Short term rents are more lucrative
Earning money with real estate - 5 recipes for success
In times of low interest rates, concrete gold comes more and more into the focus of investors. But what are the options for making money with real estate? In addition to rental properties, real estate funds and tax advantages, for example for listed properties, investors should also keep an eye on their owner-occupied property.
Invested 30,000 euros and get 30,060 euros after one year - this is what the current situation can look like if you invest your savings at a commercial bank for an interest rate of 0.2 percent as overnight or fixed-term deposits. The phase of low interest rates wears down many savers - and makes real estate buyers happy. Because even they only pay minimal interest on mortgage loans. This is one of the reasons why real estate has become increasingly popular as an investment in recent years. There are these ways to earn money with real estate:
The home: family house and investment property in one
If you buy a condominium or a home for yourself and your family, you tend to think less about making money and more about security and retirement provision. But a sober observation shows: In the short term, an owner-occupied property does not provide cash, but in the long term it often enables significant asset growth, i.e. a good return.
In the beginning, the monthly financial burden of homebuyers is often higher than that of tenants - so you have to be able to afford the purchase first. In the long run, however, rents will rise, so that after a while the tenant's monthly burden may be higher than that of a buyer. And at the latest when the property has been paid off, the buyer only pays ancillary and maintenance costs, while the tenant still has to pay rent and ancillary costs. In addition, the owner has an asset: his own property, which he can also sell again. The tenant, on the other hand, has at best the savings and the interest from what he was able to save after deducting the rent and living expenses from his residual income.
Sample invoice: when ownership can be worthwhile
In the following example calculation, we consider an apartment for self-use for 300,000 euros. It is financed with a fixed interest rate of 15 years at an interest rate of two percent, the initial repayment amounts to three percent, ancillary purchase costs of 30,000 euros are covered from own funds.
Compared to the tenant of a comparable property, the owner calculates additional costs of 150 euros per month for reserves that he needs for future maintenance as well as ancillary costs that, in the case of a rented apartment, would not have to be borne by the tenant but always by the owner - such as costs for a property manager.
For comparison, we use the costs for a tenant who rents a comparable property for 1,150 euros per month. The rent increases by one percent annually.
The apportionable additional costs were not taken into account in the sample calculation - because they are identical for buyer and tenant.
|Initial monthly charge (loans and reserves)|
or cold rent
|1,400 euros||1,150 euros|
|Monthly exposure after 15 years||1,400 euros||1,322 euros|
|Total exposure in 15 years||252,000 euros||222,200 euros|
In this example, the buyer pays more than the tenant per month during the 15 years of the first fixed interest rate.
Further assumptions: After the fixed interest rate has expired, the owner has to pay significantly higher interest rates. But because the remaining debt is only 142,700 euros, which is much smaller than the original amount, that doesn't overwhelm him - he can even agree to an even higher repayment without his monthly burden being higher: with four percent interest and 6.5 percent repayment the monthly charge is still around 1,400 euros, and the owner is debt-free after a further twelve years and one month. After a total of 27 years and a month, the property is fully paid off.
|Monthly debit at the time of follow-up financing|
or cold rent
|1,400 euros||1,322 euros|
|Monthly exposure after 27 years and one month||1,400 euros||1,504 euros|
During this time, the ratio of the monthly load also tilts. Around 21 years after the purchase, the owner lives cheaper than the tenant.
Yield also through increase in value
And also in the overall view it stands owner better there than the tenant: In addition to the ongoing operating costs, he has to pay off after 27 years and one month paid a total of 455,000 euros, of which 406,250 euros to the bank and 48,750 euros for maintenance and administration. In return, he is the owner of a property, which, assuming an increase in value of one percent per year, is worth a good 392,000 euros. The Tenant has, however, at this time around 427,000 euros cold rent paid and has no real estate assets.
The tenant would have had lower costs over a longer period of time and could invest the money saved with interest. But all in all, he would only be able to access the buyer's assets if he invested his money in risky investments with higher than usual interest rates.
Buy and rent property
Those who want to earn money with real estate often consider buying a rental property. There are various ways of doing this.
Buying a rented condominium
If you don't want to buy a whole house right away, you can buy a condominium for rent. In contrast to the case in which the entire property belongs to you, when you buy a condominium you are part of a homeowners association (WEG) and can therefore not do whatever you want. Any renovation work usually has to be coordinated with the community of owners. The legal regulations are comprehensive.
The rented condominium, however, has the advantage that investors - unlike when buying an entire apartment building - can often start with a manageable investment amount.
Purchase of a rented apartment building
The common names for rented apartment buildings such as investment property or apartment building already show the intention behind the acquisition of such a property: Earning money. Anyone who wants to purchase such an apartment building should, however, consider that at least in the prosperous metropolises a very high, often seven-digit, investment sum is in the room. Therefore, a particularly careful calculation must be carried out here, especially a valuation in view of the prices that have risen significantly in recent years.
Buy and sell property
A completely different strategy than buying real estate in order to generate rental income on a regular basis is trading in real estate. This is about the difference between your own investment costs and the subsequent sales proceeds.
Beware of tax traps
But if you want to earn money with real estate in this way, you have to keep an eye on two tax traps that can ruin the return:
The three-object boundary
The tax authorities differentiate between private asset management and commercial activity. Anyone who has owned several properties for a long time and now sells them within a short period of time is reallocating their private assets. But anyone who buys or builds and resells several properties in the near future is acting commercially.
In a large number of rulings, the Federal Fiscal Court (BFH) has differentiated commercial property trading from private asset management. Accordingly, commercial trade usually occurs when someone sells more than three properties again within five years in the near future of the acquisition, modernization or construction (BFH; GrS 1/93, BStBl II 1995, 617).
In individual cases - namely when the tax authorities assume a tax structuring abuse, commercial trade can also exist with fewer than three objects or a period of more than five years. That would be the case, for example, if a clear intention to trade is recognizable and the sale is delayed somewhat to circumvent the three-property limit. But here, too, there is an upper limit: If there are more than ten years between purchase and sale, the tax authorities do not assume commercial activity.
Because the three-property limit is not a rigid regulation according to the established case law of the BFH, there is not always commercial property trading:
- Inherited properties that are sold are not included in the count of the number of properties sold.
- Anyone who holds real estate for more than ten years and then sells it is not acting commercially - even if he sells a large number of objects within a short period of time.
- Real estate used by the owner is not included in the count.
The classification as a commercial real estate agent can have considerable disadvantages:
- A depreciation (depreciation) of buildings is not possible, as these are then part of the operating current assets of the business enterprise. That means: They are treated like normal goods.
- There is trade tax and there is a bookkeeping obligation.
The size and price of the property being traded are not important. Anyone who trades four small apartments within the five-year period is a trader. Anyone who buys a single large apartment building with ten residential units and sells it again within the deadline is generally not acting commercially.
The ten year speculation period
But even those who do not deal commercially with real estate can be confronted with unsightly demands from the tax office if they buy a rented property and quickly sell it again. More precisely: Anyone who sells an object again within the ten-year speculation period must pay tax on the profits made from it. Incidentally, the profit is not just the difference between acquisition costs and sales proceeds. The depreciation used during the holding period is also quasi reversed. The profit is calculated as follows:
Profit = (sales proceeds + depreciation - sales costs) - (purchase price + incidental purchase costs)
The reversal of the depreciation can lead to a taxable profit even if the sales proceeds are lower than the originally paid purchase price.
Divide apartment building into condominiums
If you are not afraid of the tax authorities and see good profit opportunities with real estate trading, you can consider buying an apartment building, converting it into a condominium in the land registry and selling the individual units again separately.
Concrete: An apartment building is entered in the land register as a property. Individual apartments in the house can therefore not be sold. If this is to happen anyway, the object must be split up. This is done by establishing home ownership. For this purpose, a declaration of division is made and individual housing land registers are created. After notarial certification, these are entered in the land register. Once this has been done, the apartments can be sold individually.
This concept is based on the idea that the sum of the individual sales should bring in more than the sale of the property in one piece. However, if you want to earn money with real estate in this way, you should meet some requirements:
- Real estate experience
- Knowledge of tax matters
- Experienced in dealing with banks
This procedure is very time-consuming and labor-intensive and also carries certain risks: What if the individual apartments cannot be sold quickly and at the estimated price?
Real estate foreclosure auction
An old business adage is that the profit lies in purchasing. If you want to get a cheap property, you should take a look at the current foreclosures.
But be careful: you cannot always find a bargain in foreclosures. And some supposed bargains are not cheap for nothing.
Earn money with renovations
Money can also be made with the renovation of real estate. There are a number of options:
Increase returns with a modernization rent increase
Unpopular with tenants, but an instrument to increase rent for owners of a rental property: the modernization rent increase. Owners of rental properties can increase the rent due to modernization measures that increase the residential value or lead to sustainable savings in energy and water. Up to eight percent of the modernization costs can be allocated to the annual rent. So if you invest 20,000 euros in the modernization of a unit, you can increase the rent by 1,600 euros a year, or around 133 euros a month. Incidentally, this also applies if the original rent was already at the upper limit of the local comparative rent. However, there are capping limits: the rent per square meter may increase by a maximum of three euros for original rents over seven euros, and by a maximum of two euros for lower original rents.
Here, too, modernizers may face a tax trap: It makes a difference whether you renovate an existing rental property or buy a property and start modernization measures as soon as possible. Costs that are incurred within three years of acquisition can, under certain circumstances, only be tax deductible very slowly. And then if, within three years, these exceed 15 percent of the acquisition costs of the building - without the proportionate value of the property. In this case, the modernization costs are part of the acquisition-related expenses. And these can only be amortized over a period of 40 to 50 years at an annual rate of two or 2.5 percent.
If, on the other hand, less than 15 percent of the acquisition costs are invested or if the property has been owned for more than three years, such modernization costs can be depreciated evenly over a short period of two to five years.
Modernization of monument properties
Anyone who purchases a property that is under monument protection can benefit from enormous tax advantages compared to real estate that is not listed. The renovation costs can be deducted from tax with high depreciation rates. The following applies:
- The proportional costs of the purchase price for the property cannot be written off.
- The proportionate cost of the purchase price for the building in need of renovation can be depreciated by two or 2.5 percent annually.
- The renovation costs can be depreciated by nine percent in the first eight years and seven percent in each case in the following four years.
By the way: Those who buy a listed property for their own use cannot claim a proportionate depreciation on the purchase price, but benefit from a ten-year monument depreciation for owner-occupiers of nine percent each.
An example: A listed building from the 1930s in need of renovation costs 200,000 euros. The property value is 150,000 euros, the residual value for the dilapidated house is therefore 50,000 euros. This residual value can be deducted from tax at two percent for 50 years, in this case with an annual amount of 1,000 euros.
The renovation costs amount to 500,000 euros. These can be amortized for eight years with nine percent - i.e. 45,000 euros per year - and then for a further four years with seven percent (35,000 euros) each.
Especially for high earners with a high tax rate, the monument depreciation is an interesting way to save taxes.
Buy, renovate and sell renovation property
Another way of making money with real estate is to buy properties in need of renovation in order to later sell them again at a profit. This option is also more suitable for experienced investors and tax traps such as the above-mentioned three-property rule loom here as well.
Earn money with real estate funds and Co.
It doesn't always have to be a direct investment in real estate to make a profit on concrete gold. Real estate stocks or real estate funds offer opportunities to become a partner in one or more properties, even with comparatively small sums of money. Crowdinvestment platforms have also been around for some time: private individuals have the option of pre-financing projects from property developers there. There are interest rates that are significantly higher than the usual credit interest rates from banks, but there is also a certain risk of default.
Conclusion: an exact calculation is worth it
If you want to earn money with real estate, you should calculate soberly and in detail and also weigh up risks such as possible vacancies. Also important: buyers should think about financing early on. Because even small differences in interest rates add up to considerable amounts of money over the years. A real estate acquisition that is well thought out with regard to the financing strategy provides security.
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