What are the advantages and disadvantages of individual real estate investments? After choosing the best type of investment, it is a matter of directly contrasting buy, share, bond, fund and crowd-investing.
1 | Real estate purchase
Possessing a home has always been the right way of providing old age. Besides, the low-interest rates currently favour the granting of loans with which real estate can be bought directly. The repayment of these loans can then be covered by the constant cash flow from rental income. However, if the rent index falls or there is even a vacancy, repayment is no longer guaranteed.
Also, there is a risk of high ancillary purchase costs as well as costs for the administration and maintenance of residential properties. For landlords of a condominium, problems could also arise with the community of owners, because cost-intensive improvements are often decided that hardly increase the value of the residential property.
Since rental income generates a cash flow that can be a good source of income, property prices are also rising in metropolitan areas. Real estate investments are popular, and purchase prices in large cities are already very high due to the real estate boom. Nobody can guarantee that the purchase prices will continue to rise and that a profitable sale will be possible later. In the event of losing business, there is no risk distribution: a lot of the saver’s capital is tied up in a property.
CRUCIAL TIP FOR YOU! If you want to buy a property, you have to have enough time – on the one hand, to find the right property, on the other hand, to manage it. You should also be aware that this form of real estate investment only makes sense in the long term. Also, you should protect what happens to your property with a power of attorney if you are unable to act for any reason. This is how you can protect yourself against abuse.
2 | Real estate stocks
Because, real estate rise in the world for recent years, the profits and thus the share prices of real estate companies have increased. Real estate stocks have thus become very attractive and high-yield security. The excellent framework conditions due to the low-interest rates are also likely to continue for a while.
However, real estate stocks are now already relatively highly valued, which means that further increases are uncertain. Anyone who wants to buy real estate shares must also note that the price of the paper fluctuates sharply (volatility).
CRUCIAL TIP FOR YOU! Real estate stocks are a real estate investment for risk-conscious investors. This option is not suitable as the sole form of old-age provision. If you want to profit from the profits of the real estate industry without taking too great a risk, you can also choose the real estate equity fund variant.
3 | Real estate bonds
These real estate investments offer the advantage that the right to repayment of the bond is secured in rem through the entry in the land register. In this way, the investor can get his money back, if necessary, by realizing the real estate on which the mortgage is attached. It is to be criticized, however, that numerous real estate investments in bonds only suggest “sham security”, since they usually do not offer any first-class loan collateral. Therefore one has to pay careful attention to the design of the products. This is not very easy because of the complexity and poor transparency of the papers.
CRUCIAL TIP FOR YOU! Real estate stocks are a real estate investment for risk-conscious investors. The investor should fully understand the investment product he has chosen. With such complex products, however, this is not always easy. This is why real estate bonds are particularly suitable for experienced investors who can assess the financial instrument itself and the risks well.
4 | Real estate funds
If you don’t have enough capital or don’t want to raise that much capital to buy a house or apartment, funds are a cheaper option.
A real estate fund invests the collected capital of the fund investors in several properties. This results in a significant advantage: the risk of loss is spread over several projects and not just concentrated on a single real estate investment.
A disadvantage, however, is that you always have to buy the entire basket of properties on offer, even if there are some “bad eggs” in it. Besides, there is a mountain of ancillary purchase costs for agents, brokers, administrators, etc. on the investor.
In comparison, closed-end funds have further disadvantages: On the one hand, the minimum investment is very high (often at least € 5,000 to € 10,000). On the other hand, offers usually have a very long term. It would help if you, therefore, were sure that you would not need the money invested in the next 10 to 30 years. If you want to sell the shares early, you have to look for a buyer (e.g. via a so-called secondary market). But there is no trade comparable to the stock exchange that is regulated and controlled by the state. It is also crucial to be careful about the legal form of the fund. Because it depends on the extent to which the investor is liable for losses. In extreme cases, if the closed-end fund becomes insolvent, he could lose not only his financial investments but also even more of his private assets (obligation to make additional contributions).
CRUCIAL TIP FOR YOU! Closed-end funds, in particular, are only suitable for investors who have a lot of assets and who are already broadly diversified and can cope with losses. Otherwise, this form of real estate investment is an excellent alternative to buying real estate directly for anyone who does not want to solve the maintenance and management of a property.
5 | Real estate crowd investing
The so-called swarm financing already works with small sums. At BERGFÜRST, for example, crowd investors can invest from just € 10. You can invest in a lot of properties at the same time without having to raise a lot of capital. These real estate investments are also favoured by medium-term terms of one to five years. This means that wealth is not tied up for a long time, and investors can remain flexible.
In contrast to real estate funds, crowd-investing offers further decisive advantages: You can build up your portfolio with projects of your choosing and do not travel as a “stowaway” of a fund manager. Also, thanks to the lean online structures on crowd-investing platforms, there are no usual sales costs – this maximizes the already high-interest rate for the investor. Besides, there is a fast flow of information: On the crowd investing platform you can find out everything you need for your investment decision and can communicate directly and easily via the website if you have any questions. After the investment, you don’t have to worry about the administration or argue with the tenants of the property.
As with open funds, risk diversification is possible due to the low minimum participation: The investor does not have to put everything on one card as with a single property.
CRUCIAL TIP FOR YOU! Crowdinvesting is a new, exciting investment alternative for self-determined investors. Although it is not suitable as a secure, long-term form of old-age provision, it offers small investors uncomplicated access to asset classes that were previously reserved for large investors.