Real estates: Top Hints 2000

How you put into Effect the
best real property bargains now

(interesting historical data!)

 

The year 2000 has barely begun and the demand for real property already rises. That gives us enough reason to address some topical hints here. In the past months a lot of speculations on how the further interest rate trend and the general trend on the real estate market will be have been going on. In the meantime the market for office and retail trade objects increased again markedly, the demand for rented spaces in the metropolises has also become better in the field of residential spaces, and it seems to be only a matter of time until the real estate prices to up again on a large scale. There is no doubt that the time of historical lows of the interest rates should be over.

As compared to the boom years 1990-1995 the focuses on the real estate sector have shifted. The time of low-tax objects is over, but also the time of the expensive new building projects. Partially the lawmaker has contributed to this – we have been going into the details on this at an earlier point. Another known reason was a surge of insolvency that affected the republic, especially the new federal states, in the last twelve to eighteen months. The number of compulsory auctions had increased drastically and the losses brought about for the financing institutions had been leading to a marked intensification of the criteria of granting new credits. The times where financing 120% used to be a routine are over. As well as the times where uncritical object evaluations made the sale with excessive square meter prices possible. Objects evaluated by banks in present time are partially far below those estimated values that would have been achieved after a period of two years.

The effect was clearly noticeable in the last twelve months: on one hand the lowest interest rate in history, on the other hand interminable sales and financing procedures.

Yet another trend is to be noticed: On a long-term basis, the decrease of the order situation in the construction branch will lead again to a scarcity and thus price increase of residential space. More refurbished or renovated old buildings instead of more new buildings may not increase the rental areas; however it raises the quality of the rental areas that are already there.

The action of building new houses decreases, whereby the old buildings gain value again.

An investor asks himself the question: where are the chances, and where are the risks?

Some trends can be noted clearly.

First of all, what we emphasized again and again since 1996 has proven true: the area of Rhein-Main is the definite top location of real estates in Germany. Frankfurt has overtaken every other city by now, and also the vicinity around the center of power of high finance and construction branch has benefited from this more and more. There is no other place where the demand is so high and where good areas are so much wanted as inside and around the bank metropolis – and even the nearby federal state capital Wiesbaden benefits from this.

Conclusion: Rhein-Main is and remains the top location number 1.
Locations such as Hamburg, Munich, Hannover, Essen and Duesseldorf were able to hold their position, i.e. strengthen it. One can affirm that a purchase in one of the cities mentioned is a good investment.

Nevertheless one will hardly find any bargains there. Not as in e.g. the capital Berlin, where based on our estimation one still has a huge playground for low rents and prices. So whoever wants to become successful in the business of real estate on his own can go to Berlin (or other eastern-German cities) and look for bargains there – here it is worth to get a hold of a calendar of compulsory auctions and/or to take note of this or the other court hearings. Don’t be surprised if you can acquire a top-refurbished object at a very low price; but also don’t be surprised if the bidding competition shoots up the prices before the judgment is made. Such a real estate purchase definitely requires a lot of time which one needs to spend on it; the risk being that one is more or less buying a pig in a poke.

Yet for an investor looking for chances there are also numerous other locations where the real estate prices are still low enough to find definite bargains there! But no doubt: this trend will only remain for another 2-3 years and then the chance will be over! The final introduction of the Euro will push up the rents and property prices; raised interest rates also contribute to this as the past has shown us. So someone believing that the real estate prices are going down on a long-term basis may be disappointed; it’s rather the stock market that will drop (which will also lead to increased investments into real property).

Currently one finds a lot of residential and commercial objects on the market with a yield of 9% up to 11%, also in the old federal states.
In the new federal states, the time for clever refurbishment constructors has now come. Because first of all it is really easy to acquire an old building which hasn’t been refurbished yet, and second of all numerous objects are located in so-called urbanistic refurbishment areas and thus fall under §7h/i of the income tax law, which provides a high tax advantage for landmarked buildings or buildings to be refurbished in the designated refurbishment areas: 10% deductions per year over a time period of ten years for those refurbishment actions that bring the object back into a state where it can be used properly.

The advantage of refurbishment objects that are not landmarked is that one doesn’t need to worry about the monument protection here. However, landmarked buildings do have the advantage that in some situations one can get a low-interest rate loan or even urbanistic subsidy for these objects. Whereby, in the latter case, one cannot claim any tax advantages then of course.

However, as a constructor one also bears the risk of such a situation and in case the property has to be torn down against ones expectations all of the sudden, then one faces the problem to own a land with no rental income and to bear the costs for the tear-down oneself. Or to spend a lot of money on putting a new building project there.

Thus, one should only deal with such refurbishment activities if one has got a lot of experience with it, or to get a hold of a competent partner who has such experience. Another alternative would be a property developer project in which a complete refurbishment contract is getting done additionally to the sales contract. In this case, one especially has to see that one is dealing with experienced property developers who provide a guarantee for the completion as well as for the first renting out, or a five- to ten-year renting guarantee.

A very important step before deciding to purchase is to examine the financial calculation over a period of 15 to 20 years, meaning a time-period that clearly exceeds the ten years of the huge tax-advantage. Another aspect to check is a high amortization so that after ten years, when there is no more tax-advantage, the object is clear from the credit balance and is, minimally, bringing in the costs to pay for itself, or – even better – brings in surplus additionally.

Investors are looking for the classical freehold flat at their own residential area more and more, since through this they seem to have the best control over their object. Though as a basic principle we are sharing this opinion, we are nevertheless also offering an alternative here: it is called object management, meaning that the special administration of rental affairs is being handed over to a competent administrative association which then takes over the chapter of dealing with the tenants and the renting affairs. It sees that the rents come in, sees that a new tenant gets found quickly after another ends the contract and that the apartment gets handed over in a good condition, and connects up with the property management when it comes to questions about the common property (in case it doesn’t do also this by itself). Investors with several freehold flats in portfolio are well advised to hand these over to such an administrative company completely and spend a low monthly fee on that; like this there will not be any bothering phone calls because of dripping water tabs and no stress due to bills to be paid by the tenant. We gladly advise interested investors as to a good administrative association.
Whoever owns freehold flats or houses as capital investment should engage a professional administration for the rental affairs.

Like this, in any case, the freehold flat will be maintained as a capital investment that is gaining value.

Purchase inexpensive income properties now! It is not the tax advantage but the interest yield that is the main factor one needs to look at in an investment. Income properties with a yield of 7,5% and more per year and a sales price starting from ca 750.000 DM become more and more interesting to the average income classes (120.000 DM of yearly taxable income). Such a property can be maintained well over a period of many years with very low effort, and after ten years – in case of according raise in value – can be partitioned to the tenants or capital investors in the close vicinity. Or be sold as a whole to a partitioning company that deals with such properties professionally.

Of course, when selling more than three properties in a time period of five years, the factor of commercial use needs to be considered, which applies mainly when one originally bought a property but then partitioned it into single freehold flats and now begins to sell those.
In some cases it will also be desirable to give those properties to one’s own children.

How to we estimate the trend on the market?

Based on our point of view the prices, as mentioned before, will increase again markedly. In the metropolises mentioned above this increase can already be observed. Other cities will follow, and also several regions. It is obvious that areas such as the former inner-German frontier will not be the first areas where the prices go up; but on the other hand one won’t find bargains in the shopping streets of the frequented cities. Somewhere between those two mentioned areas one finds the happy medium where one gets real bargains with future prospects.

Right now we consider residential buildings, which are just now available at low prices of which one usually only dreams of, to be special chances. Even former association buildings in the new federal states may be rewarding investment properties. The additional costs for modernizations, consisting of max. 180 DM/square meter of residential space, could help improve one’s own liquidity.

In the western republic one finds many inexpensive and well-maintained residential buildings; of course one shouldn’t remain on risk without obtaining any particulars but needs to have a look at the vicinity and the tenants. Considering the fact that sufficient living space – inexpensive and yet livable –  needs to be provided to more and more unemployed and less well-earning tenants, clever investors will find a large playground right here. Thus the art of financing such properties, bearing in mind the additional costs for renovations, forms a not quite uncomplicated field of activity – for which we have a staff of qualified experts employed.

So don’t shy back from letting your own purchasing power for real property be examined by us. We gladly talk to you about this in a personal appointment.

Just give us a call at +49-700-1010-7000 !

 

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