The one where we actually talk numbers
So we've told you that we were able to increase our return on investment pretty significantly. As soon as I am able to concentrate again, let me tell you how ...
Sorry, I can’t concentrate - last time, I made a flippant remark about our (non-existent) James Bond cat and conference table - but really wanted to talk about investments, real estate and otherwise. This week, all I want to talk about IS James Bond. I mean, have you seen it? Have you seen HIM? Does a poison garden on an otherwise empty island off the coast of Japan count as real estate? So many questions. And don’t even get me started on that ending. Maybe talking about real estate is the only thing keeping me sane you say? Fine.
Let’s get to it.
Basically, we surprised ourselves by being able to increase the investment return on our property more and faster than we thought. Looking back on it, there are three main factors that contributed to this pleasant surprise (speaking of surprises: we HAVE to talk about the ending!).
We underestimated how often people actually do move - with every move opening up the potential to increase rents. A new contract allows you to go up to market cap (if there is one), even if that sometimes means making a pretty sizeable investment in renovation works between two tenants. Obviously, this overall positively affects returns in the long run. The numbers: On average, in just 6 units, we had about one tenant moving out per year (a total of eight moves in seven years plus two tenants that moved into a different flat within the building - internal mobility, so to speak)
Despite the delightful fact above, we didn’t actually have an occurrence of the dreaded empty flat. Whether it’s Hamburg specifically or the crazy shortage in housing generally, we were always able to find a suitable tenant to immediately follow the last one. All six moves that we didn’t use to renovate went without a single day of vacancy. As for the renovations and upgrades: Three took one month each and one was a bit of an outlier with a vacancy of 45 days in total. Obviously, costs you need to factor in. Vacancies, especially those you don’t plan for, throw a MAJOR spanner in any and all calculations
The medium sized renovations we have done (more on that next time) have actually been a major lever in building returns. We went for a moderate approach and spent between 13,000 and 16,000 Euro every time we touched a flat. On average that’s between 250 and 300 Euro per square meter for new baths, flooring, the odd kitchen and a lick of paint. And the investments pay off, not in the least because they allow for slight increases in rent - they also help to maintain the overall property value. Be warned, though: Even calculating 1% of yearly rental income as a reserve doesn’t build up major capital to fall back on so it’s easy to blow through what’s there. In a somewhat classical case, we have been overly optimistic in calculating our case, meaning that there’s been several occasions where we had to deposit some money to patch up a hole or two. Not a major issue luckily - but proof that it’s easy to fall into that particular trap
So much for our personal experience. Does that constitute a rule, though, is it “the norm”? This is where I have to throw it back to my tax advisor. Shrugging emoji. If only I knew how to definitely answer the kinda pivotal question whether real estate still is a “good investment”. Per the conversation in the last edition, what’s considered a “desirable return” obviously depends in large parts on personal goals and investment strategy. With negative interest rates and no end to that in sight, some might be happy to earn mortgage and interest rate alone, reap the tax benefits and bank on an appreciation in property value for a (medium term) resale at profit. Doesn’t necessarily beat what’s possible on the stock market currently and Bitcoin, well … if you have happened to throw a few Euros into that big bag of gamble - good luck in trying to make that kinda money with even a whole block of flats in a superduper A-plus location.
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In an attempt to get closer to some more definite answers, here’s what the research seems to suggest. And, spoiler alert, there’s still a lot of “yeah … but …”.
On the plus side for a real estate investment: cash income as well as a lot of investor control (two things you couldn’t consider an upside in stocks for example)
More of an emotional argument but still important: the financial market generally but complicated financial investment products in particular are not necessarily everyone’s cup of tea. They can seem anything from daunting to positively terrifying to some (especially early stage) investors. Real estate, on the other hand, is something very tangible and “easy to understand”
The word “lump risk” (or Klumpenrisiko in German) will easily win awards for “most awkward” but also constitutes one of the bigger downsides of property investments. Because of the high price of real estate, chances are this investment will constitute a large chunk of your overall investment volume. Thus, there’s less possibility to diversify with smaller amounts in different asset classes, making the investment more risky overall
The biggest levers for affecting your return, should you decide on a property investment, are “buying cheap” (DUH!) which most likely means going outside of major metropolises as well as taking on property renovations in a way that has direct repercussions for property value (but also mean you basically take on a second job as a property developer)
As I said: a lot of “on the one hand … but on the other”. Hm. Not really what you came to expect from an advice newsletter? Well, luckily, there’s this one last thing. Cash on cash return. Yep. Not necessarily a concept I was familiar with either. But ask yourself this: what would your bank say if you asked them for a juicy but cheap loan so that you could gamble on the stock market for a bit? EXACTLY.
While a large portion of your real estate mortgage is interest paid to the bank, there is a portion of the mortgage that does go towards directly paying off the property. Which basically means you are increasing your net worth through equity. This, in my humble opinion, is why real estate investments (if done right) are still pretty unbeatable, especially if you are just starting out, with a little bit of money but not with huge koffers to your name. The current low interest situation means that a little bit of money can buy you a whole lot more money, but legally, not in a Ponzi scheme type of way.
And while it feels weirdly like endorsing a president, the takeaway really seems to be this: Buying some ETFs might be the safer (and definitely less cumbersome) way to go about it if you want a safe investment. But if you are willing to take a tiny bit of risk and put in the elbow grease (always loved that expression - what does it even mean?), the real estate lever is a pretty big one. Still. Nevermind the shrugging emoji.
Next time, on Rente aus Stein: All about decorating, but in a way that's actually driving the value of your property investment!
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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.