Nery Alaev is the Director of ESN Investments GmbH, which engages in the acquisition and development of commercial and residential property in Germany and Austria.
For experienced investors, it is easy sometimes to forget just how daunting starting out in this business can be. But deciding where to put your money and understanding how to make it work for you in order to get a good return can be a complex challenge for many.
Real estate investment in particular is an area which often requires a large initial outlay, which for many people means borrowing heavily and taking on a lot of debt. And even if you don’t need to borrow the money you require to finance the purchase of your first piece of real estate, there are still many other potential liabilities to consider.
But for me, real estate investment still represents an excellent opportunity to get a good return on your money. This return is often either in the form of a shorter term and regular rental income, a longer term final sale at a profit – or potentially both.
So is there a simple way for new investors to begin to think about starting out in real estate investment? I believe there is. Here are few thoughts on how a new investor can make those first steps in real estate.
Risk versus reward
For me, the starting point of any investment decision has to be an honest and accurate assessment of the risks and rewards the investor is prepared to face into.
As we all know, for any investor, new or otherwise, understanding the relationship between risk and reward is absolutely crucial. But often in real estate the financial stakes are even higher than for investors in stocks and shares. So, even before you look at any potential markets, or inspect any properties, it is essential that you take the time to think about the balance you are prepared to strike between these two factors.
Of course much of how this balance works comes down to the individual investor’s own financial goals and their personal appetite for risk.
For example, if you have plenty of spare capital then you may have a far larger appetite for risk than someone who is working within much tighter financial margins. Likewise, if you are keen to see a rapid return on your investment you might be more focused on buy-to-let properties or commercial units that you hope will have high occupancy rates. In this case, you might be happier to take on more risks and greater legal liabilities in search of those shorter term profits.
On the other hand, an investor who is building a portfolio of properties over the longer term and who is relying on the market heading upwards over time may have a different relationship with risk. A property that might be a risky proposition for someone who wants to buy and sell quickly might seem like a safer bet for someone who is prepared to sit tight and gradually add value to their investment.
So, understanding the kind of rewards you want to enjoy, in terms of a return on your investment, is one factor to consider. But a new investor then needs to balance these financial rewards with the financial risks they are also prepared to take in order to realise them. It’s why understanding this relationship between risk and reward has to be the foundation of any sound real estate investment strategy.
Do your due diligence
The other fundamental pillar of any investment strategy – and particularly in real estate – has to be thorough research. This might seem obvious to an investor who is used to working with stocks and shares. Those of you who are experienced stock market speculators are unlikely to invest your money in a business without first researching the performance of the company or poring over all of the financial reports that are available.
But real estate brings with it an entirely different body of data that an investor needs to consider. This might include looking at everything from occupancy rates for commercial units to comparing relative rental yield figures for different value properties in the same area, or even the educational performance of local schools. The key here for any investor is not just to know these figures – but rather to understand the direct impact that they have on the value you get from your investment.
Focus on the financing
Clearly, whether or not you have the right financing in place is what will ultimately influence how successful (or otherwise) you are as a real estate investor.
It determines all of those initial decisions you make about your financial goals and the kind of portfolio you want to develop in order to achieve them. But in order to be a successful real estate investor it is also absolutely essential that you keep an eye on the numbers on an ongoing basis too.
Why? Well, real estate investment is relatively unique in that it is one of the few assets that you personally can add value to. So, for example, if you buy an apartment in Leopoldstadt in Vienna that is in a poor condition, you can almost certainly increase your rental income by investing in improvements.
But it is also the case that you can very quickly lose money too, if you are paying too much to maintain a property. Mounting debt is also a potential danger for real estate investors as it can often be easily hidden within your growing portfolio. Many people use their existing equity and the properties they already own to secure more and more loans in order to grow their portfolio, but it pays to go carefully.
So, as a new investor, it is always worth approaching each new property with those clear financial goals you started out with at the front of your mind.
Does the property you are looking to invest in add value to your overall investment portfolio, or is it removing value by adding debt? To what extent will the new purchase help you to reach your financial goals? And what kind of burden will it place on your monthly cash flow? Will your regular income still exceed your loan repayments, maintenance costs and other liabilities?
See the bigger picture
An investment in real estate is one that you can add value to. But despite this, as a new investor it is also important to get a sense of the overall market too. Do this, and you begin to see how sustainable and reasonable the prices you’re paying for properties are.
The German housing market for example is currently in robust good health, with low levels of construction, high demand and a health economy pushing yields up. But it is also worth bearing in mind that the German national bank, the Bundesbank, suggested in 2018 that many properties in urban areas are overpriced – sometimes by up to 35%.
Why does this matter? Well, because those overheated prices impact the rental yield you might get – essentially the rental income you get as a percentage of the price you pay for the property. Or, if you’re investing for the longer term, that 35% extra you’re paying now in a booming market might swallow up any potential profit you make on a final sale if the market cools down.
My advice, then, is to always look to add value, with every real estate investment you make. Do your research, and find the properties that you can affordably improve in order to raise yields or increase the final value when you come to sell it.