Why and how getting into
real estate market
is really worthwhile now
The situation on the real estate market
in autumn 1999
As forecasted the market starts picking up again clearly in autumn/winter of 1999.
It seems all those that all the people dealing with real estates, having been asleep for so long, are waking up in time for the turn of the millennium.
Some trends can clearly be noted:
The property for saving taxes has notably lost ground. This is due to the anti-amortization politic of the red-green government, to whom – apparently – saving taxes is such a provocative phrase that any attempt to promote property investments by tax advantages has been scotched almost to its entirety.
Though some changes are absolutely sensible and would have been due since a long time; but one shouldn’t have thrown the baby out with the bath water right there.
Amortization models about funds that are summed up so badly without tax advantages that one might as well have just thrown the money out the window.
Special depreciation models bearing huge vacancies and do not bring anything except tax savings; to the contrary: many investors, for years, now pay more additionally than the amount of taxes they saved.
Newly built properties with rental guarantees, which aren’t even worth the paper they have been written on (because the registered companies listed there are already bankrupt long ago)…
One could certainly extend the list of the unpleasant experiences that have been made with real estate. But above all one mustn’t forget one thing (which, unfortunately, the government has done):
No investor would have voluntarily contributed to the enormous development that has been done in the new federal states if there wouldn’t have been clear fiscal appeals
Refurbishing the inner cities (also in the old federal states) would not have been possible without clear tax advantages
A lot of money would have gone into other investment forms and countries if there wouldn’t have been clear tax advantages, but instead it remained in our country – and created residential space here.
It is a pity that the lawmaker also penalizes the owner-occupant more and more. This, being a nightmare to anyone earning well, is getting so common that one must wonder if earning well is still wanted in our state at all (but: who will then be left to pay taxes and keep the economy going?)
Altogether, the red-green government has unfortunately created an anti-investor policy and thusly contributed to less and less property investments being done in Germany.
Extending the so-called speculative period from two to ten years is another factor contributing to less properties getting sold. The reason is obvious: someone being afraid that he needs to pay taxes on the profit does, of course, rather keep a property than selling it. Although it is mockery to still be talking about speculator-ism at a period of six or more years; who would be able to invest his money in something of such a duration when he wants to be speculating? Our appeal to be content with a period of five years has, unfortunately, fallen on deaf ears…
The prices are rising again
What is the logical consequence of such a policy? We don’t even need to discuss about this very long. A shortage of residential and commercial properties is imminent in the coming years. Where there is less subsidized there is less getting built, as per experience. This again brings about increased demand which cannot be fulfilled, then come raised rents and increasing prices for existing properties.
It is not the first time that this cycle of the real estate market occurs; for instance, in the 80es/ beginning of the 90es, the prices started to increase so much after being on a low level for a long time, that it was common to have 30 or 40% capital gain within five to six years!
Reasons for acquiring a property
With the above we can abide by the following:
If someone is purchasing properties today, he usually does it after thinking it over for a long time, not to get a capital gain within a few years.
Someone acquiring a property is considering the yield more than ever and not as much the tax advantages (which also play a role but usually in second place).
Someone acquiring real estates today usually is interested in a safe form of private retirement provisions. In this regard the real estate is a unique option to build up a retirement provision obtained by outside finances.
Someone buying a property today usually buys further properties tomorrow or the day after tomorrow because he has realized that with the according rental income and the number of properties he buys, he can perfectly take advantage of the leverage effect (low equity input – interest payments and later the amortization are getting handled by rental income and tax advantages).
Since the demands that the financing institutions are setting to the credit standing of the customer have increased, it gets more and more important to be expert in this subject. The well-tried company promoter bringing about, by means of his business connections, financings with inexpensive terms at large, is worth his salt more than ever!
Allowedly, the times have become more difficult. Yet it is still possible – provided one has the adequate creditworthiness – to get a full financing for a property, partially even including the added costs of the purchase.
The times when the real estate agent was able to act as the mere broker between the bidder and the potential buyer are over.
Now what is wanted is the expert real estate consultant who knows the market but who is also able to do spot-on assessments of demand, as much as he is able to bring about a fast fulfilment of needs.
Parts of this fulfilment of needs are undoubtedly:
- to search for a property which is suitable for the customer
- getting the means of financing it
- the consultancy and support before, during and after the purchase of the property has been done
- coordinating the purchase with the tax consultant of the customer (in regard to the fiscal aspects)
- creating an agreement within the familiar vicinity of the potential buyer (since it is common that there are certain fears and disagreements which need to get handled by the consultant too)
- well-grounded knowledge of the market
- basic knowledge about evaluating properties
Probably in a couple of years there will be a job qualification with accordant education and examination in our country too, as it is already common in other countries.
The property as retirement pension plan
In view of a wilder-getting discussion on retirement pension and the treasury getting emptier, we can only abide by the most important point in regards to the property:
No other tool can secure the personal retirement pension plan as well as a carefully chosen property fully paid by the time of retiring.
At a starting yield of 5% and regular rental increases every three years by about 15-20% as well as a starting financing interest of 6 to 6,5% all sum up to a good amortization possibility within 20 years.
That means someone at the age of 40-45 today and who has a certain career will be well off to secure his retirement pension plan by means of a property, and to do so quickly. Someone at a higher age who hasn’t yet dared the step to acquire his own property needs to hurry and put up with higher amortizations.
Additional means of amortization
In addition to the above the property investor can choose the following forms of investment (with partially good interest rates):
- investment funds (very recommended)
- endowment policy (recently this has been rather a problem because contracts starting from the 1st of January 2000 will not be tax-free; but also for this one can find solutions)
- building loan agreement (bad interest rate, but always is a good securing tool due to increasing fears in regards to interest)
- funds policy (a mixed blessing; usually it is better to use equity funds in combination with a temporary life insurance as an alternative)
- foreign life insurances (currency risk when outside of the Euro-area; but partially brings about high interest rates)
The traditional modality of repayment of the annuity loan also remains sensible. Our recommendation: (primarily) a one-percent annuity amortization, parallel to this choose one of the above options and invest one to two further percentage points of the entire loan there.
One thing is certain:
If someone wants to use the property as an additional retirement provision he needs to arrange for an amortization up to the pint when he wants to retire. Thus we strongly urge anyone to examine any financing in regards to this! Our new overview of how long one needs for the amortization of a property loan at which interest and amortization rate will help you with this. You can receive more calculations through a financial consultant.