You can count on this: the most important numbers for your investment

July 13, 2018

Recently, we had an international client visit our headquarters in Berlin, who had never invested in the German rental real estate market before. Like many investors, he desired the “perfect” (or also: technically impossible) investment: low equity + high mortgage loans, to be repaid through rental income = regular surplus payments. This is a widespread misconception about rental property investments, for which the correct numbers can quickly provide clarity. While there are many very good reasons why German rental properties are very attractive to investors, the “perfect” real estate investments, as described above, do not exist anywhere in the world.

‘All-cash investment’ means more private funds for immediate and regular returns

If investors want to reap immediate and regular returns, there is only the path of the “all-cash investment,” meaning that you must invest maximum equity. Credit-financed investments are not applicable in this case, as the repayment of the loan initially consumes most of the returns. The rental yield also doesn’t only cover the loan but also all ongoing costs.

We have an example calculation for this:

Assume that, as an investor, you achieve a rental yield of 6% on a multi-family property; about 15% of this income alone would cover maintenance costs. Additionally, we recommend that you budget another 20% of the rent to cover ongoing maintenance, as well as potential losses such as unpaid rents, vacancies, and agent fees for new tenants. So, your rental yield of 6% would already have dropped to 4%, from which you would draw your income. Of course, you don’t need to budget 20% deductions every year, but it is advisable to structure your business plan in a way that unforeseen costs can easily be covered to absorb contingencies without stress. Also, don’t forget that your 4% return is calculated on your investment funds without considering capital appreciation. Depending on where and when you bought the property, your capital value could increase by an additional 2%, 3%, or even 5% per year.

Loans: Less equity today but more stable returns tomorrow

So, we discussed this option with the mentioned investor, and he decided on a 10-year investment, where the returns would not be maximized immediately but would offer a stable income for the future. Therefore, financing the investment through a loan was a viable option for him. In this case, it is important to choose an appropriate interest rate where the repayment of the loan plus interest, in addition to the approximately 35% cost coverage as mentioned above, still makes up 55% of the rental income to ensure that repayment is definitely secured.

Unfortunately, we still hear horror stories of investors who had to finance the repayment of their loans out of pocket for their credit-financed rental properties, instead of having their secured income, even though the properties were fully rented. This happens repeatedly when the “perfect” investment is not perfectly calculated. Many are also misled by an opportunity that isn’t really one, and due to lack of information and incorrect calculations, these unsuspecting investors often fall into the trap.

So, if you want to immediately draw returns from your investment that you can benefit from directly, you need to pay in cash, i.e., finance the investment yourself. If you have time to benefit from your income through returns in the future, then a loan-financed investment is just right for you.

But no matter which option you choose: always ask for the numbers first. If they don’t add up, then nothing else will either.