Tips from a successful property investor
Paul Müller is a real estate investor, landlord and blogger. Thanks to his successful content, his blog immocashflow made it into our selection of the best German real estate blogs of 2021. In an interview, Müller provides helpful tips for aspiring real estate investors and an insight into his everyday life as a landlord.
Why did you decide to invest in real estate?
At some point during my white-collar job in consulting, I simply looked around to see how I could build up an additional income. In the process, I came across the topic of real estate investment quite quickly, also via a book. Once I understood the logic, the process and especially the leverage effect, I wanted to try it out myself relatively quickly. That was in 2016, when I started to search real estate portals, made my own calculations and finally bought my first property package. From that point on, I simply fell in love with the subject of real estate and became virtually addicted to it. And those who know me know that when I do something, I do it right and with full commitment.
As a real estate investor, what do you attach particular importance to when buying property?
I would distinguish between properties that I buy for my portfolio - buy and hold - and projects that I want to develop and sell again - project development or fix-and-flip, so to speak. With existing properties, I always look at the cash flow. If a property doesn't generate a positive cash flow or can't generate one in the future, then it's not a deal for me. So there still has to be something left over from the rental income after deducting all the costs for the loan instalment, management, and reserves. In contrast, I make a different calculation for fix-and-flip projects or project developments. There, it is much more about calculating in advance how high my total investment costs will be. This includes the purchase price, additional costs, refurbishment/renovation costs, financing, and later marketing costs in the sale. I would like to make a profit of 20 to 30 percent on these total costs. Of course, it is also essential to analyse the sales prices in detail beforehand. If I can achieve a price for the fully developed project on the market that still gives me a margin of at least 20 to 30 percent on the calculated total costs, then it's a good deal for me. Of course, these considerations always include a target group and location analysis. I ask myself the following questions: Who are the potential tenants or buyers? Is this property in demand on the market? What is the macro and micro location of the property?
What types of flats are most profitable for you?
For me, this is completely dependent on the location. In some locations, 1-bedroom flats are good, in others not. I like to buy single-family houses in the outskirts of cities. In cities with lots of students, small flats make just as much sense as larger flats with a floor plan suitable for shared flats. Is there a certain type of flat in a particular location that can be re-rented very quickly and another type that is very difficult to rent? Therefore, you can't say across the board that a certain type of flat is the most profitable. It really depends very much on the location.
What type of financing do you prefer when buying a flat?
Up to now, I have always tried to bring in very little equity capital for my investments. The reason for this is simply that I wanted to grow quickly and because borrowed capital is currently incredibly cheap. However, it is important to always buy below market value, otherwise you will quickly have a problem with a too high mortgage lending value. But the goal should be to buy below market value anyway. For larger project developments and short-term property trading, I also like to finance part of the total costs through co-investors.
What does your everyday life as a landlord look like?
As a landlord, I don't really have that much to do. In my residential and commercial buildings with several units, I always have a property management company and a caretaker who take care of everything. With individual condominiums, I still do at least the condominium management myself. Apart from the utility bills and the occasional new tenancy, there's not really much to do. Sometimes a tenant informs me if something is not right. But then I pass that on directly to the property management or a tradesman. At the end of the month, I always do an analysis to keep an eye on the financial development of my portfolio. More work is involved when you renovate a flat when there is a change of tenant. So there is not the same amount to do every month. Otherwise, of course, my day is filled with project developments, where I carry out complete renovations of houses and property developments. But that is the daily routine of a project developer and not that of a landlord.
What running costs do you calculate for a rented flat?
So far I calculate with 0.50 € to 1.00 € per square metre per month additional maintenance reserve for the condominium and about two percent loss of rent. Ultimately, this depends on the condition of the property, the location and how well the flats can be let. Of course, as with any property, I also calculate the loan instalment for interest and repayment of the loan and the management costs.
Have you ever been confronted with major problems in your function as a landlord?
I have experienced quite a few. With my flats rented out for a short time via Airbnb and Booking, there were various curiosities: Guests who didn't arrive, a double booking, internet not working, missing key. I think this is where most things happened. Fortunately, I also have a service provider on site who takes care of everything. Otherwise, I've already had a tenant who didn't get in touch after giving notice and didn't hand over the flat, or a tenant who couldn't pay the rent anymore, to name two examples from my long-term rented flats. As a property investor, it is definitely important to have strong problem-solving skills.
As a landlord, what do you think of the rent cap in Berlin?
In my opinion, the rent cap makes no sense from several points of view. The rent cap does not solve the problem of the lack of housing. Nor does it solve the problem of rental housing remaining accessible to certain groups of tenants. In the end, flats in the city centre or in higher-priced neighbourhoods will continue to be allocated to the most solvent tenants. So it has not had the desired effect. In addition, landlords are now able to build up fewer or no reserves for maintenance due to lower income. This worsens the condition of the properties in the long term. We have already seen the same thing abroad, where a kind of rent cap was tried out. Moreover, landlords have no motivation to improve the condition of the properties if no higher returns can be achieved anyway. As a result, fewer energy-efficient refurbishments are carried out. In addition, rent payments or one-off payments are now made in the black and are not included in the contract. Furthermore, second homes are now being sold less frequently because it is cheaper to keep them. I can think of even more arguments against the rent cap, but that would go beyond the scope of this article.
How has the Corona pandemic affected your investments?
I have hardly felt any impact on my investments due to the Corona pandemic. I have continued to buy properties. There have not really been any shortfalls in my rentals. Only the new lettings of commercial units have become more difficult. But I don't have very many of those.
What are your goals for the coming years?
I have written down my goals for this business year here on my blog. With Paul & Cie Immobilien GmbH, I do project development and fix and flip in Berlin & Brandenburg. Among other things, I would like to purchase more than €3 million of projects this year, move into a new office, employ 5 people, and sell three projects. My vision is to develop the company into a leading project developer in Germany with triple-digit employee numbers. I am building up the portfolio both privately and with P&P Immobilien GmbH. Here I would like to increase the property portfolio to over 60 units this year and reach a portfolio of 500 units in the coming years. These are ambitious goals and they spur me on a lot.
What is your forecast for the real estate market in Germany?
I always find it difficult to make a forecast about such a divided market. For me, there is not just one real estate market in Germany, but rather different fragments within the real estate market that have to be considered independently of each other. In my opinion, residential real estate will continue to develop well, especially in the conurbations. It is possible that the space required by a family will increase by one room compared to the past, because more home offices will be established - even after Corona. On the other hand, smaller flats may fall in price. Commercial real estate is completely separate from residential real estate and must be considered separately. It is already noticeable that commercial properties of 500 square metres or more are much more difficult to let. This is not yet the case with smaller office units, because companies are downsizing but still want to keep an office. In addition, the desire for office space among very young start-ups continues unabated. But that only applies to my home market of Berlin. This can be completely different in other locations. The hotel industry is also a very interesting submarket of the real estate industry. Will hotels as we know them come back? Will the owners change or will hotels develop more into apartment buildings of private landlords? I don't dare to speculate here. So, as so often, it has to be looked at in a differentiated way. However, I am sure of one thing. There will always be very attractive submarkets on the real estate market. It's just a matter of identifying them.