ᐅ Multi-family residential building as an investment property in a city with an aging population
Created on: 2 Oct 2016 12:08
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MaxPower90
Hello everyone, my concern is not directly related to building a house, but maybe some of you will find it interesting and want to join the discussion, which I would appreciate. Given the low interest rates and the fact that I have saved some equity, I am planning to buy 3 to 4 smaller condominiums to rent out, or even better, a small multi-family building.
I come from the Ruhr area and want to buy in this region as well. Of course, with a property, just like with a nice vacation, I want good value for money. At first glance, for example in Herne, you can find properties without maintenance backlog yielding around 7% net annual rental return. In my opinion, this high return is linked to the fact that Herne is not an attractive city for any age group. I have reviewed all the population forecasts I could find online, and Herne is aging faster than average and is projected to lose up to 10% of its inhabitants by 2040.
My question to you is: Is investing in a city like this likely to be a losing strategy due to falling property prices and probable vacancies? Or could it also be an opportunity if the micro-location is good (shopping facilities, public transport, parks, etc.) and the building could potentially be converted to be barrier-free in the medium term? Especially considering the attractive rental yield and the fact that retirees, whom I imagine to be “good” tenants, might be the main target group.
I have never bought residential property before and find it really difficult to assess. I look forward to your opinions!
I come from the Ruhr area and want to buy in this region as well. Of course, with a property, just like with a nice vacation, I want good value for money. At first glance, for example in Herne, you can find properties without maintenance backlog yielding around 7% net annual rental return. In my opinion, this high return is linked to the fact that Herne is not an attractive city for any age group. I have reviewed all the population forecasts I could find online, and Herne is aging faster than average and is projected to lose up to 10% of its inhabitants by 2040.
My question to you is: Is investing in a city like this likely to be a losing strategy due to falling property prices and probable vacancies? Or could it also be an opportunity if the micro-location is good (shopping facilities, public transport, parks, etc.) and the building could potentially be converted to be barrier-free in the medium term? Especially considering the attractive rental yield and the fact that retirees, whom I imagine to be “good” tenants, might be the main target group.
I have never bought residential property before and find it really difficult to assess. I look forward to your opinions!
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Bauexperte4 Oct 2016 21:46Bieber0815 schrieb:
I also know that a 7% return nowadays only comes with significant risk.Exception: the land is owned _and_ fully paid for. The rest is then supported by the KfW Regards, Bauexperte
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HilfeHilfe5 Oct 2016 07:43MaxPower90 schrieb:
I would say you’re mistaken here. I read the following in a real estate book, which was confirmed during my return-on-investment research: .You should spend less time studying theory and instead talk to people who are landlords and learn about the concerns as well as the benefits they experience with their investments.
I always find it amusing when people cite books as if they have discovered the secret formula. If rental property investment were a one-way street and a guaranteed jackpot, everyone would be doing it and would be wealthy.
HilfeHilfe schrieb:
You should spend less time studying theory and instead talk to people who are landlords and understand the concerns and also the benefits of their investments.
I always find it amusing when people refer to books as if they discovered the wheel. If renting properties was a one-way street and a jackpot, everyone would do it and be rich.I think it’s similar to many other entrepreneurs.
There are those who have a knack for it and succeed, those who try it and fail, and those who invest time and money but don’t get much in return.
I once read a very interesting blog. For the blogger, the key was purchasing properties at a low price. He had set up filtered searches over a long period on real estate portals, and as soon as a bargain appeared, he would call the same day, request documents, and arrange a viewing appointment. Speed was crucial to secure true bargains.
This way, he bought one property after another. This approach helps reduce the risk reserves, since it’s unlikely that all properties will have issues at the same time. The reinvested money generates returns. And with a larger number of properties, a vacancy or rent default doesn’t hurt as much.
The average person, who buys a condominium or apartment (“ETW”) on the side to supplement their retirement, simply doesn’t have these advantages and experiences. Usually, these are the people who then complain about problems and negative returns from renting. For them, it’s great when the property is paid off, but in reality, it actually lowers the overall return.
MaxPower90 schrieb:
I read the following in a real estate book, which my return on investment research has confirmed: In top cities and/or prime locations, you have lower net yields than in less desirable areas! Even though my title is "surveyor / publicly appointed surveyor," we were trained in property valuation during our studies and practical training.
It is certainly fine that you educate yourself, but I still doubt that you can do this flawlessly yet.
Wherever you are – in Germany you will achieve a net yield (not to be confused with net cold rent!) of 7% only if you rent at extremely high prices, so high that the local rent index no longer applies (yes, that is possible) – or if you operate in the illegal sector. Then even 100% is possible.
If you were to achieve 7% net yield without any ongoing costs, this would mean you would pay about 14.3 net annual cold rents as the purchase price. That was the lower end of the scale (15–25) before the financial crisis, but from the net annual cold rent, ongoing costs still have to be deducted – at best about 4%, but if things go badly, only 0%. If, on the other hand, you want to generate a 7% net yield after deducting all costs, your purchase price today would have to be at about 10 net annual cold rents. Reversed, that quickly means at least €16 cold rent per square meter, therefore well above €20/m² gross rent – please ask yourself if that is even remotely achievable in the location where you intend to buy your properties, especially if this simultaneously exceeds everything asked for in central Munich.
Today, you will hardly find a new property that can be purchased at less than 20 net annual cold rents. In metropolitan areas, it gets completely absurd; there it goes up to over 40. This means that 7% is very difficult or not attainable at all.
So, with all due respect, the question is not whether you can achieve 7% in Herne – but where the mistake in your calculation lies.
Best regards
Dirk Grafe
MaxPower9010 Oct 2016 23:21Thank you all for your responses, and especially you, Dirk. I actually caused some confusion by equating net cold rent with net yield. But for myself, I had correctly calculated using the yield.
At least when I talk about net cold rent Kaltmiete, a 7 - 8% return is realistic here in the Ruhr area. Of course, these houses are at least 40 years old. But if I buy a house where not much investment is expected in the coming years, then my net yield is roughly equal to my net cold rent minus 1%. That’s my assumption anyway, since besides a maintenance reserve, there aren’t many other expenses. Naturally, taxes on my rental income still need to be paid. I’m not even looking at fairly new properties. While they have low ongoing costs, meaning fewer repairs, market observations show that due to the high purchase price, the net yield is worse. Rents simply don’t increase proportionally. And you first have to come up with that high purchase price.
It’s an interesting topic, and I will keep following it and report back. By the way, I have since moved away from considering Herne. I believe there are even more promising cities in the Ruhr area for the future.
At least when I talk about net cold rent Kaltmiete, a 7 - 8% return is realistic here in the Ruhr area. Of course, these houses are at least 40 years old. But if I buy a house where not much investment is expected in the coming years, then my net yield is roughly equal to my net cold rent minus 1%. That’s my assumption anyway, since besides a maintenance reserve, there aren’t many other expenses. Naturally, taxes on my rental income still need to be paid. I’m not even looking at fairly new properties. While they have low ongoing costs, meaning fewer repairs, market observations show that due to the high purchase price, the net yield is worse. Rents simply don’t increase proportionally. And you first have to come up with that high purchase price.
It’s an interesting topic, and I will keep following it and report back. By the way, I have since moved away from considering Herne. I believe there are even more promising cities in the Ruhr area for the future.