5 Affordable Ways To Invest In Real Estate
Real estate prices (in Germany) have increased tremendously in the last years. Our 5 ways to invest in real estate will show you how everyone can still buy properties. 🏠
Table of contents
Introduction: Investing In Real Estate In The Traditional Way
Buying a property in Germany in order to rent it out to a tenant is the most basic and traditional way to invest in German real estate. Standard and traditional real estate investing can be a very lucrative investment strategy when approached in the correct way, so nothing wrong with that. As some people do not want to spend the enormous amount of money required for real estate, the effort of securing a mortgage, or the time managing the property after you bought it. Let us take a look at 5 easy & affordable ways to invest in German real estate.
Does that mean that traditional real estate investing is a bad idea? 🤔 Of course not! Buying an investment property in Germany outright will earn you a lot of benefits that you might get only indirectly in the other 5 ways of this article – or you don’t get benefits in terms of taxes (e.g. depreciation) or leverage with a bank loan at all. The foundation of PerFinEx is that there is no “universally best”, so there is also no best way to invest in real estate. There can only be a way to invest in real estate that fits your personal situation the best.
The big downside of traditional real estate investing is that there are a lot of requirements that mostly come from the banks when requesting financing. As property prices in Germany have been rising continuously over the last years, probably everyone reading needs a bank loan when trying to buy property. Even if you could afford a property without a mortgage, leveraging is probably the way to go at current interest rates. What are these bank requirements exactly?
- Additional purchasing costs (e.g. notary, ground tax, agent) can be +10% of the property value and need to be covered fully by you
- A down-payment of another 10% might decrease the interest rate you have to pay for your mortgage (depends from case to case)
- Solid financial situation: High income compared to expenses, high assets compared to liabilities (e.g. existing loans)
- Trustworthy personal situation: High Schufa score of +95, unlimited job contract with no probation period, etc.
Our 5 simple and affordable ways to invest in German real estate have none of these requirements. So if you would like to own real estate as an asset class but cannot get a mortgage for whatever reason, the following creative ways to buy properties in Germany might be for you. They will for sure save you a lot of time, money, and effort compared to the traditional way to invest in real estate in Germany.
Affordable Real Estate Investing #1: Shares, ETFs, Or Funds
Instead of investing in German real estate in the traditional way, you can also buy shares of companies involved in the real estate business. The issue from a strategic investment perspective is that you are not diversified with shares of just one single company and you have the same cluster risk that you have with traditional real estate investing. Buying a real estate ETF that invests in multiple real estate companies (maybe even worldwide) will help you to diversify your investments.
Be aware that shares and ETFs are traded on a regular stock exchange and will therefore fluctuate a lot more visible in value than properties do in the real world. Nobody knows really if a property is worth a couple of thousand Euros more or less than yesterday. When investing in real estate shares or ETFs, you can see the exact value every single second. Be aware of that and don’t panic when the stock market drops the next time for whatever reason and your investments go down as well.
If you have a traditional German bank account with a local bank (e.g. Sparkasse), the salesman might have told you to buy (closed) real estate fund, ship fund, airplane fund, or wind parc fund. As these are most of the time closed funds, you cannot sell your shares in these funds anymore if too many other investors want to sell their shares as well. Also, do not believe the salesman that you will enjoy tax benefits from investing in these closed real estate funds. Most, if not all tax benefits, are not accepted by Finanzamt anymore. (Real estate vs. Stocks & ETFs)
Affordable Real Estate Investing #2: Real Estate Investment Trust
You are a fan of investing in real estate. Otherwise, you would not read this article, right? If you are a fan of passive income as well, you will absolutely fall in love with real estate investment trusts (short: REIT). REITs are relatively unknown to many people in Germany as trusts (German: “Stiftung“) are mainly used in the United States.
Real estate investment trusts are regular companies that own and operate income-generating properties in a specific region, maybe even properties all around the world. As REITs are mostly publicly traded on a stock exchange they are very similar to real estate ETFs or real estate mutual funds. REITs buy properties and rent them out in order to pay dividends to their shareholders. There is one major difference between regular real estate funds or ETFs and real estate investment trusts:
In order to maintain their tax beneficial status, REITs have to pay out a minimum of 90% of their taxable income to investors. Some REITs pay even 100% of their profits to shareholders. When paying out at least 90% of profits, REITs are free of paying corporate tax in Germany. The only taxation will happen once the dividends are paid out to you and you have to pay capital gains tax after your 801€ tax-free threshold.
Affordable Real Estate Investing #3: Real Estate Security Tokens
While all possibilities to invest in real estate on this list have been traditional security traded on a regular stock exchange, real estate security tokens can be traded on a blockchain like Ethereum or Polygon. Aside from the fact that these real estate security tokens could be traded around the clock virtually 24/7, the consulting company Roland Berger estimates that tokenization will save up to 4,6 billion € on trading costs.
Tokenization is solving a lot of downsides associated with all existing real estate investing possibilities and allows investors to buy properties a lot easier, more liquid, and cheaper than ever before. Imagine any property worth 1 million € that is being bought by a GmbH company that serves as a special purpose vehicle. The only task of this GmbH is to hold the property as legal owner in the German land registry and to tokenize this property into 1 million security tokens worth 1€.
As these 1 million security tokens represent a legal claim against that GmbH (like a traditional bond would as well), investors own with every 1€ security token 1/1.000.000th of the property, 1/1.000.000th of the rental income, as well as 1/1.000.000th of the resale value if the property is being sold. With their legal claim, security tokens are fundamentally different than any made-up coins (“shitcoins“) or NFTs with no value in the real world.
The up and coming marketplace GermanReal.Estate has specialized in tokenizing investment properties in Germany in the most profitable way possible for investors. And with the newest regulatory proposal from the German Ministry of Finance, the real estate security tokens from GermanReal.Estate can also be sold completely tax-free after holding them for just one single year (even when receiving passive income from your real estate security tokens).
Affordable Real Estate Investing #4: Real Estate Partnership
Real estate is generally speaking a long-term investment strategy that you should only engage in with a long investment time frame in mind. If your investment time horizon is really long into the future, you can join a real estate partnership that allows you to join professional real estate investing strategies utilized mainly by large institutional investors (e.g. pension funds, investment banks, insurance companies).
A common form is a real estate limited partnership with one general partner that handles all the operational work and assumes full liability for the partnership (usually a corporation or professional property manager). You can join by investing money into the real estate partnership as a limited partner that is not involved in day-to-day operations and therefore only liable for the contributed amount of money. In exchange for their contributions, investors will receive an investment return.
Before joining any real estate partnership you should carefully consider the goals of the selected partnership and how they are aligned with your personal financial goals. Real estate partnerships can exist for a different amount of years, some partnerships pay out rental income in the form of dividends while others reinvest their profits in order to buy more properties. Usually, there are multiple real estate partnerships existing at the same time giving you the option to choose which partnership you would like to join as an investor.
Affordable Real Estate Investing #5: Real Estate Crowdfunding
Last but certainly not least a way to invest in real estate that has become quite popular in the last few years: Real estate crowdfunding. Instead of raising money in the traditional way (e.g. with a mortgage from a bank), crowdfunding utilizes the power of retail investors to collect money from a large number of people towards a common goal. The funds from the crowd are usually collected through an online platform.
Some of these online platforms promise almost astronomical interest rates of at least 10% per year that are hard to believe. At the end of the day, these crowdfunding investments are backed up by properties so in order to pay out a 10% profit the property needs to generate also a 10% return on an after-tax basis. As you can imagine, a higher return usually equals a higher amount of risk. Double-digit interest rates do not come for free. You have to pay for this return with the risk that is certainly the highest in all forms of investing in real estate in this article discussed.
Conclusion: Which Way To Invest In Real Estate Is Best?
Do not worry if you find real estate in Germany to be expensive and not affordable anymore. This article helped you to find 5 simple and affordable ways to buy (German) investment properties for as little as 1€ with real estate security tokens from GermanReal.Estate. As always, there is no single best solution to invest in real estate that will work for everyone. A different financial situation might require a different way to invest in properties.