The most important thing to keep in mind when in investing in real estate
As with most things in life - chances are you’ll be better off if you have a strategy. Real estate is no exception. And we’ll talk you through the most common ones
I am going to let you in on a little behind the scenes here … some weeks I am getting to my computer, already knowing exactly how I am going to start this newsletter. Maybe because there’s been a show I have been watching or a particular magazine article I have read and the wheels have been turning for a while. You know, the infamous shower thoughts … All you need to do is get them on paper. Other weeks, I am feeling like I am somewhere on a sliding scale between “just a little uninspired” and the dreaded writer’s block (it happens, right?) - in which case google is where I am starting. What’s happening in any particular week or month? Normally, inspiration isn’t far away (which I would claim is an interesting learning all on its own and applicable to general life maybe?) ….
Suffice to say, the current newscycle has depleted me (and everyone else) emotionally to a point where this is DEFINITELY a google week. And, obviously, the first thing that’s coming up for April is … you guessed it: April Fools. Ugh. In the eternal power ranking of “fake holidays that make me gag” it’s listed in a safe second place, right behind Valentine’s Day. Something about fooling your friends and and big corporations getting “in on the fun” and the glee with which people yell “April Fooooool’s” stopped being awesome over the age of, I don’t know, 9 and a half maybe? So yeah, not my way to start the April editions of Rente aus Stein really. Until I kept reading. And, in typical internet rabbit hole fashion, followed a few links. And then it hit me. “April Fools is not a public holiday in any country, except in … “ Wikipedia reads. Except in the Ukrainian city of Odessa. Hard swallow. The day is called Humorina and includes “a large parade in the city center, free concerts, street fairs and performances”. Tears. I am vowing to reconsider my attitudes towards this day - and pray that this April 1st, Ukrainians get to breathe freely again. And think about what costume to wear for Humorina. #standwithukraine
So for this month’s newsletter … it will just have to do without an intro that seamlessly connects to what we are actually going to talk about. Which I think is okay, right? As long as we lay out that we will have some pretty dope content for you in April as well as our first very practical forays into our hunt for another object to buy this year. Let’s get to it.
You probably know this from your work, your wedding planning or from the last time you tried to wrangle your neighborhood group for a potluck dinner. As with any big project, where you start is pretty clear: with a strategy. We have said it over and over again, but it bears repeating. There’s so many ways to go and so many things to consider that, ultimately, what your real estate adventure looks like will be entirely up to you, your goals, your budget. There is no one size fits all when it comes to your investment strategy (which makes sense given you are dealing with highly individualised investment objects as well). But you are not completely lost in the woods, either. There are certain guardrails I guess, tried and true approaches that can be loosely clustered into groups to give you some idea on where to start. And the details of those are what we’ll get to over the course of the next few posts.
Coincidentally, I am looking at my bookshelf as I type away and the last novel I read and only finished a few days ago is called “we begin at the end” (luckily this isn’t a book review newsletter as I am still somewhat undecided on whether I liked it or not). It’s a good nudge, though, for your real estate strategy as well. How you go will, in large parts, be informed by where you want to get to - that goal orientation, which also happens to be the major fault line between the different strategy-clusters. Not to state the obvious, but it makes a difference whether you are looking to earn money relatively quickly or whether you have a more relaxed investment timeline and the ultimate goal of building out a property portfolio to secure your retirement for example. Either aim is totally legitimate and there’s ways to get there - but you will have to know your destination in order to set the sails correctly so to speak. Which is why Moritz and I have done a few workshops over the last couple of weeks to get on the same page (they were actually fun and relatively casual Zoom calls, so don’t be alarmed by much more official sounding moniker).
Your heart beats faster for real estate? Rente aus Stein tells you how to invest. To receive new posts and support our work, please become a free or paid subscriber.
We’ll be doing a deep dive into some of the questions in the next few editions - almost like a workbook that you can use to prep and develop some clarity. In the meantime, though, let’s look at some tried and true versions of how you could approach your strategy development. While most resources you’ll find will cluster real estate investment strategies slightly differently, the main gist stays largely unchanged, contains three “buckets” and goes something like this:
For long term investments, you buy and hold. Buying and holding can be applied to any type of asset class, from single-family homes to apartment complexes, and the key to finding a suitable property to hold onto is research. You need to know the ins and outs of your target market, what appeals to renters in the area, and how to increase your property’s value over time. To further differentiate within this bucket, look at whether you are aiming to deal with a positive or negative cash flow initially. Both is possible and both would be classified as “buy and hold” but you would be looking at totally different properties and will also have to adjust all major financial KPIs as well as the property management accordingly
For a mid term investment, the 1/3/10 strategy makes sense. Basically, this strange combination of numbers explains how to best make use of German tax laws: Only do slight renovations the first three years after you have purchased a property as there’s a ceiling of what’s tax deductible, leave bigger investments until year four and then sell without having to pay taxes after you have held the investment for at least ten years. Sounds easy enough and has the potential to save you a lot of money - but as always, the devil is in the details and a calculator will have to make an appearance!
For a short term investment, the most common strategy is fix & flip. Buying a dilapidated property and fixing it up (with your own work instead of getting contractors for an even bigger upside) is the idea here. With a bit of elbow grease as well as imagination and style you are basically sprucing up something that your potential buyers lack the time, willingness or know how to do, thus being able to command a much better price. Obviously, the line between a clever but doable project and a crumbling disaster of a building site are fine here - so buyer beware, quite literally.
While I personally think the fix & flip approach sounds really fun (and evokes all sorts of Netflix docs that make it look ridiculously easy to magically beautify a ruin on a deadline while sipping rosé), Moritz and I have decided to stay in our lane for the foreseeable future. Our aim definitely is to further build out our current portfolio. We are still (relatively) young, the existing properties are going great and we can use our learnings to do some things better than before. Hopefully a good recipe to create an attractive return on investment over a longer period of time. It’s an interesting moment, really: On the one hand, we feel like we have learned a decent amount over the last couple of years to not stumble into the whole thing blindly - and on the other hand there’s still so much to really try out in the real world. We have been writing this thing you are currently reading for a while after all, so it’s about time we get this show on the road. Will you follow along?
Next week, we are going to revel in the newness of spring - it is the Easter week after all. What that means for real estate? Stay tuned :)
Please make sure to subscribe to read all of those posts in April. I promise they will be entirely free of April fool’s jokes! And thanks so much for your support.
Disclaimer: We are not lawyers (sadly) and as such can’t give you legal and/or tax advice. We are simply telling our story in the hope that it’s inspiring to you.