Invest in real estate. Take advantage of attractive investment opportunities.
There are many ways to invest in real estate, from direct purchases and equities to real estate funds and crowdfunding. Read what investors should keep in mind and why real estate investments are still particularly smart, even today.
What makes real estate a good investment?
Investing in real estate pays off in three key ways:
- Real estate offers a certain amount of protection against inflation: Rents on commercial properties are usually adjusted annually in line with inflation. Even in the case of residential properties, a percentage of inflation can be passed on to the tenants but with a delay.
- Relatively moderate interest rates: Although interest rates have been rising sharply for the first time since 2008, they are still at moderate levels by long-term comparison.
- Reduced overall risk: As a component of any portfolio, real estate investments increase the level of diversification, making the portfolio more resistant to fluctuations. Thus, they can make a significant contribution to improving the investor’s risk/reward ratio.
What options exist for investing in real estate?
There are many different ways for people to invest in real estate. In addition to the traditional method of directly purchasing a property, widespread opportunities include indirect investments in open-end and closed-end real estate funds as well as in real estate equities and, increasingly, the crowdfunding of real estate.
Indirect real estate investments mean that investors possess only shares representing an investment in a property. The property itself does not belong to the investor. That gives investors the chance to benefit from returns on the properties they hold even when investing on a limited budget.
Purchase of real estate
There are a number of advantages to buying a property. For instance, you can live in the house yourself and use it as a retirement asset or rent it out to generate regular cash flow.
If the value appreciates, investors can make a profit when they are ready to sell.
However, investors need to keep in mind that buying a home requires an enormous amount of capital even though mortgage interest rates remain relatively low and that the money invested is strongly tied up. This is also what makes effective diversification across several properties so expensive. Managing properties for investment purposes also means a great deal of time and effort, and costs of renovation also need to be factored in. Besides that, the end of the era of negative interest rates means a key driver of investment property values has been eliminated. Annual increases in value will no longer be automatic in the coming years. The focus will once more turn back to rental income and its growth potential.
Real estate funds
Real estate funds invest the collective capital of all investors in real estate portfolios. In that way, the risk is effectively diversified. Depending on their orientation, the portfolios are mainly made up of industrial, office, or residential properties. Investors, however, have no say in which properties their money is invested in.
The return on real estate funds is generated through rental income from the properties held and the increase in the value of each property. The return to be paid out to investors is calculated by subtracting the expenses for managing the funds. The distinction between open-end and closed-end funds is also important.
Open-end real estate funds have flexible assets. Investors can normally contribute or withdraw their capital easily. When the assets grow, the fund can invest in new real estate, but in the event of a loss, properties may have to be sold in some cases. Shares in open-end funds are also a good option for small-scale investors.
Closed-end real estate funds, however, generally have a higher minimum investment and invest in a few select properties. As soon as the capital is collected, the fund is closed. The money is tied up until the fund matures because shares can no longer easily be sold.
Real estate equities
Investors can access companies from the real estate sector on the equity market, which allows them in turn to profit from the growth opportunities on the real estate market. Equities can also be traded easily at any time and offer good diversification options. The disadvantage of real estate equities is their relatively high volatility, which increases the short-term risk of this investment form. What’s more, real estate equities are more dependent on the general performance of the equity market than other real estate investments are.
Real estate investment through crowdfunding
With crowdfunding, individuals can use a platform to invest relatively small sums in a selection of properties with high yield opportunities – for example, the construction of a multi-family dwelling. Once the project is completed, the invested capital is returned to them – plus interest. Since the terms to maturity are usually short (up to five years), the invested capital is therefore not tied up for too long.
Nevertheless, this kind of crowdfunding also involves risks. For instance, high-risk real estate projects that did not receive financing from a bank may be listed on these online platforms. This is why it's crucial to carefully review the platform and the actual projects in order to avoid severe losses.
The various types of real estate investments differ in key areas that you should consider carefully before deciding to invest.
Why is real estate a relatively safe investment?
Directly owned properties are largely independent of the stock exchange and offer a certain level of protection against inflation. This means that short-term fluctuations on the financial markets do not affect a property’s value. Moreover, the supply of land and housing is limited so demand is persistently high.
How much money do you need to invest in real estate?
The amount of capital you have available plays a major role when investing in real estate. To make a direct purchase, buyers require equity capital of at least 20–30% of the total cost. By contrast, those who want to make indirect real estate investments can do so with relatively little money. However, real estate equities and listed real estate funds are subject to stock market fluctuations, unlike direct ownership. Saying that, they can be sold again at any time with comparatively low transaction costs.
Should you invest your money in real estate?
Since real estate is considered to be an investment that retains its value and is hardly susceptible to fluctuations, it is a popular form of investing. In particular, however, investors should consider their personal financial situation. That is because the terms of the investments have different lengths, and, until they mature, the capital is not accessible. Investors should determine in advance how long they can and wish to make do without the invested funds.