A company that buys, owns and manages real estate is of course only one of the possible options, but one where the chances of success are quite high. In the following article I would like to present the main advantages of real estate compared to other asset classes.
Advantages of real estate as an investment
I once read somewhere that about 80% of the self-made millionaires earned their fortune with real estate. On the other hand, with retirement almost 90% of the population are not financially independent and dependent on their statutory pension payments. Many actually put almost nothing on their side throughout their lives. I can hardly imagine it, but it is probably so.
Due to demographic change and the rising costs of our social security systems, however, it is unfortunately very uncertain whether and to what extent we will still receive a pension from the state in 30 years. So if you count on being able to finance your lifestyle of today later with the statutory pension, then you are either a minimalist and can lead a happy life with extremely few means, or you have to reckon with working beyond retirement age and earning money. And I’m not even assuming that you have a family or something that needs to be financed.
From my point of view, you can forget the statutory pension. Most likely the whole statutory pension system will have collapsed by the time it’s our turn. You cannot and should not depend on this system. Also, the government’s regular discussions about pensions should not cause you sleepless nights. Being dependent on others and becoming dependent on others is a mistake per se, I think.
If you want to plan ahead and be financially independent, then you should invest early e.g. in rented condominiums or real estate, pay these off over time, so that you can live from the incoming rents later. If you want a little more, you can always burden your flats again and increase your portfolio until you can live from the cash flows.
Your savings will be worth less in the future than they are today because of inflation. It is therefore extremely important for your pension planning that you choose investments that not only offer a good return, but also good protection against inflation. In plain language, this means investments that typically increase in value over time.
Real estate already fulfils this criterion. In addition, you also have significant tax advantages with rented real estate. Basically, you can deduct all relevant costs from your tax bill: Depreciation, interest on borrowed capital, maintenance and income-related expenses, broker’s fees, etc. are all tax deductible.
Appreciation potential
As you probably know, real estate has grown immensely in value in recent years, especially in major German cities.We are currently seeing a strong trend towards a return to the cities, i.e. the demand for residential space in large German cities is steadily increasing. On the other hand, very little new housing is being created, at least not for the budget of most people who move to the cities (high-end new construction projects for the wealthy are, of course, like sand on the sea).
This naturally leads to rising rents, because more people are looking for apartments while the supply of apartments remains constant. And because the value of a property correlates with the amount of rent, the value of the property also rises.
In the big cities, however, it is not only the population itself that is growing.
The number of households is also rising. This means that people are increasingly living alone. Reasons for this trend are higher divorce rates and the general trend towards being single. Many are no longer willing to compromise and therefore prefer to live alone.
More and more investors are interested in real estate. Due to the low level of interest rates, typical German savings bonds or call money accounts are no longer attractive. And with shares most are anyway cautious. On the other hand, the low level of interest rates also makes investing in real estate attractive because loans can be obtained quite cheaply. Of course, this also has a positive effect on real estate prices.
Inflation
But even if you think that today we have something like a real estate bubble: If you look at the price development of real estate over a very long period of time, you can see that prices have continued to rise steadily. The statistics are very clear here. And if you buy an apartment or a house or if you already own an apartment, then you just have to look at the land register extract.
If your apartment is a bit older, i.e. built between 1950s and 70s, then it has certainly been sold several times over the years. And because in most cases a large part of the financing is taken over by banks and they always register in the land register to secure their credit, you can see there what loan amounts the buyers have taken out at their bank.
Cash flow
A widespread strategy of many investors is to generate a continuous passive income from each apartment or property with the aim of being able to live on this income in the medium to long term.
Cash flow is the amount that remains after interest on borrowed capital and redemption as well as repair expenses have been deducted from net operating income (NOI). The NOI is calculated from the rental income less the expenses attributable to the properties including the operating cost balance. The NOI thus represents how much you earn operationally from your properties. Put simply: the cash flow is what remains after payment of all bills and is what you can regularly count as income.
Your tenant pays off your loan at the bank via his rent payment. This essentially creates a large amount of equity without your intervention over time. In the end, your loan will be completely paid off and you will own the entire property. The cash flow will then increase enormously and ideally allow you to live comfortably from the rental income. At least the rental income will be a good addition to your salary or down payment.
Statistically speaking, you are more likely to become financially independent in the real estate business than in any other form of investment.
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