Are you thinking about investing in real estate? It’s a good time to do so because the German and Austrian property markets are in good shape. The Oesterreichische National Bank reports the Austrian residential property price index was up by 7.97% in late 2018, while the experts at Deutsche Bank also expect German real estate prices to continue to rise throughout 2019.
But how do you make a start in real estate? Here is my advice.
How to make a start in real estate investment
Have a clear vision of what you want to achieve – it will be fundamental to your success. As you formulate your plan, consider your own financial capabilities, the level of risk you’re willing to take and your financial goals.
They’re all crucial: without a clear understanding of your own financial spending power you can’t develop a clear idea of your risk appetite. And without an idea of your investment goals, you can’t formulate a clear plan of what kind of real estate you need to purchase to achieve them. So, what might these goals look like?
- Regular rental income.
Pros: regular, reliable income, with a return on your investment now.
Cons: You may need to spend time as a landlord managing the properties however.
- A return over the longer term, by adding value to them over time and eventually selling them at a profit.
Pros: If the market goes up, so does your investment. Cons: If the market falls, you could be left with negative equity.
Clearly, these two approaches to buying real estate aren’t mutually exclusive, and you may even be able to build a portfolio that delivers both over time.
Take advantage of the data
From estimated operating expenses to market projections and existing vacancy rates, the amount of information available to potential investors of any kind is huge. An overview of the European real estate market as whole, such as PwC’s regular Emerging Trends in Real Estate® report is a handy starting point.
The key to success for any new investor is understanding how these figures impact your projected income (or final return). To succeed as real estate investors, we need to understand these figures in terms of the practical, real-world impact they will have on our own finances.
Take the average square metre rental figures for Berlin over the last three years. They rose from 12.5 Euros per sq metre in 2017 to 13.2 Euros per sq metre in 2019, as developers create more and more new apartments in a popular market. They’re superficially encouraging for anyone looking at investing in a buy-to-let property in Berlin. But the backstory is that the pace of this rise may slow as more new apartments are completed and availability improves.
So, rental prices might continue to grow in an increasingly healthy residential property market in Berlin. But there is also a good chance you’ll see a slow down in the rental growth rate – one which could directly impact your own monthly cash flow.
Always build value across your portfolio
Real estate is unique, as we can add value to the investment ourselves. We might spend money on improving a property and then sell it on quickly – or buying and hold it over the longer term.
But it is important to keep an eye on your monthly figures. Watch your yield rates, your mortgage repayments and maintenance costs. If your mortgage repayments are rapidly outgrowing the amount of rental income you receive, then it is time to reassess the rates you charge, or even sell up.
Watch your debt levels as well – it can be easy to lose track of expensive debt building up, hidden within your portfolio of properties. Choose your financing method wisely – these might include:
- Releasing equity by selling an existing property in your portfolio. You aren’t adding to your debt, but you are also taking potential value out of your portfolio.
- Take out another mortgage or get a loan secured against existing equity. Relatively simple, but you are increasing your debt liability, and exposure to fluctuating interest rates.
- Consider an alternative source of funding, such as crowdsourcing. There are a number of online crowdsourcing platforms that allow you to invest alongside other investors. These allow you to diversify easily, spread the risk and enjoy consistent investment performance. On the flip side, you’re relying on other people’s judgement – in contrast, Real Estate Investment Trusts (REIT) portfolios are usually managed by real estate investment experts.
The bottom line
Both the German and Austrian property markets are in a good place right now, but there’s no need to rush in.
The key to success is to think about every new purchase in terms of how it adds value to your portfolio. Each new property brings new financial liabilities – so how do these stack up against the potential returns you’re likely to enjoy?
As a final point, it’s also worth saying that a passion for property helps when you’re starting out too. This might seem obvious, but property is a big, long term financial commitment, and you need to be enthusiastic about what you’re putting your money into. Investing in real estate can be time consuming and complex – you need to have genuine enthusiasm for your assets.
So, find a property sector you enjoy working in, research it thoroughly, and build your investment patiently over time.