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EVERYTHING ABOUT REAL ESTATE RETURNS - FROM CALCULATION TO TAXES AND APPRECIATION

DEFINITION AND CALCULATION

WHAT DOES YIELD MEAN IN CONNECTION WITH REAL ESTATE?

A reasonable return is the goal of every investment. If you put the return in relation to the capital employed and the costs incurred, you get the return on the capital investment . The sense of a real estate investment lies in rent savings for owner-occupation and in generating rental income for third-party use. While the self-use of a house or apartment promises a high psychological return in the form of independence and well-being, the profitability of rented properties must be assessed by an exact return calculation.

Return from rental income

Whether it is worth economical to buy a house, is measured by the capital expenditure which, purchase price and the sustainable gross rental income . Every investor should find out on the housing market, for example via rent index, which rents are locally realizable. The achievable annual rent is required for the calculation. This is the cold rent without operating costs such as hot water and heating expenses . The annual rent depends on the current housing situation , the state of the real estate market, the location of the property , the size and equipment of the property and other regional influencing factors.

Return through capital gains

With rented properties, a reasonable return can also be achieved through the price . If the owner of a property sells it above the price at which he acquired it, this results in a surplus, which must be set in relation to the duration of the property. The capital gain is calculated from the difference between the purchase price and the proceeds from the sale. The acquisition costs also include all ancillary acquisition costs, subsequent production costs for extensions and conversions as well as advertising costs in connection with the sale. When determining the return on the sale, the tax burden on the sales proceeds must also be taken into account. Private investors enjoy the advantage that the sale of their rented house or apartment is generally tax-free after 10 years. If you have lived in the property yourself or used it for your own residential purposes in the year of sale, including the two previous years, the sale remains tax-free.

HOW DO YOU CALCULATE THE RETURN ON REAL ESTATE?

Only a few private individuals acquire several properties for rent in their lifetime, so buying or building real estate needs to be carefully considered. The calculation of the annual return of a real estate investment needs of any investor to assess whether the acquisition of a house or an apartment carries an economic perspective. How high can the purchase price be so that the investment pays off for the investor? The return calculation is also necessary in order to be able to compare real estate with stocks and bonds.

The gross rental yield of a property is calculated from the quotient of the gross annual rent and the investment costs of the property.

WHY CROWDFUNDING FOR REAL ESTATE?

The investment in real estate is a worthwhile matter, however, has in its previous form one decisive disadvantage: in order to be really close as investor in the development of each project going very high individual amounts to be invested.

Alternatively, there is the option of paying into a real estate fund. But here the return always depends on the general market development, the skill of the fund management and, last but not least, the “management costs” of the fund . With the concept of crowdfunding for real estate, we have created an alternative that enables you to follow your project closely at all times, even when using smaller investment amounts - and with a fixed interest rate that has been set in advance.

  • Example:If the gross rent is € 6,000 per year and the purchase price of an apartment is € 120,000, this results in a gross rental return of 5 percent. The gross rental yield is often advertised when buying a property, but it says little because it does not take into account important cost items and the risk of vacancy.

In addition to the purchase price or production costs for new buildings, the investment costs include ancillary acquisition costs of at least 10 percent. These are real estate transfer tax, brokerage, notary and land registry fees. In order to determine the actual annual net income for the investor, the administration and maintenance costs per year must be deducted from the gross rent. The amount of the maintenance reserve depends on the type of use, the age and the condition of the property. A guideline for maintenance and repair costs is 6 to 14 euros per m² of living space and year or a flat rate of 20 percent of the annual rent.

  • For our example, this means:The annual net income is EUR 5,560 with an assumed EUR 300 administration costs per year and EUR 8 maintenance costs for 55 m² and the investment costs EUR 132,000. A vacancy risk of 2 percent of the gross annual rent is to be deducted, so that an annual net income of 5,440 euros is calculated. This results in a net rental return of 4.1 percent.

The net rental return is more meaningful than the gross rental return and can be used as a benchmark for other asset classes. It is the return on the capital invested in the property, after deducting all property-own costs, before taking taxes into account. The following relationships can be derived from the calculations mentioned:

  • the lower the costs and the higher the rental income, the better the return,
  • the lower the purchase price (worse the situation), the higher the return,
  • the better the location of the property (high purchase price), the lower the return.

It follows that the net rental return alone cannot be a sufficient basis for a qualified investment decision. So far, the financing structure for the acquisition of the property and its taxation has been completely disregarded when determining the return. If the investor uses borrowed capital in the form of a building loan for financing, the return on the equity invested can be determined as follows:

  • In the example, a mortgage loan with 2 percent interest has been granted for 50,000 enet result object is 4440 euro in this case. The basis for the return calculation is now only the use of own funds: (4,440 euros / 70,000 euros x 100) = 6.3 percent return.

The return on equity is therefore 2.2 percent higher than the net rental return. If the investor's equity is reduced further, for example to 40,000 euros, the calculation looks like this: The interest on the loan is 1,600 euros and thus the net property result is 3,840 euros. With a real estate loan of 80,000 euros, that results in a return of 9.6 percent! This is called the leverage effect for the return due to the increased use of borrowed funds.

EXCURSUS: DUPLICATOR

The multiplier is the present value factor for capitalizing the income. With the capitalized earnings method , a real estate valuation can be carried out with the aid of the duplicator . A very simple return calculation can also be carried out using the multiplier factor: 100 / factor = return. The multiplier factor is calculated in two ways: purchase price / net rental income or 100 / gross rental income.

For our example, this results in a factor of 20. So you can simplify the market value (or market value ) indicating a property. The multiplier factor expresses that the sample apartment costs 20 times the annual rental income. However, this calculation is greatly shortened. In the income approach , the land value of the property, the property interest rate, the remaining useful life of the building and the gross rental income minus the management costs (net income) are taken into account. The simplified calculation is sufficient as a guide for the market value of different properties in different locations. The real estate decision should be based on in-depth analyzes of the earnings value, the achievable return or the sales proceeds.

CROWDFUNDING FOR REAL ESTATE - YOUR ADVANTAGES AT A GLANCE

Crowdfunding for real estate is a modern, contemporary investment method that is particularly attractive for private (small) investors.

  • detailed information even before deciding on a project
  • high level of security, as only projects are approved for which bank financing is available and the building permit is available
  • Participation in crowdfunding for real estate is possible at EXPORO from as little as 500 euros, pre-determined, short terms
  • attractive, fixed interest rate
  • First-hand experience of the entire project development
  • Participation in a sustainable project, the results of which you can see for yourself

TAXES

If real estate is acquired as an investment , there are many ways to save taxes . First, however, the income from renting and leasing must be taxed at the personal tax rate. In return, the owner of a rented property can have a number of expenses recognized as tax-relevant. The following cost items are, for example, tax deductible:

  • Acquisition and production costs of the property (for houses built after 1924, 2 percent annually can be depreciated for 50 years)

  • Costs for renovation and repairs of tenant apartments (20 percent share, maximum 6,000 euros)

  • Interest on mortgage lending
  • Property taxes
  • Brokerage fees
  • Costs for lawyer and tax advisor
  • Additional costs of the tenants as business expenses
  • Other: account management fees, office, travel and telephone costs in connection with the rental, advertising fees

Homeowners and landlords should definitely seek tax advice in order to fully benefit from government subsidies and tax rebates. The amount of tax savings often depends on individual decisions, especially in the case of real estate used by third parties.

CROWDFUNDING FOR REAL ESTATE - YOUR ADVANTAGES AT A GLANCE

Crowdfunding for real estate is a modern, contemporary investment method that is particularly attractive for private (small) investors.

  • detailed information even before deciding on a project
  • high level of security, as only projects are approved for which bank financing is available and the building permit is available
  • Participation in crowdfunding for real estate is possible at EXPORO from as little as 500 euros, pre-determined, short terms
  • attractive, fixed interest rate
  • First-hand experience of the entire project development
  • Participation in a sustainable project, the results of which you can see for yourself

LEVERAGE FOR INCREASING RETURNS

INCREASE / OPTIMIZATION OF CURRENT RENTAL INCOME

The current rental income largely determines the success or failure of an investmentin houses and condominiums. In this way, landlords can calculate with regular income, but should deduct the risk of rent loss in the amount of the average vacancy rate from the rental income in order to determine a realistic return. In addition, the amount of possible rental income has a major influence on the valuation of the investment property. Satisfied tenants can prevent yield losses. The investor achieves this, for example, with value retention and renovation, rapid elimination of rental defects and control of operating costs. For larger or multiple residential properties, professional facility management is worthwhile for landlords.

APPRECIATION AND CAPITAL GAINS

Early maintenance measures help to preserve the substance of the building, modernizations, renovations as well as extensions and conversions increase the value of the property. Whether the property actually increases in value when it is sold depends on many factors in the real estate market. The lower the purchase price in a good location, the higher the chance that the value of the property will increase over time. Regions with excessive price demands or without future prospects should be avoided when renting residential or commercial properties.

OPTIMIZATION OF THE FINANCING STRUCTURE

Increase in return on equity

The property yield allows you to compare different properties with each other and find out which property is most profitable. In addition, this return indicator is suitable for assessing whether the leverage effect can be used sensibly, as it records all income and expenses, including tax effects, but not the consequences of the financing structure .

  • The property return ratio is determined using the following formula: net rental income minus maintenance costs minus tax burden .

Since the tax advantages for real estate have been limited in the last few decades, the return must be increased in other ways. The return on your own savings capital can be improved through the leverage effect with the help of an increased use of outside capital. Borrowed capital has to achieve a higher return than it costs, which is easily possible in times of low interest rates . For private individuals, however, the ability to repay and the avoidance of over-indebtedness are the natural limits for expanding their loan use. The repayments to be made should not exceed the depreciation amounts or a certain percentage of the net income.

Lowering the cost of capital

The prerequisite for an optimal financing structure is the comparison of as many financing offers as possible . A good credit rating on the part of the borrower is very helpful. Measures to increase creditworthiness such as additional collateral help reduce the cost of capital. The financing structure can be optimized if the landlord chooses a fixed loan for repayment instead of an annuity loan.

The interest can be deducted from tax, so it makes sense to put the repayment contributions in a savings plan to build up wealth according to your own risk tolerance. With this, the fixed loan is then completely replaced. The big advantage of this variant is a constant monthly burden for the borrower during the entire financing period. The profitability of the equity investment can be increased if the equity flows into a contribution deposit instead of the ongoing financing of the property, thus increasing the interest burden and the tax advantages. The bullet loan is repaid with the balance of the contribution deposit. However, in this case the borrower should have a credit rating beyond any doubt.

EVALUATION

With real estate as a capital investment , returns in line with the market should be achievable and investors should not only rely on tax advantages. First and foremost, the location of the property determines how high the income will be for the landlord. Properties in sought-after locations close to the city in large cities have an advantage over small towns and peripheral areas. Tenants are also increasingly looking for living space in city centers and economically prosperous regions. The description of location is the main determinant of the recoverable proceeds even with a sale of the object. In real estate trading, the location of the real estate object is therefore mentioned first. The structural condition of the building and theThe quality of the infrastructure also play a major role.

When return card buyers should make sure that only realistic net returns are chosen as a basis for comparison and that the purchase price in relation to other objects and asset classes is not too high. The buyer cannot influence the rent level and the legal rental regulations, but rental contracts and the acceptance of the purchase price can. In addition to location, supply and demand, this depends on the investor's attitude and willingness to take risks as well as the amount and composition of his or her existing assetsfrom. The profit is not only from stocks in purchasing. With market knowledge and good timing, without time pressure and, if necessary, with professional help from a broker, the investor can avoid buying his property too expensively. However, the risks of purchasing real estate must not be ignored, especially since most real estate investments involve high investment sums and quickly lead to a cluster risk in the investor's asset composition. Diversification is easier with forms of participation such as crowd investing for real estate , REITs or open real estate funds.

REAL ESTATE CROWDINVESTING - CURRENT INVESTMENT OPPORTUNITIES

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