Is buying rental property a good deal in 2021?

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If you are thinking about buying rental property, you should read this article. I will tell you about my experience and give you some tips. Is it a good deal and what are the expected returns?

Preface

When I was buying rental property a few years ago, I also had the goal of renting it out. But I had no idea what it actually depends on and what you have to consider. Fortunately, I have some friends who already had apartments and houses that could help me. In addition, there was also the Internet and books as a source of information. Since then, I have always educated myself further, because I enjoy the subject.

With a basic knowledge I bought the first apartment. This is a 30m² unit and I paid 20,000€ for it. In addition, I paid about 3,000€ in incidental expenses and financed 20,000€ and paid the 3,000€ from my savings. The net rent at that time was 5.50€ / m² and therefore 30 x 5.5 x 12 = 1,980€ / year. The gross rental yield was 9.9%, which was very good. The cash on cash return of 16.4% was also in the green zone.

After ten years, this apartment was worth about 60,000€. Within this period, the invested 3,000€ then became 60,000€ – remaining debt of 12,000€ = 48,000€. That is a return of 32% per year. Not bad, right? The risk is also manageable considering I only put in 3,000€. You can also achieve this if you keep a few things in mind.

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What to consider when buying?

Basically, the numbers have to be right. That is the most important thing. After all, you want to earn money with real estate by buying rental property.

If you are thinking of perhaps moving in yourself later, then of course you should like it. But please calculate first whether it makes sense economically. Until the time you want to move in, you do not want to lose money, right?

1. Calculate the profitability

Basically, you should first make a calculation whether it makes sense to buy this or that property and then rent it out. Before you think about a purchase, the rough figures must be correct. Find out the purchase price and the net rent. This will be your income later.

Enter these values into the return calculator for real estate. If the value of the gross rental return is at least yellow, then it is worth looking at it further. Then it is a matter of collecting more values and performing a more detailed calculation.

I use a self-made Excel list for this purpose. With this you can go deeper into the calculation than with the simple calculators. You can download the free file here (coming soon).This will help you to play through all possible variants and to see how high, for example, your rent surplus turns out.

2. Location

Another decisive factor is the location of the rental property. The better the location, the easier it is to rent out the apartment or house later. Near the center in a big city, you will always find someone who wants to move in. But somewhere far away from jobs and from a big city, it will certainly not be so easy.

An apartment in the attic with a balcony will be easy to rent. In contrast, you will have a harder time renting one on the ground floor without a garden. The closer a house is to the center, the more positive the effect on rentals. An important point is also the transport connection. The faster you can reach the subway, buses, trains, etc. from the property, the better it generally is.

In addition, you should also look at how the population in the area has developed in recent years. If there has been an outflow of the population in recent years, this is likely to continue. Thus, this is not an optimal location for buying rental property either. Look for a location where you think there is more likely to be population influx in the coming years.

3. Rent index (in Germany)

To see whether you can increase the rent in the coming years, you need to look at the rent index. This is available for every city and can be viewed online. In Berlin you can find the information on this page. Enter the data and then you will see how the rent of the apartment is in relation to the Rent index.

It is important to see in which area the property is located. In order for real estate to be profitable, and for buying and renting to make sense, it can be important to increase the rent. Often this was not done by the previous owners. Therefore, look at what the maximum rent you can charge. This can then be included in your calculation if necessary.

Please note that the rent cap is currently in effect in Berlin and the rent control is in effect throughout Germany. Please inform yourself about this.

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4. Facilities and layout of the property

These things are also very important to successfully rent. Over the years, I have visited several apartments. Each time I realize again how important the layout of the rooms is. For example, I am a fan of old buildings. But many people don’t like that at all and prefer completely new ones. Think about what is important for the rental and don’t let yourself be guided by your own interests.

Important things are for example

  • Brightness
  • Balcony
  • separate guest toilet
  • Condition of the windows
  • how quiet is it in the apartment

In addition, of course, you need to look at how the apartment is equipped. What is the condition of the floors? Is there a fitted kitchen? Are there wallpapers on the walls?

5. Condition of the building or the apartment

The next step is to determine the condition of the apartment or house. To do this, you should ask the following questions. When was the last renovation of the apartment or the entire building? Depending on this, additional costs may soon be incurred. The renovation of a bathroom can easily cost $20,000 or more. You must include this in the calculation.

You should also check the building. What is the condition of the building? Does the heating system or the water pipes need to be redone? What is the condition of the roof, the facade and of the staircases. Even if you share these costs with all owners, the burden can be very high.

6. Reserves and additional expenses

Then you should definitely look at the reserves and additional costs. You can get these documents from the property management. The reserves show how much money is available for renovations and maintenance of the building. Also check how much money has been spent in the recent years for renovation. It is very important to ask what expenses are planned and whether they are covered by the reserves.

After the rents have risen very sharply in recent years, it is quite important to look at the additional costs. In the case of old buildings, these can often be quite considerable and twice as high compared to a new building. If the ancillary costs are very high, then this can have a negative effect.

You will compete on the market with all properties and the tenants are interested in the total rent costs at the end of the day. Gross rent = net rent + utilities. That’s why it makes sense to take a closer look at this cost component.

You should also note how high the share of additional non-billable costs is. These costs must be borne by you as the landlord and are not paid by the tenant. As a rule, this should be about $10 / m² per year. For a 30m² apartment, this would be $300 / year and $25 / month. Should this be much more, you should question it.

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What matters when renting?

Of course, it depends on whether the property is rented or vacant. If it is already rented, then you should take a close look at the financial situation of the tenant. Where does he or she get his or her income from? But what else should you pay attention to?

1. Tenant selection

When you pick a new tenant, one of the things you have to consider is the tenant’s financial situation. If the financial situation is good, I think it is also important that you like the person(s). In addition, I always make sure that the potential tenant also fits the house and the neighborhood. Imagine your potential tenant is very young and likes to listen to loud music and party. Then he would not really fit into a house or neighborhood with older people and families with children.

This is my opinion, you can of course make your decision for other reasons as well. It can also be good to rent to someone who is in need at the moment and you want to and can help this person. That is entirely up to you.

2. Type of rental

The first type would be the classic rental. The majority of all real estate is rented by style. This means the apartment is largely empty except for the usual furnishings. The bathroom, etc. is, of course, fully functional. In the kitchen is also fully equipped, other than in Germany, when you sometimes don´t have that. The advantage of the classic rental for the tenant is that he can furnish the apartment according to his taste.

In addition, there is also the possibility to rent the apartment or house furnished. In this case you will have more often a change of tenants. Such real estate is usually rented from a few months to 2-3 years. The potential tenants normally live in a furnished property only temporarily for work reasons or similar. You can get a higher return on investment, but you will also have more expenses and possibly more deterioration.

Last but not least, you can rent out the property as a vacation home. Please note that in many cities there are legal regulations for this. In this case you have guests only for a few days or weeks in the apartment. The effort is much higher, but so is the possible return. In addition, you must consider that these people do not take such good care of the apartment and more often something is broken or must be replaced. In addition, they have to renovate more often. One advantage is that they can also use this property yourself, for example, to go on vacation.

3. Property management

Rental management means that a property management company takes care of the apartment. In doing so, it takes over the technical support, accounting and tenant support. Their tasks include the rental contract, arranging small repairs and direct contact with the tenant. The management of the deposit, rent increases and the dunning process also falls under it.

Of course, this service is not free of charge. The fees vary greatly between states but you can expect to pay between 5% to 12%. Of course, it is up to you to hire a property management company. I do it for all my apartments, as I prefer to use my time more wisely.

Nevertheless, it is up to you. If you want to save the money, that’s fine too. I know many people who do the management of their properties themselves.

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What to do after you decide to purchase?

If you have decided to buy, then you must first negotiate real estate financing with a bank. Before you do that, you should be clear about what your strategy is with the apartment. Do you want to keep it or do you plan to sell it at some point? In addition, you need to look at what the interest rate level is at the moment. If you don’t want to sell the property, then I would take out a loan with a long term at today’s interest rate level.

Make sure that the equity ratio is right. This helps you to generate even more revenue. In addition, you will have more money left over to buy more properties and then rent them out. Use my calculator for this.

After you agree to purchase, you have to get a solicitor. Once you have signed the purchase contract, everything goes its way. The entry is made in the land register and the purchase price is paid. After that, the change of use and encumbrance is completed and you are the owner of the property. This process can take from several weeks to some months.

Advantages and disadvantages

Like any form of investment, buying rental estate has its advantages and disadvantages. I have briefly summarized them here.

Advantages

  • Return on investment calculable
  • Leverage effect
  • Plannable risk
  • Relatively safe investment
  • Passive income

Disadvantages

  • Requires a lot of time to find a suitable property
  • Management and maintenance costs
  • Bad tenants possible
  • Purchase process takes several months

Conclusion – buying rental property

Although buying and renting real estate is very time consuming, it can be a very good investment. When you sell a rental property, you need to pay tax on the profit that you realize. The IRS taxes capital gains with a tax rate of 0%, 15%, or 20% depending on filing status. Additionally it taxes depreciation recapture with a tax rate of 25%.

Even though I always continue to search, I have realized that the market is overheated at the moment in many places. In recent years, prices in metropolitan areas have risen so much that it is difficult to buy a cheap property. This is not the only reason why I do not invest all my money in real estate.

For me, the focus is always on diversification. If you invest your money in just one asset class, there’s always a risk that you’ve bet on the wrong horse. So I know a lot of people in Germany who have become very rich with real estate. On the other hand, I know far fewer people who have achieved this with shares or similar. But that’s probably a phenomenon in Germany. In the United States, the situation is probably quite different.

Alternatives

There are also other ways to invest your money. Perhaps it is interesting for you to check the comparison of financial investments. Here you can see how the different forms of investment have developed in recent years.

Other well-known financial investment are socks or funds, where you buy a share in a company. In addition, nowadays there are ETFs that track an index, or the classic government bonds. Another way to invest in real estate ist to buy REITs.

I find p2p real estate platforms very exciting at the moment. Here you also invest your money in real estate, either in existing properties or in the financing of new buildings. A mortgage serves as collateral in the event of financial bottlenecks.

If that doesn’t yield enough return, I can also recommend P2P lending or peer-to-peer in general. Here you act as a lender and lend money to others. There are different types of loans, such as consumer, pawn, car or agricultural loans.

I hope you enjoyed the article and look forward for your feedback!


GELVOS is all about “How to make money without stress”. For this purpose, all articles about finance and joy of life are divided into these sections: make. save. invest. live. If you don’t want to miss anything, subscribe to our free newsletter and get a big step closer to your goals!

This article is not an investment advice, it is only our personal opinion. We report here only on our personal experiences and findings as private investors. Thus, my texts serve solely to impart knowledge and do not constitute an invitation to buy or sell investment products. For further information please refer to the disclaimer.

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