2021-03-01 | At what point is the purchase of a flat relevant for your capital formation?
At what point is the purchase of a flat relevant for your capital formation?
The “experts” are very much at odds here. Until the low-interest phase, i.e. until 2009, it was common to advise mainly high-income clients (over €65,000 per year income) who already used a property themselves to buy a property as an investment. This changed with the low interest rates and rising rents. In the meantime, less well-off people can also afford housing as an investment, but less so in big cities like Berlin. But do these investments always make sense? Especially with the introduction of the Mietpreisbremse (rent control) and the rent cap, many flats will no longer be profitable as an investment.
You should consider buying as an investment if you want to invest money in the long term in addition to the positive cash flow of the individual property. By long-term, we as real estate experts mean 10 years or more. Germany is one of the last countries that does not tax the profit on the sale of a rented property with income after 10 years, i.e. you can book the possible profit “tax-free”. However, whether this regulation will still be valid in 10 years, and whether you will have a profit at all, is of course a risk that you should evaluate when buying. Please also talk to your tax advisor about the tax issues before deciding to buy. In addition to the long-term investment period, you should also keep an eye on the performance. If interest rates rise again, please remember that the property will not necessarily have a positive cash flow for a buyer in, let’s say, 10 years, as it does for you today. Presumably, the rental income will also increase in 10 years, but we do not know today what the relationship between the possible interest rate increase and the rental development will be in 10 years. Therefore, you should carefully analyse the location, as well as the size, floor plan and special features of the properties for several potential buyer groups.
Unlike some other very well-known consultancies in the real estate and investment industry, we have been advising a rather conservative approach to forecasting rental income and value development for years:
In good middle-class locations in Berlin, you will achieve between 2.5% – 3% return per year with a solid rental (return per year = net proceeds per year from rental income of the property / 1% of the purchase price of the property). In very good locations in Berlin you will get a return of approx. 1 – 1.5%. If, as an investor in a Berlin property, you attach more importance to location, you will have a poorer return than in medium locations. If you choose supposedly poorer locations in Berlin, you can even achieve returns of 4-5% per year. In addition to rental income and cash flow, however, you should also take the performance into account. However, past performance is always a very limited predictor of future performance. Nevertheless, you can at least read trends. This is particularly exciting in Berlin. Please also read our other articles on this. We advise you to reckon with an average increase in value of 3-5% per year. The average in Berlin is currently around 8-10% per year. In the last 10 years, prices in Berlin have more than doubled. (Please also read more about these statements here and ask us for evidence on this).
Conclusion: A solid investment in a Berlin flat for capital investment should generate 80% return in 10 years. That is 3% rental yield plus 5% appreciation per year = 8% “return” per year on the purchase price. If you have financed the purchase price favourably and achieve a positive cash flow, you can leverage this return on your own invested money (=equity) once again. We would be happy to tell you more about this in a personal consultation.
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Current Real estate projects
Do you want to buy a flat in the countryside, close to the water and surrounded by greenery? Or would you prefer to call a beautiful condominium in the middle of Berlin your own? Our current real estate projects have a lot of potential for independent living – as an owner-occupier or capital investor.