Is a rented apartment a worthwhile investment?

There are now many good arguments against rental apartments as an investment. But there are still reasonable properties available and interest rates are very low. What should you look out for?

Doubters aren't exactly the most popular people. Especially not when they humorlessly shatter dreams of a successful investment. In fact, these are all valid arguments that, after years of the real estate boom, are now being raised by astute minds against investing in rental properties.

Just a reminder: Prices have outpaced rents, creating a bubble that will burst sooner or later. Furthermore, the new tenancy law, the rent control, prevents the enforcement of adequate rents. And nowhere are acquisition costs as high as with real estate. These can amount to as much as 14 percent of the purchase price, something no one would accept with other investments. So why should it be the case with rented properties?

Making good use of equity in rental housing construction.
All of this is true. But there are also other solid arguments: Real estate companies are more active than ever, buying and building massively – say the mortgage lenders. For well-known reasons, the demand for housing is rising faster than ever expected. Interest rates are incredibly low, with the consequence that many investment rules need to be re-evaluated. Therefore, there are still investment opportunities in rental housing construction – and not just the salespeople say so.

More on the topic:
How marriage can also change things financially.
Reselling closed-end funds can be worthwhile.
The state will be taking a double cut from many citizens in the future.
Real opportunities despite all the concerns? It depends, but with conservative assumptions, it's certainly possible: If the investor receives four percent rental income on the investment, it's still a good deal even if they borrow every euro and repay the loan over 20 years. Because then they pay 2.7 percent interest until the final installment. The difference initially seems meager, but it must be considered in relation to the equity. And where interest rates are fixed, rents can and will rise. The new rent control isn't so effective that every rent increase is ruled out for 20 years. The same applies to savings interest rates. The interest rate for 20-year German government bonds is currently hovering around 0.9 percent. When the tax authorities then skim off 26.375 percent of these meager interest payments, practically nothing remains that could be called a return: roughly 0.66 percent. Four percent rental income from a real estate investment before costs and taxes is quite respectable in comparison, especially since depreciation, along with other expenses, helps to reduce the tax burden somewhat. At least on paper.

This shows that equity capital can now be used effectively in rental housing construction. This wasn't always the case. Apparently, low interest rates have changed the traditional financing rules for rental properties. Previously, financing rental properties worked like this: as much debt capital as possible and ideally no ongoing repayments at all. Life insurance companies typically took care of the eventual repayments, promising to clear the debt with a life insurance policy after a few decades.

Annuity loans as primary financing –
all of that is now irrelevant: The tax advantages of interest on life insurance policies are gone, interest rates are at rock bottom, and no insurer can fulfill its promises from back then. They all keep lowering their profit-sharing rates, and there's no end in sight to the downward spiral of interest rates. And what about the investors who trusted the insurers back then? They now have to save up to pay off their debts.

So, traditional mortgage financing with equity and standard fixed-rate loans now also applies to rental properties. The market reflects this. Today, most rental properties are financed with fixed-rate loans. However, these typically start with relatively low repayment rates, such as 1.5 or 2.0 percent, according to major mortgage brokers.

Source: FAZ