and a possible real estate bubble are some of the many other concerns.
My advice is to start small. As in small deals lead to bigger deals. Buy a one or two-room flat in the suburbs of a major city. If in doubt, acquire a property that doesn’t throw you off course financially. Get some experience and use it for your next bigger deal. If you are a long-term investor interested in a regular income rather than short-term profit, the price you originally paid for the real estate will gradually fade into the background with each year you hold the property.
About the Author:
Georg Redekop is managing partner of Redekop & Partner KG and specialist author for the magazines “Börse Online” and “€uro am Sonntag”.