Avner Motaev manages several companies in the real estate and telecommunications industries. He is the founder and CEO of mobile2business and lives and works in Vienna.
If you’re wondering about how to start investing in real estate, you’re doing so at just the right time. In fact, the German and Austrian property markets are doing well, with real estate prices continuing to rise. So, now is a good time to begin investing in real estate.
According to the Oesterreichische National Bank, the Austrian residential property price index was up by 7.97% in late 2018, while the experts at Deutsche Bank also expect German real estate prices to continue to rise.
However, for those of you who are used to dealing in stocks and shares, real estate can sometimes feel like an expensive and often dauntingly complex area to move into – but the potential returns on your investment can be excellent.
So, with that in mind, how do you start investing in real estate? Here I’m sharing the best advice to help you.
How to start investing in real estate
We all know that in any area of business, having a clear vision of what we want to achieve is fundamental. And if you’ve spent time developing an investment portfolio of any kind already, you’ll understand that property is no different.
But before we get into what that vision might be (and how you might go about planning to achieve it), it is also worth saying that real estate is an area where a personal passion for your individual investments is essential.
The financial scale of a real estate investment and the commitment it can require to add value to it means you should be passionate about what you’re putting your money into.
This obviously isn’t the same as the emotional attachment a private individual might feel about buying a residential home for their family – as an experienced investor you know it is still important to bring an objective, data-driven approach to any real estate investment decisions you make. But, equally, investing in real estate can be time consuming and complex – so you need to have genuine enthusiasm for property over the long term.
Find your passion and develop a plan
So, now let’s get back to that vision, and the plan you develop to achieve it. There are at least three key factors to weigh up here as you begin to think about investing in your first piece of real estate:
- Your own financial capabilities
- Your individual tolerance for risk
- Your financial goals.
All three factors are interdependent. Without a clear understanding of your own financial spending power (in terms of the finances you are readily able to access), you can’t begin to develop a clear idea of your risk appetite.
And without an idea of your ultimate investment goals, you can’t understand what kind of real estate you need to purchase to achieve those goals. Here’s a quick overview of what those goals might be:
- Regular rental income from your property portfolio. The advantages are that this income is reasonably reliable, and you can enjoy the return on your investment now. The cons are the upkeep of the investment, including the time you need to spend as a landlord managing the properties.
- A return over the longer term, by adding value to them over time and eventually selling them at a profit.
The pros here are that, if the market goes up, so does your investment, with relatively little input from you. On the flipside, if the market falls, you could be left with negative equity, and with assets worth less than the value of your loans.
These two approaches to buying real estate aren’t mutually exclusive, and a savvy investor might even be able to build a portfolio that delivers both over time.
We live in the age of ‘big data’, and the amount of information available to potential investors of any kind is vast. From market projections to estimated operating expenses and existing vacancy rates, it is all out there and accessible to anyone who takes the time to look for it. An overview of the European real estate market as whole, such as PwC’s regular Emerging Trends in Real Estate® report is a good starting point.
But the most important consideration for any potential investor has to be how these figures actually impact the projected income (or final return) that you hope to receive on your investment. As real estate investors we need to understand these figures, in terms of the practical, real-world impact they will have on our own finances.
For this reason, it is important to always dig behind the headline figures and understand all the implications of a particular set of numbers. As a quick example, take the average square metre rental figures for Berlin over the last three years. It rose from 12.5 Euros per sq metre in 2017 to 13.2 Euros per sq metre in 2019, as developers create more new apartments in a popular market.
They’re encouraging numbers for any potential investor looking at a buy-to-let property in Berlin. But dig deeper and it’s clear that the pace of this rise might slow, as more new apartments are completed and availability improves.
So, you could buy now, expecting rental prices to continue to grow. But there is also a good chance you may experience a slow down in the growth rate of rents over the coming years –which could impact your own cash flow.
Slowly build value, not debts
Real estate is a unique investment type, as it is one that we can add value to ourselves. Whether we are following a ‘fix and flip’ investment strategy – buying up properties, spending money on improving them and then selling them on quickly – or buying and holding over the longer term, as investors we can put money into property to improve its value.
Which is great: but we can also steadily lose money on our investments without being aware of it if we aren’t careful about what we’re spending on a regular basis.
Unsurprisingly, the key to avoid losing money in this way is to carefully monitor your monthly figures. Yield – rental income as a percentage of the price you paid for the property – is a crucial figure. So are mortgage repayments and maintenance costs. If your mortgage repayments outgrow rental income, then it is time to reassess the rates you charge.
Your own personal levels of debt are also crucial. As you grow your real estate portfolio over time it can be easy to lose sight of the levels of debt building up, hidden within your portfolio of properties.
Without careful monitoring, inexperienced real estate investors can find that their financial liabilities can rapidly spiral out of control. This impacts both their regular cash flow and their longer term returns on their investment.
So, it might be that you need to change your financing strategy. Here’s a quick breakdown of the different financing methods you might consider:
- Release some equity by selling an existing property in your portfolio. The pros are that you aren’t adding to your debt, but against this you are also taking potential future value out of your portfolio.
- Take out another mortgage or get a loan secured against existing equity. A relatively simple way to get the finances you require. Disadvantages are an increase in your debt liability, and being exposed to fluctuating interest rates.
- Consider an alternative source of funding, such as crowdsourcing. There are a number of online crowdsourcing platforms that now allow you to invest in real estate alongside other investors. These allow you to diversify easily and spread the risk. They’re also not linked to the stock market in anyway, so offer more consistent performance that Real Estate Investment Trusts (REITs). On the flip side, you’re putting your faith in other people’s judgement of what represents a good real estate investment – REIT portfolios on the other hand are usually managed by real estate investment experts.
Ultimately, every decision you make needs to go back to that original vision you had for your real estate portfolio. So, before you buy a new property, think about it in terms of how it adds value to your portfolio. Each new property brings new financial liabilities. So, how do these stack up against the returns that you’re likely to enjoy, over the term required for you to meet your financial goals?
Both the German and Austrian property markets are in a good place at the moment. And, it’s likely that the upward trends we’re seeing in certain sectors will continue. But once again, the measure of success in real estate investment is how your purchases add value to your portfolio overall, and help you towards achieving your own financial goals.
The bottom line to starting out in real estate investing is this: do your research, build slowly and always add value, not debt.