Tailor-made solutions for investment, insurance and finance

Real estate as an investment

Digital innovations - Tax-optimized investments - Individual consulting

Real estate as an investment for long-term wealth accumulation

Real estate as an investment is a reliable strategy for building wealth over the long term. Unlike stocks or bonds, investing in real estate offers not only potentially stable and attractive returns, but also the advantage of a real and tangible asset. Additionally, real estate can provide a passive income source through regular rental income or appreciation in value.

Why real estate is an interesting investment

Real estate is considered a safe investment, especially during times of crisis. It is characterized by stable value appreciation and is ideally suited for long-term wealth accumulation. Furthermore, the value of real estate has risen significantly in recent years. Here are some reasons why real estate represents a worthwhile investment:

Value appreciation
In many regions of Germany, real estate prices doubled between 2010 and 2022, particularly in major cities like Munich, Frankfurt, Berlin, and Düsseldorf. Furthermore, many areas show a long-term trend of rising prices – especially where infrastructure is good and demand is high. This means that the value of a property can increase over the years, potentially leading to attractive capital gains upon later sale.

Inflation protection
Real estate is considered one of the best hedges against inflation. When prices rise, rents and property values usually rise as well. This ensures that the value of a property is maintained or even increased in the event of inflation.

Passive income source
Renting out real estate can generate a passive and stable income. Rental income is often more reliable and predictable than, for example, dividends from stocks, especially with long-term leases.

Tax advantages
Investors benefit from various tax advantages, particularly when renting out real estate. For example, depreciation and operating expenses can be claimed on tax returns, and mortgage interest is also tax-deductible.

Stable investment
Real estate reduces the risk of an investment portfolio because it is less sensitive to market fluctuations than, for example, stocks. This offers additional security for investors.

These advantages make real estate a particularly attractive investment. Investors who value stability, inflation protection, and long-term growth should include real estate in their portfolio.

What are the arguments against real estate as an investment?

Although real estate offers numerous advantages as an investment, there are also some aspects that potential investors should consider. A significant disadvantage is the high capital outlay required to acquire a property. Even with debt financing, a large portion of the purchase price often has to be raised from personal funds. For many investors, raising this equity presents a considerable hurdle.

Another disadvantage is the lack of liquidity associated with real estate. Unlike stocks or bonds, which can be sold relatively quickly, selling a property typically takes significantly longer. Furthermore, investing in real estate requires a long investment horizon, making it less suitable for short-term or medium-term investments.

Furthermore, real estate incurs ongoing costs. Especially with rented properties, the administrative burden is relatively high, and there is always the risk of rent defaults. While the real estate market tends to be less volatile than other markets, it is not entirely immune to change. Interest rate fluctuations, economic crises, or local market developments can negatively impact a property's value.

In summary, real estate as an investment is not risk-free. Potential investors should therefore carefully weigh the long-term opportunities against the challenges and risks.

When does a property make sense as an investment?

Anyone looking to finance a property in February 2025 can expect an interest rate between 3.0 and 3.6 percent. For a loan amount of €250,000 and an interest rate of 3.4 percent with a fixed rate for ten years, the monthly payment would be €1,333, based on an initial repayment rate of three percent. However, for a property to be a worthwhile investment, several conditions must be met:

Attractive location: The property must be located in a desirable location, as this increases demand and therefore profitability.
Good building structure: Solid construction quality is crucial for maintaining value and minimizing repair costs.
Solid return: The property should be able to generate a stable and attractive return, whether through rental income or appreciation in value.
Long-term capital commitment: You should be prepared to invest your capital for the long term, as real estate typically requires a longer holding period to reach its full potential.
Good loan terms: Favorable financing is crucial to minimize monthly expenses and maximize the return on investment.
High demand for rental properties: High demand in the region ensures stable occupancy rates and guarantees regular rental income.
Appropriate rent multiplier: The rent multiplier should be realistic in comparison to rental income and purchase prices in the region in order to achieve a reasonable return.

If these conditions are met, a property can represent a worthwhile and stable investment.

The return on a property

The return on investment (ROI) of a property indicates how profitable an investment is. Various calculation methods are available for investors, with gross rental yield, net rental yield, and total return being particularly important.

Generally speaking, a profitable property should achieve a net rental yield of at least four percent.

Gross rental yield
Annual rental income / purchase price of the property x 100 = gross rental yield

The gross rental yield shows the ratio between the annual rental income and the purchase price of the property. It does not take into account ancillary costs such as financing costs or maintenance expenses.

Net rental yield
(Annual rental income – Operating costs) / Purchase price of the property x 100 = Net rental yield

Net rental yield is the most important metric for investors, as it takes into account not only rental income but also the property's operating costs. It provides a more realistic assessment of the property's profitability.

Total return
(Annual rental income + property appreciation) / purchase price of the property x 100 = total return

The total return goes beyond rental income and also includes the potential appreciation of the property. This metric is particularly relevant for investors who are not only interested in ongoing rental income but also want to benefit from an increase in the property's value upon its eventual sale.

The rent multiplier as a key indicator of a property's profitability

The rent multiplier helps calculate how many years it will take for the purchase price of a property to be paid off through rental income. A commonly used figure is 25, meaning that the purchase price of the property is reached after 25 years of rent. Properties with a higher rent multiplier might be considered overpriced.

Important NOTE: However, the rent multiplier does not take into account the location or the potential rentability of the property. In sought-after regions such as Munich, a rent multiplier of 30 can be quite appropriate, as consistent occupancy and increasing rental income are expected. In less sought-after areas, where vacancies and lower rents are possible, a rent multiplier of 15 could already be considered high. Therefore, the rent multiplier is relative to the location and the property itself.

Calculate rent multiplier
Purchase price / net annual rent = rent multiplier

For a realistic assessment, the general rent index for the respective location should be taken into account. It should be noted that higher rents may be charged for newly constructed properties or those with high-quality amenities.

Example:
A condominium has a purchase price of €250,000. The expected monthly rent is €850, resulting in a net annual rent of €10,200.

Purchase price of €250,000 / net annual rent of €10,200 = 24.50

In this example, the rent multiplier is 24.50. This means that the property will be paid off through rental income after almost 24 years.

Alternatives to real estate as an investment

Although real estate can be a profitable investment, it is not always the best choice. Those who value liquidity, only want to invest their capital in the short term, or do not have sufficient equity should also consider other investment options. The capital market offers a wide variety of options for investing money profitably.

Safety-oriented systems
If you want to reduce the risk of loss to zero, safe investment options such as fixed-term deposits, money market accounts, or savings books are an option. However, you shouldn't expect high returns from these investments. The interest rates are generally insufficient to offset inflation, which can actually reduce the real purchasing power of your capital.

Systems with higher fluctuations
If you can better withstand fluctuations in the capital market, securities investments are an interesting alternative. These include stocks, funds, and bonds. Real estate funds, in particular, offer a way to invest in various real estate projects without directly purchasing individual properties.

ETFs as a cost-effective option
Another popular form of investment is ETFs (Exchange Traded Funds). They offer a cost-effective way to invest in a broad portfolio and thus diversify risk. ETFs are particularly suitable for investors who prefer a diversified investment without having to pay high management fees.

Is this property a suitable investment for you? Get advice now!

Real estate as an investment can be worthwhile if you're looking to invest long-term, acquire an attractive property in a good location, and secure financing at favorable terms. With stable rental income and potential appreciation, real estate can be a lucrative investment. However, thorough calculations are crucial. You should also have the necessary equity to benefit from low-interest financing. If the loan is too expensive, however, the interest payments can significantly reduce your return. Get advice now to find the best options for your investment!