How to save for real estate
Are you looking to buy a property in Germany? 🤔 If so, how are you saving for that property purchase when the stock market and the crypto market are more volatile than ever before? Find out how to save for real estate in this article.
- To purchase a property, you will likely need the additional acquisition costs (approx. 10% depending on the state) and 10% equity.
- Before you start saving your property, you should determine the purpose of the property and when to purchase it.
- Savings opportunities depend primarily on your risk tolerance when investing and the timing of your property purchase.
- Often, a combination of the various savings options makes the most sense in order to be in the best possible financial position.
Introduction: What to consider?
In the course of life, many people have the goal of owning their own property. This applies to both an own home and for investment purposes. Therefore, we have already clarified here where exactly the differences between the two real estate are. Hence, the following article will be all about how you save for a property. For this, we will first take a look at the costs involved.
When it comes to the amount you need to save for a real estate investment, something significant has changed due to the rising interest rates. In 2021, it was possible to get a hundred percent financing without any problems. This is and will probably not be possible in the coming months and years (As of August 2022). Currently, you have to bring mostly an equity of 10%. This is in addition to the approximately 10% in additional purchase costs (More on additional purchasing costs here). Now you know an approximate amount to save. So let’s get to the proper way to save for a property.
Saving is essentially broken down into two different parts. These are:
The first part is mainly important to determine the approximate savings goals and loan terms. The second part is about making sure you save properly using the goals you set. What this means in detail is exactly what you will read below.
Before you start saving for real estate
Before you start saving on a property, it is important to know a few basics while establishing certain purposes. The following matters are important to keep in mind:
- Kapitaldienstfähigkeit: Once you are ready to take out financing with a bank, they will look at your ‘Kapitaldienstfähigkeit’. This is your ability to earn enough money to repay your loan. For instance, renovations, or the lack of a tenant count here. That score will affect your interest rate and borrowing capacity. Therefore, look to save money on a regular basis.
- Purpose of the real estate purchase: Before you start saving on a property, you should determine its purpose. This will affect you later, especially in terms of taxes. To be precise, with an investment property you can deduct many costs that you cannot deduct with an owner-occupied home. You can read more about deductible expenses and the general decision between renting and buying here.
- Purchase date of the property: The most important point before you start saving on a property is that you determine the approximate date of purchase. Depending on the time of purchase, there are different savings options available to you. What exactly these are and with what time horizon you should expect, you will learn below.
With the help of these determinations, you will have the actual real estate transaction much easier. If you want to know more about the right strategy for how to approach a real estate investment, you can do it here.
The right asset class to save for real estate
Once you’ve considered everything that needs to be considered before saving for a property, you can start saving. Here, the most important factors are your own risk tolerance when investing and the time period you have until the real estate purchase. These factors can then be used to determine the possible asset classes. For this purpose, you can choose from the following asset classes:
Bank account or fixed-term savings account: If you plan to purchase a property within the next five years, a bank account is a good savings option. Both bank accounts and fixed-term savings accounts. This is because money in an investment account or pension is subject to some volatility. This is not the case in the bank account. So, for example, if you would need the money in two years for the ten percent real estate down payment, the amount of money will not decrease in your account (except for the real purchasing power).
Real estate security tokens: Real estate security tokens are another option for saving for a real estate purchase. This option is also suitable for a period of up to five years. Depending on the type of token, you can either earn passive rental income or participate in the appreciation of the property. If you have a longer time horizon, then even both are possible. You can find out more about real estate security tokens from GermanReal.Estate here.
ETFs & Mutual Funds: If you would like to buy your real estate in five or more years, more volatile investment options are also available to you. For example, ETFs and mutual funds. These investment products allow you to invest broadly in the stock market. Over the long term, you can look back on an average return of 7% of the stock market. It should be noted that past performance is no guarantee for future results. If you are interested in investing in the stock market, you can learn more here. We also offer guided investments. You can read more about it here.
- Private Pension Level 3 and Riester Pension: In general, there are two different types of pensions that you can use for your real estate purchase. However, both variants are not used to save directly for a property but are used as an additional instrument. Specifically, as collateral for the real estate investment. Thus, with the help of pension insurance, you can lower your future interest rate. More about how exactly this works here. It should be noted that Riester and pension level 3 are treated differently. You can only use the Riester pension as collateral for a loan when buying a home. The private pension, in contrast, you can use as loan collateral for both, a home and for an investment property. With both options, your money can also be invested in ETFs and mutual funds. If you’d like to know more about this form of real estate savings or how exactly you can use pensions for real estate, you can schedule a free consultation here.
Do you need help on how to best save for your future real estate investment? Then let’s find out together.
Conclusion: The right savings plan
All these options are available to you for saving for a future real estate investment. It is also possible to combine the savings options. For example, you can save a portion with the help of relatively liquid asset classes such as the bank/fixed-term savings account, real estate security tokens, or ETFs/Mutual funds, for the purchase costs incurred. And another portion into a pension to lower your future interest rate. In general, it’s important here to find a savings option you feel comfortable with.
If you need help creating a real estate savings plan or developing the right strategy, you can book a free consultation here. After that, we will together find the best real estate savings strategy for your needs.