Investment Property In Germany

Definition of investment property

The reason for commercial acquisition of a real estate deal (also known as investment property) is not self-use of the property, but to gain returns on invested capital. KARODI helps the investor to distinguish between residential and commercial property.

Residential Real Estate As An Investment Property

For residential properties, the focus is on multi-family homes, and properties with multiple dwelling units. A house can be purchased just for the purpose of achieving return on sale, but such a return is usually lower than that of an apartment building, because single homes are usually for self-use, and renting them out to tenants does not incur high-volume return.

Commercial Real Estate As An Investment Property

There are different types of commercial properties. Please consider the following before investment:

• Commercial real estate, including retail properties
• Office and administrative, social buildings
• Factory land, factories, distribution facilities, logistical companies, garage plots, etc.
• Special real estate, real estate operators, hotels, hospitals, nursing home real estate, hotels and real estate services
• Publicly used buildings (Public Facilities land), which are subject to a permanent public purpose.

Demarcation of residential property and commercial property in Germany

The reasons for investing in residential or commercial properties in Germany are various. Principle can be achieved by means of commercial property over residential properties with higher returns, due to the specialized nature of the restricted property. The more specialized a property in its use, the harder it usually is to find a new tenant. The risk of higher vacancy rates for commercial properties than for residential properties always exists. A human needs a spatial home, so demand for housing is significantly greater. Another important aspect, when considering whether to invest in residential real estate or commercial real estate, is the tenancy options. While the tenancy in a residential area is heavily regulated by law, generally the commercial property affords much more freedom of contract, such as the agreement of fixed-lease terms of up to 30 years. The total duration of use of investment properties is longer (with proper maintenance of residential property) than that of commercial property. For a residential property, a total useful life is usually around 80-100 years. The commercial property has a total useful life of up to 80 years, although it depends greatly on the type of property. For example, we calculate that a real estate office has about 50-80 years of total duration of use, and a retail park has approximately 30-40 years. The differences in the total duration of use in residential or commercial properties are particular to the fact that the usage requirements of a commercial property change according to time. A property with a commercial purpose can be quickly overtaken by a property which was built for private use or used once. The total duration of use can generally be extended by modernization, both in residential and commercial real estate. The business tenants of commercial real estate as a whole are more rational, and more decisions can be made based on facts. Decisions by housing tenants are often made emotionally.

Return on Real Estate: Investing in a residential property or commercial property?

The individual investor must determine which property personally appeals. Both the residential and commercial property have their own merits. Investment in a mixed-use property can also be considered and is also possible in a so-called residential and commercial building. Such property consists of both residential and commercial units and renders a good compromise.

The classes of investment properties

The return on real estate can be drawn from investors’ perspectives which can be divided into four classes:

• Investment Property Class A

  This class can be defined as investment property of less than ten years old. The features of the property are modern and of high quality. It achieves high rents and the tenant is of a more demanding clientele. The maintenance cost of the investment property is generally low in total and real estate property can be easily managed in this category. The average outcome is more solid.

• Investment Property Class B

  Class B is composed of buildings that are ten to twenty years old and are in overall good condition. This class can be defined as usually the most stable class and turns out to be more suitable for real estate investment properties. The buildings are available in attractive areas with creditable tenants. The class provides sufficient facilities and friendly prices for the average investor or tenant.

• Investment Property Class C

  Class C contains all the buildings between twenty and thirty years old with few or no special amenities. The maintenance cost of the property is above average and it needs modernization work soon. The tenant clientele is average to below average. The investment property can be significantly enhanced through refurbishment.

• Investment Property Class D

  Class D refers to all buildings over thirty years old with substantial modernization. The situation is simple: the tenant clientele is below average to weak in terms of credit. The maintenance costs are very high, and costly upgrades must often be urgently made, such as installing a new roof or a completely new heating system.

Conclusion of the investment property classes
Generally, all four property classes achieve good returns. Class A is certainly the variant with the lowest risk and least administrative burden; however, there is little leeway in terms of return at the top. On the other hand, Class C and Class D investors willing to solve existing problems expediently can achieve above-average returns. A return on property must be analyzed as one can always upgrade it to achieve higher rents in the market. For investment property you can consider whose value is based primarily on the purchase price and the achieved rents (gross). The higher the achievable market rent, the higher the value of investment property. Usually, a relatively inexpensive "facelift" is all that’s required to create added value.

For example, appreciation of real estate deals may be achieved by:

• Redesign and permanent care of the front garden, including lawns, trees, sidewalks, all clean, and swept, and the planting of attractive flora with lots of color.
• Redesign of the entrance area - the front door should have color and the first steps in entering the building should be well remembered because the first impression counts.
• Redesign of the exterior color and the inside area. There's nothing more refreshing in real estate than a new coat of paint.
• New floor coverings, for example, tile or laminate flooring with no stains. No worn-out carpets or dirt allowed.
• Planting of healthy green plants. Faded, dry, dusty or dead plants without flowers give a bad impression. And no water stains. Plants should always be placed near windows, so the gap from the inner to the outer area is closed, psychologically creating more space and giving a feeling of being closer to nature.