My readers know that in general, I am a big fan of residential blocks (multi-tenant-housing, or multi-family-house as we call this in Germany), but at the current market situation, I think it’s smarter to buy a portfolio of flats in central areas.
For fast readers, here is the conclusion of this article:
We advise our clients purchase a collection of apartments in the same building, as the multipliers for blocks are as high as for units. As the same property manager runs all the units, and this keeps things easy to handle.
Here is my explanation why.
Low interest and the lack of alternative investments drive the German property market. Therefore the prices for real estate have skyrocketed, and multi-family-housing in quality central locations are either expensive or not on the market at all.
The absurd situation
The multipliers (of the rent) asked for multi-family buildings, build around 1900 with all the potential technical problems are the same as for new build or yet to be build units.
The offers we receive from brokers show factors between 25-40x (caprate 4% to 2,5%), which is very expensive because the bank would only finance up to factor 13.
I agree, the factor is not everything, typically the rents in older buildings are much lower (as new laws more or less freeze them) and therefore the square meter price is much lower and looks more appealing. The idea of sellers and brokers around is to optimize and work on the rents, which is much easier to say than do, due to the legal framework protecting renters heavily. On top buyers and brokers tend to forget the future maintenance costs which are much higher in older buildings.
At the current situation, we advise our clients to invest in a portfolio of centrally located flats instead of buying a block in a rather not so central location.
The benefits of an investment in a condominium are:
– no significant administration effort on the investor’s side needed (one could fully rely on the condominium assembly)
– very little technical problems, compared to older buildings
– very less legal problems
– a five years guarantee by the developer (by law)
– more central and better location
– a much higher potential for capital appreciation, because of features, location, and quality
The downsides of an investment in a condominium are:
– co-owner might not share the same opinion and will make decisions harming the investments, especially if self-use owners and buy-to-let investors are mixed in a condo.
– frustrating and lengthy decision-making process regards the condominium
– not such a high negotiation power of the investor, as his weight is much lower than in a block investment.
The main arguments again
1. The central location guarantees for better capital appreciation than a block outside the center. Wealthy local buyers and internationals are willing to pay higher prices in central locations, and the scarcity inside the city are the guarantor for proper capital appreciation.
2. The quality of the construction is much better than in old buildings. The building rules for ventilation, protection against fire and noise cancellation are much stricter than in existing buildings.
3. The rental yield is the same than in older buildings, and due to a much higher tenant turnover in smaller flats with high rents, the adjustment of the rent is much easier. Therefore the potential for future yield improvements is much greater than in older buildings with bigger units and lower rents
If you invest in small flats and furnish them, to find young urban professionals that are in need of a flat fast. Even if given a regular (unterminated) contract, circumventing the problems that occur out of short-term rentals, the tenant turnover will average less than two years per contract.
Try to buy a full floor of small flats. The small units fit the market needs of today. But as more and more office space gets converted into residential, it is visible that we run into a scarcity of office space, in the future. The full floor investment might give you the opportunity to merge all flats and the common area together and switch them into an office.
Always get legal, tax and economic advice before you invest.
Just my 2cents