Pint-sized properties: Why studio apartments make great investments

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Investing in studio apartments

Cities are growing, populations are increasing, and space is coming at even more of a premium, especially in the centres of popular cities such as Berlin, Frankfurt, or Munich. Meanwhile, the top tenant groups renting properties are students and young professionals. As a result of this, compact studio apartments are becoming ever more popular, and could make the ideal investment property. Let’s take a closer look.

They are more affordable

The first advantage of investing in studio apartments is the most obvious – the smaller the property, the lower the cost. As a real estate investor (or potential investor) with little capital on hand, this gives studios a distinct identity as a low-cost asset. It also offers the opportunity of real estate investment to those who might otherwise be priced out, who may be unable to afford a larger apartment, a property in a more expensive city, or an apartment in a desirable waterfront location.

Solid capital appreciation

Although capital appreciation is dependent on a number of interrelated factors and can be difficult to predict or quantify, more affordable housing such as a studio apartment is considered to have good prospects, particularly over the medium-to-long term. Berlin has seen property prices increase by more than 10% p.a. for more than a decade, so even the relatively low price of a studio apartment could see considerable growth over the years, as much or even more than luxury and premium apartments. This is, however, exactly the point – good capital appreciation does not (generally) happen overnight. Real estate has less inherent risk and volatility than most other asset classes, meaning that growth is steadier but slower. Studio apartments in particular see slower capital appreciation than other properties. Yet their popularity and practicality mean that they can be seen as a fairly safe investment. Adding to this medium-to-long term outlook is the fact that there is no capital gains tax on real estate if it is held for 10 years or more. So, the longer you hold onto the property, the better an investment it becomes.

High rental yields

However, if you’re not into delayed gratitude very much, there is another advantage to buying a studio apartment as an investment. On average, studio apartments see a higher rental yield than other one-bedroom or even two-bedroom apartments. Due to factors such as their smaller size, self-contained nature, and often a city-centre location, the rental costs per sqm for studios are higher than for larger apartments. This means that you should receive high rental returns, in comparison to the cost of the apartment. If you want to calculate exactly how much your investment will return, use our return calculator. This brings us to another important factor – location! This is not a very original consideration; location is the most important factor when deciding to buy any property. But with studio apartments, it is more important still. You need to go where the tenants are, and as the top tenant groups renting studios are students and young professionals, you need to be close to business centres and seats of higher education.

Easy maintenance

In keeping with the lower cost, a smaller apartment also means easier maintenance. Less space means fewer complications, which means less time and expense spent on upkeep, either when renovating your newly-purchased studio or seven years into a rental contract.

Dealing with tenants

Buying a studio apartment as an investment is not all positives, however. There are also downsides. As is the case with anyone who has a property offered for rent, one issue is, in fact, dealing with tenants, and collecting rent. Particularly if you are not a full-time landlord, this can consume a lot of time and energy. You need to be prepared for late payments, finding new tenants and dealing with maintenance issues, and both the personal and financial implications of these.

Lack of liquidity

Another drawback is not unique to studio apartments but is a feature of property investment in general. Real estate is a relatively illiquid form of investment; once your money is invested in the property, you can’t just cash out whenever you want. If you are on a tight budget, or experience some unexpected circumstances, this could create considerable financial strain on you.

In conclusion

Studio apartments are ideal opportunities for those starting out in real estate investment. They enjoy relatively solid capital appreciation and good rental yields, as well as coming at a lower cost. Additionally, if you buy a studio apartment that is fully managed, then you are left with a simple, uncomplicated investment. If you are a new investor, or looking to expand your investment portfolio, why not take a look at our range of smaller studio and 1-bedroom apartments?

Written by:

Alex McKerrell

A Londoner by birth and a Berliner by choice, Alex has lived in the German capital for over a decade. Whether you need to know Berlin’s best Indian restaurant (Bahadur in Wilmersdorf, no question) or a history of Nikolaiviertel, he’s the person to ask.

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