Property acquisition guide

Whether an apartment or a house – what you should know before buying a property.

The know-how to become a property owner

The road to your dream property throws up several questions: What should I be aware of when buying a property? What should I know about location, financing, personal use, or investment? What are the pros and cons of owning an apartment? We offer some facts and tips.

In order to find the right apartment or house, you should think about what conditions the property should fulfill in your view. After all, you plan to live there for a very long time – in utmost comfort. First, define the location and the characteristics of the apartment. Some important aspects are:

  • City, country, suburbs – what location do you prefer?
  • Apartment, terraced house, semi-detached house – what is your preference?
  • Rooftop or upstairs apartment, maisonette or loft, ground floor with garden – what apartment type is right for you?
  • What surface area, and how many rooms?
  • Old or new construction, in need of renovation, with the possibility of making modifications before moving in?

A dream property can come in many variations and locations. Consider that your decision will have long-term consequences. You should think about any expected professional or personal changes beforehand. Put your ideas down in writing. This will give you a clearer idea of the specific conditions for your desired property.

The location is usually a major criterion for the purchase decision. If you plan to live in the apartment yourself, your preferences and needs, of course, take precedence. But even if you intend to rent the property out, some location characteristics are more important than others. Things to consider include:

  • Transport connections: Ideally, the location is easily reachable both by public transport and by private car. Commuters, for instance, are dependent on a good transport network.
  • Noise: A drawback of good transport connections could be increased noise. But things like the nightlife or long-term construction projects may also influence the quality of life.
  • Shopping: The closer the location is to supermarkets and shops, the higher it is usually valued.
  • Leisure activities and parks: Having parks and stadiums, restaurants, bars, cinemas, etc. around the corner is a definite plus for the property.
  • Reputation of the neighborhood: Cities like Berlin have trendy neighborhoods with a long reputation and others that are still up-and-coming. An “uninteresting” neighborhood may be just one street away from a trendy one, but with much lower prices or rents. Ask your broker about the qualities of the neighborhood. It doesn’t have to be Prenzlauer Berg…

Whether an apartment or a house, buying a property continues to be an attractive and relatively secure investment, especially in the long term.
There are many reasons for this:

  1. Housing is tight and is getting tighter, especially in large cities with a growing population. Rising prices for investment properties are, therefore, a near-certainty in places like Berlin, Hamburg, Munich, or Frankfurt. This is reflected in a higher yield – up to four percent after tax is a reasonable estimate.
  2. There are a few good investment alternatives. Interest rates are at a historic low and will presumably remain so for the foreseeable future. This affects the profitability of classical investments like savings accounts or government bonds. Investors prefer hard to value and are “rewarded” for this with favorable financing conditions: banks are issuing property purchase loans at very appealing interest rates.
  3. “Concrete gold” is a reliable protection against currency depreciation through inflation. A property investment is, therefore, ideal as a pension fund.
  4. According to experts, the German real estate market overall is in a long-overdue catch-up process. The prices have to rise just to reach the levels in other countries and large cities.
  5. Once the loan to purchase an apartment for personal use has been paid off, you have more liquidity on hand than someone who must continue to pay rent. And if you rent out a property, you can look forward to regular payments from the start.

By buying your apartment, you have the opportunity to invest your capital securely for the long-term. You no longer pay monthly rent and improve your retirement fund. You no longer pay monthly rent and also create a retirement fund. On the other hand, you are less flexible should your life circumstances, and therefore your living needs, change. However, you can rent out a privately owned apartment and so still end up financially better off. If you live in a rented apartment, you have more flexibility and less responsibility. But you generally cannot implement your own ideas – a new bathroom, a chimney, etc. Even walls you may have painted over the need to be restored to their original color when you move out. In other words: As a tenant, you live in a relation of dependency – and the rent you pay is “gone”. In contrast, the expenses incurred to buy your own apartment, even taking out a loan, can be seen as investments.

Real estate is an expensive investment: usually your own funds will not be sufficient to finance the acquisition. But you can buy it with borrowed capital – a loan. In addition, a carefully calculated use of borrowed capital can increase the yield of property investments. This is called the leverage effect. However, the larger the share of borrowed capital, the higher the risk that the loan cannot be repaid. And one should generally be aware of the financing costs, mainly the interest on the loan. It is, therefore, preferable to have a certain amount of own capital. Ideally, your own capital should cover 30% of the purchase price. And you should preferably be able to cover the associated costs, such as taxes and broker’s and notary fees, out of your own pocket. So you should first get a clear impression of your own finances to obtain a realistic overview of your options. Find out how much you need, and then compare the offers of different banks. Even if interest rates are currently very low, you should only borrow as much money as you really need. If the property you have your eye on is not financeable, look out for a cheaper one. Consider that with a loan, you cannot pay too much out of your monthly income for interest and capital repayment. You will still need money to live off. And be aware that you may have to pay for unexpected repairs or renovations. These costs should also be considered beforehand.

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