How to make money on a value added project in Germany
In recent years, in major European cities, housing prices have grown faster than rental rates, and the yield from the delivery of real estate has decreased. According to the site Wohnungsboerse.net, in Germany, the average yield of apartments of 60 m² decreased from 4.4% in 2011 to 3.7% in 2016. In the most liquid markets, this figure is even lower. For example, in the center of Munich, housing brings only 2-2.5% per annum.
Those who seek higher returns are encouraged to invest in value-added projects, the essence of which is expressed in three words: “buy, fix, sell”. Such projects bring 15–20% per annum on invested capital minus the costs of the management team.
Among other advantages of value added projects is a short investment period (not more than six months) and no need to personally participate in management: a team of specialists selects and buys objects, structures the transaction, arranges financing, hires a contractor and sells objects at the output. An investor can buy the project entirely or enter it together with other investors. In the latter case, the minimum budget for entry is 30 thousand euros.
Where to invest
One of the most interesting markets for value added projects is Germany. There are several reasons for this:
high real estate liquidity: in the most popular markets, such as Munich and Frankfurt, there are 20–40 buyers per high-quality apartment;
affordable financing: non-residents in Germany receive loans in the amount of 50% of property value at 1.5% per annum, residents – up to 100% of value at 0.8% per annum;
high rental demand: on average in Germany about 50% of the population rent housing, and, for example, in Berlin – more than 80%.
It is recommended to buy apartments for renovation and rental in economically healthy cities of Germany, namely:
in the cities of Bavaria (Ingolstadt, Munich, Nuremberg and its surroundings: Amberg, Weiden, Kümmersbruck, Lauf, Neumarkt, Pegnitz, Schwandorf, the urban region of Nuremberg between Roth and Erlangen) is the richest and most prosperous region of Germany;
in Berlin – the capital and largest city of the country;
in Hamburg – one of the main ports in Europe;
in Frankfurt – the European banking center and a major transport hub (Frankfurt Airport is one of the busiest in the world);
in Stuttgart – the center of the industry, focused on the global market (in the city and its surroundings are the headquarters of Bosch, Porsche, Ritter Sport and other companies).
How is the project implemented?
For example, consider the project of value added, which was implemented in the first half of 2017.
In February 2017, buyers from Russia purchased a 69 m² apartment in a mortgage near the historic center of Munich, in the Ludwigsvorstadt-Isarvorstadt district. Accommodation is located in Glockenbachvortele – one of the busiest neighborhoods with many bars, restaurants and nightclubs.
The cost of buying an apartment – 610 thousand euros. The new owners spent on repair, furnishing and interior design 43 thousand euros, and by May 2017 housing was estimated at 828 thousand euros. Taking into account all expenses and credit, own investments amounted to 396 thousand euros. Return on invested capital including management fees was 15% per annum.
In addition to the value added resulting from repairs, the project will generate increased rental income. This can be achieved due to the fact that three students will simultaneously rent an apartment. Each of them will live in one of the three bedrooms with an area of 11-18 m², and will use a shared bathroom and kitchen.
Such a scheme is more profitable than renting a new apartment to one tenant.
Each of the three tenants will pay 700 euros per month and bear the cost of utilities. The owners will receive 2 100 euros per month or 25.2 thousand euros per year. Rental yield – 4.1% per annum.
Having bought an apartment in a new building for the same money and renting it out to one tenant, the owners would earn 1,350 euros per month. The area of such an apartment would be smaller (since in the primary market a square meter costs more), the rental price for one tenant is more expensive, and the yield would be one and a half times lower – 2.6%.