The one in which we take a step back

Given this might actually turn out to be a real newsletter - some establishing facts about the house we bought as an investment property

Jul 15, 2021

Hi. Welcome back?! You might be as surprised to see me as I am myself. Turns out, this might be a newsletter after all, with several instalments, not just a one off fluke of a little text that I wrote in a pandemic and job-loss induced fever dream?! Who knew. I am pleased and I hope you are, too.

I kinda dove into it there last time, though, straight to the good (read: big) stuff. Whatever it takes to keep you and I both motivated, I guess. So today seems like a perfect time to take a step back. Or to put it in real estate terms: I showed you a light filled attic but nobody thought about a foundation for this house newsletter / newsletter house of ours. Which is what we are going to rectify right now. Let’s get to it then!

As I have learned in journalism class at uni a thousand years ago - it’s always good to start with the obvious questions. The what, when, where of our real estate investment, to have something to ground us. And if we really want to do this, come back to some of the things we learned in more detail - well, then we better know what we are talking about, no?

When we started looking for a house, a muti-unit property to invest in and rent out, we actually looked all over Hamburg. It’s not like supply is amazing enough to be super picky or very niche - so where we ended up was, I don’t know, luck, coincidence or a result of many factors combined seeming like a good choice. Setting the scene, quite literally, this is where we are:

Wilhelmsburg is a suburb of Hamburg, on the southern side of the river Elbe. To be more precise, it’s an island IN the river, the biggest inhabited one in Europe as a matter of fact. Politically, “the jump to the other side” has been a key goal of Hamburg’s senate for a few years, just because growing the city on a big stretch of land previously occupied by the harbor and corresponding industries seemed like a smart thing to do. They put a bit more weight behind this political agenda by organizing IBA, the International Architecture Exhibition, in Wilhelmsburg between 2006 and 2013, meaning that a lot of new buildings went up as showcase for the future of real estate. Convenient. While politically sanctioned and furthered gentrification of a place formerly known as a “working class neighborhood” seems like a bit of wild concept, consensus seems to be that it might actually have worked in this case: Wilhelmsburg has become more lively and more livable without sacrificing diversity or raising the rent to a level as astronomically high as in the rest of the city to the North. So here we are, in Wilhelmsburg, the part of it called Reiherstiegviertel to be more precise.

Before we get to the house itself - one more note on it’s location. All over the world, there’s certain areas in cities that are supposed to be “on the up”, whispered about as the next big thing. In Cape Town that’s Woodstock. In London it was Clerkenwell. While Wilhelmsburg is that for Hamburg, the place always just on the precipice of becoming uber-desirable, it’s not the reason we decided to invest there. Sure, if that was to happen - great. But these things feel too much of a gamble to bet real money on it. Plus, we have owned the house for over seven years now and it still “hasn’t happened” - which makes me believe, it just never will. Which really just means, word of caution: make sure that your calculations are viable without a big “hip factor” potentially inflating your return. It might just never materialize - or take much longer than the real estate rumor mill wants you to believe.

Speaking of what from now on will be called “the house” - some facts:

Turn of the century building, built in 1900 to be exact
340 square meters of space, split into 6 units on 3 floors (including the ground floor)
All 6 units are residential and about the same size and layout - roughly 55 square meters, with two rooms, bathroom and kitchen
Located in a quiet residential cul de sac with the end of the street facing the river. There is no view or anything, but it’s still a nice location with shops and public transport in walking distance
Interestingly, the surrounding buildings are higher as our relatively small 2 story building
All units were rented out when we bought it with the renters being middle aged employees, handymen etc (as opposed to the apparently very prevalent student shared flats in Wilhelmsburg)
Also, never hurts to say this, I think it’s actually quite pretty with its classical features and white facade :)

With the what? and where? out of the way, let’s continue our roundup of background information, shall we? How and when did we actually buy this house? So glad you asked.

While I would absolutely tell everyone looking to rent a flat to try and go without an agent - with entire houses and real estate investment properties it feels like it would be sheer luck to stumble upon something to be sold privately. I mean, maybe we are just not hanging around the right circles, where houses get traded over lunch like society gossip (that’s at least what I am imagining). For us it has always been through agents and brokers and this house was no different. We followed a pretty standard process of an initial viewing of “just” the common areas like staircase and cellar with only the second viewing allowing us to actually see flats from the inside. As apartments are rented out, it’s understandable that not every viewing will go through the trouble of bothering tenants - a “somewhat serious” bar needs to be cleared first. Fine by us. Especially since this order of business allowed us to start initial discussions with banks prior and also bring an appraiser by the time we were able to see all apartments.

We pulled the trigger on January 1st, 2014 - with me living all the way across the world on a different continent for my job. We bought a house!!! Insane.

As for the how much? …. the part that’s maybe most interesting? … the appraiser gave us a pretty good picture of what he believed would need to be done to the property generally and which of those issues would need an investment relatively quickly. Overall, he figured that something like a little under 20% of the asking price would need to be invested at some point with about a third of that being somewhat urgent (mostly costs related to some dampness in the basement). We used this figure to make an offer - which we eventually negotiated to be a little closer to what they wanted, but still gave us a sizable discount. The interesting thing and big learning here is that this reduction didn’t just come out of the seller’s pocket: the agent actually agreed to forgo a part of his commision (which initially was 6.25% of the purchase price and was reduced to 4.46% eventually). Note to self (and you!) - definitely always try to make an offer instead of assuming the asking price is some sort of divine law and, secondly, include the agent and their fee in your negotiations!

As for the bank and our mortgage, these are some of those facts:

We very loosely got in touch with several banks initially - and then continued the conversation more focused with two of them, Commerzbank and DKB. DKB is the one we actually went with in the end
We got a loan for 100% of the purchase price, meaning that only the additional purchasing costs (like taxes and the agents commission) had to come out of our own pocket - this usually is around 12% of the purchase price in Hamburg
While that seems ridiculously high now, our loan conditions stipulated a 3.4% interest rate, set in stone for 10 years, and 3.5% initial repayment. We’ll talk about that more in the future - especially as we are approaching the 10 year mark and, with it, a chance to refinance in 2023

In hindsight, and I mentioned that even last week, this has been a great decision. But hindsight is the year of the Covid pandemic, as they say, so it’s worth exploring why even then two googly-eyed newbies decided to throw their life savings at this house and opportunity. What, in fact, were we thinking? I don’t even have a bulleted list here which is a bit disappointing. I know. But what I think it comes down to is the relatively small house, at a relatively affordable price - which isn’t even meant to speak to the relative cost (even though I said “relatively” twice in the last sentence), but the total one: this was a house with training wheels attached to it and the overall risk, especially divided by two, felt manageable. We were determined to try our hands at real estate and this seemed like the way to do that. We would be fine. Add to that the fact that there was potential upside in two missing floors, some renovations that the appraiser pointed out and, yes, even the gamble on Wilhelmsburg turning into that Cinderella story everyone seemed to be waiting for - and we were sold. And the house was sold.

This seems to be as good a time as any to add a few disclaimers that have been rummaging around my mind while writing this. Also good for future reference, I guess, just like this factsheet of a house?

Yes, I wasn’t kidding when I said we invested our life savings into this. Sure, a relatively short life at that point, we were both in our early to mid-thirties, but still. At the same time I fully realize that the sheer opportunity to have life savings, to even entertain the thought of investing some money, to get a loan, to “dabble” (as I describe it rather flippantly) in real estate even at a young age speaks of immense privilege that I think is important to acknowledge. We earned our money through good jobs. But even having good jobs is privilege. I hope you get the idea - to me, this is important to say. What we are trying to do is tell our story and hopefully show that even with little money and even less experience you can get into real estate, still a crucial lever to build generational wealth. The “even less experience” part is important here, because the second thing to mention is that none of this constitutes legal or investment advice. We will do our darn bestest to research and link the shit out of this but we certainly aren't lawyers. Cool.

To end on a little lighter note, though, attentive readers might have realized that I left out one important question. Not to go all Gossip Girl on you, but we shall remain anonymous (at least for now). Sorry! xoxo

Disclaimer: We are not lawyers (sadly) and as such can’t give you legal and/or tax advise. We are simply telling our story in the hope that it’s inspiring to you.