Real estate as an investment: advantages, risks and alternatives
Investment properties are real estate that serves as a capital investment. Particularly in times of low interest rates or economic crises, real estate is considered a stable investment and a good addition to the investor's portfolio. When investing in real estate there are some advantages, but also risks.
What are investment properties?
Investment property is a popular form of investment for capital investors. They are often used for old-age security. The aim of investing in real estate is to generate a return. This is what distinguishes investment property from a house or apartment you live in yourself. With a property you use yourself, you save rent, but usually do not generate a return and cannot claim any tax advantages.
Variants of investment with real estate
There are two ways of using an investment property
Buying and selling: In this variant a property is bought with the aim of selling it again and benefiting from an increase in value in the meantime. When selling, a price should be achieved which is higher than the original purchase price of the investment property.
Renting and leasing: This variant involves the transfer of rights of use for a fee. There are essentially two possibilities: renting and leasing. The difference lies in the rights granted to the user. As a tenant, the property may only be used; as a lessee, it may also be used commercially, for example by subletting.
Advantages of financial investments with real estate
Investments in real estate are very popular. Reasons for this include the following:
Stability of value: Real estate is regarded as an investment of stable value, which is subject to less volatility than other asset classes such as shares.
Attractive returns: In low-interest phases, investment properties can generate attractive returns and can be a useful addition to an investment portfolio
Independence from the stock exchange: Living space is in demand - and with an investment property you are independent from trading on the stock exchange.
Problems with the acquisition of investment property
Diversification: When investing money, the principle is never to put all your eggs in one basket. However, the direct acquisition of investment properties usually requires relatively high minimum investment amounts, which makes it difficult to build a diversified real estate portfolio.
Unforeseeable risks: Investment properties are also subject to the risk of impairment due to external influences. If, for example, the infrastructure surrounding a property changes, this can have a negative effect on the value of the property - for example, the planned construction of a motorway near a residential property will certainly have a negative impact on the value of the property.
Alternatives to investment properties. What are the advantages and disadvantages?
Instead of investing directly in investment property, there is also the possibility of investing indirectly in real estate. There are two main forms of investment:
Real estate funds: an alternative for investors who do not want to buy an individual property. There are open-end real estate funds and closed-end ones. However, the two forms of investment are different
Open-ended real estate funds invest investors' money mainly in commercially used properties, for example office buildings. Open-end funds usually comprise a large number of different properties, some of which are from different countries, and do not invest all of the money in real estate but also in interest-bearing securities. The interest-bearing securities can be sold at short notice and thus act as the necessary liquidity to pay out investors who want to sell their units. The funds' income comes from rental income, gains on property sales and the interest income from short-term investments.
Closed-end real estate funds are entrepreneurial investments in only a few properties, sometimes only one. Investors participate in the success or failure of the company. How high the liability is depends on the legal form. With a KG / Kommanditgesellschaft, the investor can loose the money he has invested, with a GbR / Gesellschaft bürgerlichen Rechts under civil law he may even be obliged to make additional contributions.
If one uses the possibility of investing in a real estate fund, one has the possibility of investing in various properties at the same time, but the composition of the real estate funds is the responsibility of the fund manager and the investor has no possibility of directly selecting the properties.
Crowd investment: Crowd investing is becoming increasingly popular and is a form of financing in which many people - "the crowd" - can invest small amounts of money in real estate via the Internet. Since transactions are usually processed digitally, transaction costs are low and the effort required to manage the portfolio is easy. Crowd investing is very well suited to building up an individually diversified real estate portfolio with smaller amounts and thus minimising investment risks. Especially for beginners and small investors crowd investing is a smart alternative to direct Investment in investment properties.