Risks of purchasing property as capital investment
Again and again our clients ask us about the risks. So, what exactly are the risks of buying an apartment as capital investment?
This is where we should differentiate between whether you should buy an apartment that is already tenanted or a newly built apartment e.g buying an empty apartment and renting it out yourself. Apartments which are already rented out have the disadvantage that the rent is often below the current average of the rent possible on the market, and that the amount you can raise rents is limited. (More on that topic can be found under „rental price break“, rent index, or directly from the tenant association). That also means that tenanted apartments are often offered at a cheaper price.
Buying rented apartments depending on the location (see our artical „rent return“) in Berlin in good to mid-range locations between 1.5% and 3% rent return per year. The advantage of buying a tenanted apartment is, however, the purchase price. The purchase price in relation to the rental return remains, and if the rental income is low then the purchase price will be even lower. Many clients are specialized specifically in buying tenanted apartments, renovating them and then renting them at market rate or adjusting the rent.
Purchase of an apartment in Berlin-Marzahn, mid-range location, rented at €4 net cold rent after deduction of all costs. 70m2 of living space in need of of renovation.
€8.00 possible on the market after renovation in accordance with the rental rate with existing tenant. Purchase price of the apartment with tenant is €117,600 = 2.86% return. Market value of the apartment after renovation and increase of the rent by 8% with a return of 2.86% = €234,900. There is a price difference for the same apartment (similar location, similar floor plan, similar features just in a better condition) of €234,900 – €117,600. The worth is basically doubled. There is still no appreciation per se included in the calculation here, as well as the fact of whether or not the tenant would like to pay for the renovations. You should also include the cost of renovations for the apartment as well as projected time it will take to complete the renovations.
Let’s continue with our example of the Berlin-Marzahn apartment . The apartment is renovated, empty and has a possible market purchase price in Berlin-Marzahn from c. €3,500 (view our buy and sell rental price map here). 70m2 x €3,500 = € 245,000 purchase price.
Rent according to market value (not according to rental price!) Is €10 net cold. This is €8,400 per year of positive cash flow.
You buy this apartment with the chance of generating a rent return of 3.43%. That is a good value. Also assume that the seller can sell the apartment at a higher price than €3,500 per square meter, since many customers would by such an apartment up to €4,000 per square meter. Personal occupiers will possibly pay even more for an attractive apartment of this size in this location.
As you can see from this example, there is a market for the purchase of a tenanted apartment for both an investor who can make a solid investment, as well as for buyers who are interested in renting out an empty apartment.