If you’re new to investing, or new to real estate, weighing out your options before putting down a huge sum of money can be stressful and confusing. Here we will break down both the benefits of investing your money in property, as well as potential risks involved.
Relatively high returns, low risk
Investing your hard-earned money is sometimes an intimidating process, and inevitably involves a little bit of savvy, a leap of faith, and not a small amount of luck. However, if you invest wisely, the payoff can be substantial. That’s why investing in real estate is almost always a sound choice. Investing in stocks can have a huge payoff, but there is also a huge amount of risk involved, and the constantly changing market can be daunting for those who are not familiar with it. Direct investment in real estate, however, gives you a tangible asset. Real estate is one of the most concrete and scarce resources that one can invest in. Global demand is continuously exceeding supply: currently 54% of people are living in cities, and rising urbanisation trends will see this number go up to 68% by 2050.* This growth in demand drives real estate prices higher, with urbanisation putting an emphasis on cities.
*United Nations, 2014.
This means that an investment in real estate usually has comparatively high returns, despite being low in risk and volatility. The stock market can be unpredictable and unreliable, with outside factors frequently out of your control. When you own property, your investment is under your control as a tangible asset. Moreover, your risk of loss minimizes over time: the longer you own your home, the more profitable the investment. As the housing market improves, your home also increases in value. While the housing market has been uncertain in the past, those who did manage to keep hold of their investments have seen prices return to normal. With appreciation back on track, real estate investors in the top performing markets are now enjoying large profits.
Purchasing real estate can be simpler than other forms of investment: there are fewer stakeholders, no derivative contracts, and less frequent trades. Moreover, hundreds of large financial institutions are willing to finance the majority of real estate asset purchase prices, leading to higher returns on investment.
There are some potential cons to real estate investment, however. It is time consuming, and requires patience in order to see future profit. You will need a large sum of money to put up front, and you will then need to take out a mortgage to purchase the property. Furthermore, real estate is not a liquid asset, so it cannot be turned into cash quickly in case of an emergency. If you purchase a rented property as an investment, you will inevitably have to deal with tenants, maintenance issues, and potential liability. If you invest in a property that needs extensive care and renovation, there are always associated risks and potentially unexpected additional costs that must be taken into consideration.
Overall, a sound investment
That being said, property investment continually receives positive returns globally, compared to more risky investment classes such as stocks. A comparison with other asset classes that have a similar risk profile--such as gold, cash, and bonds--suggests that real estate typically yields more returns, measuring 8.9% over the past 5 years.* As a relatively simple investment product, real estate can provide a significant cashflow. If invested in correctly and carefully, purchasing a rented apartment will generate an excess income that can be reinvested elsewhere, or used to cover living expenses. An investment in real estate can also diversify your portfolio. If you have ever spoken with a financial advisor, then you have probably heard about the importance of diversification in order to spread out risk and reduce loss. Real estate will always be a safe tangible asset to alleviate more risky investments.
*FTSE EPRA/NAREIT Global REITs Index, 2017
Stable residential real estate market in Germany
Those looking to invest in residential real estate abroad will find Germany’s stable investment market highly attractive. Germany has a track record of consistent returns on real estate investment, particularly on apartments. Unprecedented low interest rates on property investment loans (international investors can finance up to 80% of the total investment amount at 1.-3% interest) combined with easy access to capital, with many lenders willing to make long term loans to international investors, optimise potential investment returns. Another key incentive for making long-term investments in Germany, is the fact that there is no local capital gains tax on investment in residential real estate if held for 10 years or more.