What is the secret of real estate investing

Six strategic tips for real estate financing

Marle Schwien

Updated on Aug 14 • 3 minutes read

Bank interest rates are at a record low: in keeping with the motto “concrete gold instead of savings book”, real estate is currently a popular investment option. Real estate has always been seen as an investment of stable value with which a considerable return can be generated.

But how can capital and private investors successfully finance a property?

We have put together six strategic tips for you.

Tip 1: Aim for a three to five percent return

It is no secret that real estate as an investment should generate the highest possible return. However, the purchase price must always be in a reasonable relationship to the expected return.

The rule of thumb here is: The return to be achieved should be between three and five percent as best as possible.

(Yield (in percent): earnings after taxes x 100 divided by equity).

A market analysis helps capital investors to correctly assess the potential of a property. Investors must ask themselves the following questions:

  • Which current trendy districts will be at the top of the rankings in the foreseeable future?
  • Which district will become more popular in the future?
  • In which neighborhood can landlords expect constant demand?

Basically, real estate in large cities and popular districts has a significantly higher purchase price. In return, however, they also generate a higher return. It is therefore important to find a healthy balance between the purchase price and the return.

Tip 2: plan a financial cushion

Investors should definitely plan financial leeway in order to be armed against unforeseeable costs such as repairs, maintenance or additional cost back payments.

Investors should always plan a financial cushion of around twenty percent of the total investment.

Practical tip: Take a look at the minutes of the last owners' meetings to check whether there is any construction work to be done on the property and what costs you can expect in the short and long term.

Tip 3: Compare offers and secure low interest rates

The calculation of a real estate investment is the be-all and end-all. When planning interest and repayment financially, investors should plan no more than 40 percent of their net income as a monthly burden.

Because even if the interest rate level has reached a historic low, the differences between the bank offers are large. By comparing the loans and conditions (term, repayment modalities, interest rate) of different financial institutions, several thousand euros can be saved.

Practical tip: Negotiate the cheapest offer from another financial institution at your house bank.

Good to know: Plan in advance by when you would like to have the property paid off at the latest. Use high repayment installments for your capital investment so that the property is paid off faster and you benefit from the return sooner. A two percent repayment is recommended for capital investments.

Tip 4: negotiate special repayment

When it comes to real estate financing, investors have to find a healthy balance between an initially high repayment rate and a realistic monthly rate.

Agree on a special repayment clause with your bank so that your loan can be paid off more quickly if you have a higher income.

Tip 5: Higher equity is rewarded with lower risk

Real estate financing without equity (unfortunately) is more of a dream than reality - and apart from that, it is not recommended.

Because: A higher equity share is rewarded by banks with more favorable conditions.

As a rule, the more equity capital is used, the lower the interest rates.

As a rule of thumb, investors should at least cover the ancillary costs with their equity. An optimal use of equity is twenty percent of the purchase price as well as the ancillary acquisition costs (e.g. notary, real estate transfer tax and land register entry).

Tip 6: Research forms of financing

Investors as well as private individuals can benefit from support from (state) subsidy measures.

As a capital investor, you should take advance financing appointments with various financial institutions and compare the advantages and disadvantages of the loans and conditions.

State funding measures (Federal Office of Economics and Export Control) promote, for example, the use of renewable energies and heat generation.

In addition, investors can usually take advantage of low-interest loans or grants.

Practical tip: Investors are subject to a significant tax advantage: some expenses can be deducted from tax, so that the taxable income is reduced by the tax savings.

Real estate financing at a glance

If you are planning to invest in a property, you should consider the following strategic tips for real estate financing:

  • Focus on high returns: Choose a property that will generate the highest possible return as an investment over the long term. Make your decision based on facts rather than feelings.
  • Financial scope: Can I bear unforeseeable costs in an emergency?
  • Interest comparison: Which bank offers the cheapest loan with the best conditions?
  • Special repayment: Is there a special repayment clause in the contract? If so, in which form?
  • Equity: Does my equity investment cover at least the ancillary costs and, ideally, 20 percent of the purchase price?
  • Funding options: What (state) funding measures are available to me as an investor?

A real estate investment should generally not be subject to hasty decisions. Instead, a market analysis helps capital investors to find a location for a promising return and to obtain optimal loan offers and conditions through intensive research. This is the only way to successfully finance an investment.

Additional Information?

Do you have any more questions about real estate financing? Let an expert advise you.

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