Nery Alaev is the Director of ESN Investments GmbH, which engages in the acquisition and development of commercial and residential property in Germany and Austria.
Real estate investment represents an excellent opportunity to get a good return on your money, over both the short and long term. But how should new investors begin to think about starting out in real estate investment? Here is a quick guide.
Put the right financing in place
The crucial first step, that directly influences how successful (or otherwise) you are as a real estate investor. Your current financial situation determines everything that follows, including:
- The financial goals of your real estate investment plan. It could be that you are looking to raise funds quickly through a series of ‘fix and flip’ property purchases. Or you might want to invest in a piece of real estate that will grow in value over time to give you a healthy retirement fund. Either way, these financial goals are likely to be shaped by your current financial position, as you consider your main priorities.
- Your risk appetite. How much money you have now also directly impacts the size of your risk appetite. This is essentially the amount you are willing and able to risk – and potentially lose – on your investment. My advice is to always make sure you have an emergency fund in reserve.
Do your research
There is no excuse for not doing this next step properly – we live in an era where vast amounts of data are readily and easily available to anyone who looks for it.
This kind of research is second nature for stock market speculators who won’t invest before poring over all of the financial reports that are available. But as a real estate investor, you might find yourself looking at occupancy rates, comparing relative rental yield figures for different value properties in the same area, or even the standard of local schools.
It’s crucial that you get right under the skin of these figures, understanding the direct impact that they have on your investment and, crucially, your monthly cash flow.
See where the value is in the market
As a new investor, you’ll need to quickly get a sense of the overall market, and how sustainable and reasonable the prices you’re paying for properties are.
The German housing market for example is doing very well at the moment. It’s being driven by low levels of construction, high demand and a healthy economy pushing yields up. Which sounds great – but it is also worth bearing in mind that the German national bank, the Bundesbank, suggested in 2018 that many properties in urban areas are overpriced – sometimes by up to 35%.
Why does this matter for investors? Well, because those overheated prices may impact everything from rental yield to any potential profit you might make on a final sale if the market cools down.
Always try to build slowly and add value to your investment
Real estate investment is relatively unique in that you personally can add value to it by investing in improvements. Refurbish a property and selling it on can be a quick way to see good returns. But watch those monthly numbers regularly – if you’re paying more to maintain and improve your properties than you are receiving in rental income, it may be time to sell off some of the more costly parts of your portfolio.
Watch out for your debt levels too – it can often be easily hidden within your growing portfolio. Traditionally, investors use their existing equity to secure more loans in order to grow their portfolio. But you might want to look at alternative methods that won’t increase your debt, such as crowd-sourcing investments or releasing equity by selling off existing properties in your portfolio.
As a new investor, always approach each new property with those clear financial goals you started out with at the front of your mind. Does the property you are looking to invest in add value to your overall investment portfolio, or are you just adding debt?
Ultimately the key, as with any investment, is to do your research – and take your time.