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Real estate investments
Invest in real values:
Single investment or entire portfolio - open up new investment opportunities and sources of capital.
Direct real estate investments are in demand today like never before. No wonder, because high-quality properties combine attractive potential returns and maximum security. Provided you have a partner or a club with experts at your side who also have the necessary experience and local know-how. Welcome to the Techcyber Investment Club - your partner for professional real estate investments, especially apartments and apartment buildings in Austria, Germany and Switzerland.
What is the leverage effect & the leverage?
First we ask ourselves why the leverage effect is so powerful.
We usually need a lot of equity for all types of investments. We invest this equity in an asset class in order to get income and interest on the capital employed. The more equity we use, the more income we can generate.
This equity is often limited and is the bottleneck for many investors. Especially if you want to invest in something that is bigger than your own budget.
Even if a family wants to buy their own home, they rarely buy it in cash.
This is where the leverage of leverage comes into play. We borrow money from the bank to make a major investment.
Most people in the world do the same to buy consumer goods. The new television, the new furniture or the car are financed through a loan (outside capital) and thus you can buy more than you can actually afford.
We pull purchasing power from the future into the present.
This is exactly what works with investments. We can take out a loan to get money and invest it.
This loan costs us money (bank interest) and reduces our profit on the investment.
However, if the profits from the investment are greater than the cost of the loan, then it is worth taking out the loan and thus leveraging the investment.
Wikipedia writes: “ Leverage is understood to be the leverage effect of the financing costs of debt capital on the return on equity. The return on equity of an investment can be increased through the use of outside capital. However, this only applies if an investor can borrow capital on more favorable terms than the return on total capital achieved. "
As an example, let's take an investment of any size that has a guaranteed return of 10% and a loan that costs us 3% interest. For example, if we put equity of € 10,000 in this investment, then in one year we will get 10% of the € 10,000 invested. We make a profit of € 1,000. In the second variant, we take a loan of € 50,000 and invest the money in the same investment. The € 50,000 generate another 10% return, which this time would be € 5,000. At the same time, we have to pay the bank 3% interest on the € 50,000, which is € 1,500. This leaves us with a profit of € 3,500 (€ 5,000 minus € 1,500).
So we see that we can generate more profit with leverage than if we only use our own money.
In purely theoretical terms, this can go on indefinitely, but this model is often limited by two factors. First, most investment opportunities are not infinite, and second, we don't get infinite credit from the bank.
Third, a return is always offset by a risk. Very few returns are guaranteed and very often they can fluctuate. If the yields fall below the interest on the loan, then we make a loss.
From the last point in particular, it can be said that not all investments can be made into a leverage product. Especially if the profit of an investment fluctuates strongly (is volatile), leverage through loans is not advisable.
In the following I want to describe four ways of building wealth and their effects of the leverage effect.
How do I use the leverage effect when building up wealth with real estate?
As noted above, most real estate is bought with borrowed capital. Real estate is very expensive for both capital investors and homeowners. Therefore, real estate is almost always bought on credit, only the loan amount is different.
Since the real estate yields a profit as an investment (rent), the leverage effect comes into play here.
In order to keep the example calculation comparable, we take the same return as for the stocks. So we expect a rental yield of 8.34%, which is already very high. I have an average rental return of 8.49% in my portfolio.
The leverage results in costs through interest of around 2% and non-reallocable house money of 1.3%. Let us calculate both conservatively rounded up to 3.5%. With a capital employed of 10,000 euros, we have a return of 4.84% (8.34% minus 3.5% costs).
We don't have this 4.84% return on equity on the 10,000 euros, but on the leveraged sum of 100,000!
After all, we can get 100% financing without any problems and only have to bear the ancillary costs when buying the property. So we can buy a property for 100,000 euros with 10,000 euros.
With the 4.84% on the 100,000 euros, we get 4,840 euros every year. Since we only used 10,000 euros, that makes a return on equity of 48.4%. And 48.4% look a lot better than 8.34%.
So if we get 4.84% over 10 years on 100,000 euros, then we have a profit of 60,424.29 euros. From this we still have to deduct the ancillary purchase costs of 10,000 euros, so we have around 50,500 euros.
An additional plus point is that you are working with inflation instead of against inflation. You build up wealth by saving instead of saving.
The debt becomes less with saving and the remaining debt becomes less with inflation. I have described the principle in more detail in my guide to real estate investments.
What are the 10 most common mistakes when investing in real estate?
There are many mistakes one can make when investing in real estate. After all, real estate is always about a lot of money. And without a minimum of basic knowledge, you can just as easily lose money in this area as you can make it with a healthy basic knowledge.
Why doesn't an investment in real estate always work?
I once summarized the mistakes that beginners typically make when investing in real estate. The nice thing is: These mistakes really don't have to be! Most people only pay the hardship in real estate because they haven't looked up information.
Here are the 10 most common mistakes when buying a property:
1. Buy from an emotional point of view and not according to numbers / data / facts
Beginners in particular approach the subject of real estate investment just as much as they do with buying a home. They furnish the apartment with ideas, miss the golden taps and complain about the lack of a bathtub. However, they forget that there are tenants who have completely different needs and wishes. And what they also forget: that they want to earn money with the real estate. And then it is important that the numbers are correct. Of course, the property itself has to be in a good rentable condition, but it has to suit the tenant and not the landlord. First and foremost, the landlord must be happy with the numbers, data and facts and not the living experience. This also includes a sensible return calculation. Which brings us to the next typical mistake.
2. The return was not calculated or was calculated incorrectly
Many investors are tempted to buy by the rental yield that the broker advertises in his synopsis. However, this type of property return says absolutely nothing about how the investor's capital actually pays off. For this, the investor would have to calculate the return on equity of the investment property. And most of them don't know how to do this and which factors actually belong in this calculation.
3. Financing is not tailor-made
Most bank consultants have no real estate investment themselves and they simply lack the knowledge of the special requirements for financing real estate. They offer the investor the same financing as a home buyer. And in the rarest of cases, this also fits into a real estate investment. That is why it is important to build up a basic knowledge of the financing of real estate capital investments yourself.
4. The rent is not high enough
This means that the costs of the investment property are often higher than the rental income. The beginner then assumes that he can increase the rent. But a rent increase is subject to very strict legal requirements. There are also upper limits that should not be exceeded under any circumstances. That is why every investor should get an overview of the market rents. And if he wants to buy a rented apartment, he should check the rent increase options before buying it.
5. The location of the property is not ideal for (re) letting
One hears again and again how important the situation is when investing in real estate, but many investors do not heed this factor. Given the location, it is particularly important that a typical tenant is provided with everything he needs. And many investors start with their own needs. And they also forget that the situation factors can also change. If a railway line is suddenly built next to the property, the price will drop faster than you can believe. And then finding a tenant who pays a high rent is almost impossible.
6. The real estate market in the region in question is on a downward trend
There are often investors who live and have grown up in a region in which they feel comfortable. It never occurs to you to investigate the trend in this region. Is there more likely to be an immigration or emigration? Investing in real estate is often tricky, especially in rural areas. Those who like to live with body and soul in a small village far away from civilization must unfortunately not assume that the target group for potential tenants for this area is high.
7. The purchase price of the property is now too expensive
Unfortunately, this is now often the case in many regions of Germany. Munich in particular is a good example and everyone is talking about it. The city has a very high quality of living and a high influx. A great shortage of living space is also forecast for the next few years. But: The purchase prices have now risen so much that the rents no longer compensate for the higher investment costs. The investor can therefore often no longer generate a surplus by buying a home.
8. Too much has to be invested in the property for maintenance afterwards
This is a common problem because defects are often overlooked during the inspection or the costs of a renovation are underestimated. The prices for this work have risen a lot in recent years and the craft companies are busy. A beginner often does not expect this to be the case when investing. In addition: There are many investors who make a lot of profit by upgrading real estate. That is why many newcomers think that they can also buy and upgrade a building that is in need of renovation. Often they then pay significantly more for the measures than they have calculated.
9. No credit check of the tenant for new leases
Again, this is a typical rookie mistake. Those who rent for the first time are often uncomfortable having to investigate the prospective tenant. If the prospect makes a nice impression, then it is better to promise the apartment with a large portion of hope than to be financially scrutinized. It is completely normal to request certain application documents and check them carefully. Because the reliable rent receipt is for the landlord the financial basis for the success of the entire investment.
10. Bringing in too much equity
This typical beginner's mistake reduces the return enormously. Since we are almost all brought up in such a way that debts are generally bad and should be kept low from the outset, many beginners invest too much equity. They neither use the leverage of debt financing, nor do they know the difference between debt for home ownership and debt for real estate investment. They don't even know that by investing a lot of equity they have a lot less return on equity. And since they have not carried out the return calculation either (see point 2), they then complain that they do not earn any passive income with their property.
Source: https://www.jeder-kann-immobilien.de/die-10-haeufsten- Fehler-beim-investieren-in-immobilien/
An investment banker who specializes very successfully in real estate - Gerald Hörhan
Gerald Hörhan - the investment punk - is an Austrian investment banker, real estate investor, online entrepreneur and publicist.
Hörhan attended high school in Mödling and then studied applied mathematics and economics at Harvard University and was elected to the Phi Beta Kappa student association in 1997. He then worked as an analyst for mergers and acquisitions at the private bank JPMorgan Chase & Co. in New York and as a consultant at McKinsey & Company in Frankfurt.
If you want to find out more about Gerald Hörhan and his investment strategies, click on the link. https://www.investmentpunk.com/
