Your first investment property? First understand what you are really buying.
Purchase price, market value, yield, financing, running costs and location together decide whether a property really pays off. Here you learn the most important basics – clearly explained and with a focus on Germany.
How do you recognise a good investment property?
A single key figure is not enough. Only the interplay of purchase price, rent, financing, costs and location shows whether a property works as an investment.
Purchase price & market value
A low purchase price is only good if it fits the location, the condition and the actual market value of the property. What matters is therefore not only what is being asked – but what the property is realistically worth.
Rent & yield
The yield sets the achievable rental income in relation to the capital invested. It helps you make different properties more comparable – but it is not yet your actual profit.
Cash flow
The cash flow shows what is left each month after ongoing income, expenses and financing – or how much you have to put in yourself.
Financing
Interest rate, equity, loan instalment and repayment have a considerable effect on your result. A good property can still become a financial burden with unsuitable financing.
Costs & reserves
In addition to the purchase price there are purchase costs (Kaufnebenkosten), ongoing expenses, maintenance and possible renovations. You should factor in these costs realistically from the start.
Location & demand
Location affects lettability, achievable rents and the long-term change in value. What matters is not only the city, but also the specific surroundings of the property.
How can the asking price be put into context?
The asking price of a property is not automatically its actual value. Different methods are used for the valuation:
- Vergleichswertverfahren (sales comparison method): Compares the property with properties that have actually been sold and are as similar as possible, and takes into account differences in location, size, condition and fittings.
- Ertragswertverfahren (income capitalisation method): Looks above all at the rental income that can be achieved on a sustainable basis and is therefore particularly relevant for let investment properties.
- Sachwertverfahren (asset value method): Values the land and building by their substance and construction costs, taking age and condition into account.
SmartLandlord combines these perspectives with current market and property data into an indicative market value and sets it directly against the purchase price.
Yield is not the same as cash flow.
The gross yield is a good first figure for comparison, but it says little about what is actually left after costs and financing.
- Gross yield: Annual rent in relation to the purchase price – quick to compare, but still without costs.
- Net yield: Also takes running costs into account and so shows more realistically what the property earns.
- Cash flow: Shows what is left each month after income, expenses and the loan instalment – or how much you have to put in yourself.
- Return on equity: Shows the return earned by the equity you have actually put in.
SmartLandlord shows these figures together, so that you don't just see an attractive percentage but understand how the investment actually behaves day to day.
Remember:
A property can have a good yield on paper and still cost money every month. That is why you should always look at yield and cash flow together.
These expenses belong in your calculation.
A property incurs costs when you buy it, during financing and while you run it. If you plan for them realistically from the start, you will also understand the actual yield better.
Purchase costs
In addition to the purchase price, the acquisition involves further costs such as Grunderwerbsteuer (property transfer tax), notary and Grundbuch (land register) fees and, where applicable, estate agent's costs. They increase your actual capital requirement.
Financing costs
Interest and other financing costs affect how expensive your investment really becomes over the entire term.
Ongoing owner's costs
Not all ongoing expenses can be passed on to tenants. Management, insurance and other owner's costs reduce your actual return.
Maintenance
Even a well-maintained property needs repairs and renewals. You should set money aside for this regularly instead of reacting only when damage occurs.
Vacancy & rent loss
A flat is not necessarily let permanently. Periods without rental income or missed payments should be taken into account in a cautious calculation.
Unplanned expenses
Renovations, repairs or changes to the building can cause additional costs. A financial buffer protects you from a single expense upsetting your entire calculation.
How the fixed-rate period (Zinsbindung) and repayment shape your financing.
Loan type, equity, fixed-rate period (Zinsbindung), repayment and term change cash flow, risk and wealth building. That is why you should always look at the financing together with the property.
Loan type
An annuity loan, interest-only financing repaid at maturity or other models work differently. How and when you pay back interest and capital affects your cash flow over the entire term.
Equity
More equity reduces the amount you need to borrow and often the financing risk too. At the same time you tie up more of your own capital, which is then not available to you for further investments.
Interest rate & fixed-rate period
A fixed or variable interest rate and the length of the fixed-rate period (Zinsbindung) determine how predictable your financing is and how hard future interest rate changes can hit you.
Repayment & term
A higher repayment reduces your remaining debt faster, but increases the regular instalment. A longer term eases the monthly burden, but can increase the total financing costs.
Loan-to-value & property value
The purchase price is not the only thing that matters. The ratio between the loan and the actual property value also shows how large your financing buffer is.
Instalment & cash flow
The loan instalment, together with running costs and reserves, has to fit the rental income. Only then do you see whether the property earns money each month or needs additional capital.
Check the location: demand, infrastructure and surroundings.
For an investment property, it is not only how attractive a neighbourhood seems today that counts. Infrastructure, demand, population trends, income and accessibility influence how easily it lets and how its value develops in the long term.
- Micro-location: immediate surroundings, local amenities and infrastructure
- Macro-location: city, region and economic development
- Demand: lettability and local target groups
- Socio-economic factors: income, population, labour market and age structure
Six things we tell beginners again and again.
Not every mistake can be avoided. But many become much less likely if you rely on figures, experience and the right partners early on.
