Property expert and managing director at Tranio.com, George Kachmazov, argues the benefits of low yield residential property for small budget investors.
The current economic climate has got everybody a little rattled. Growth is sluggish, property prices are rising and it is hardly worth keeping money in the bank anymore. In short, there are less and less viable alternatives for making money if you are not financial expert or already very rich. Sure, there are plenty of schemes like betting on stocks or currencies, but realistically, they are about as reliable as online poker.
But it is not the end of the line, even if your budget is small, because property is and always will be a solid and tangible investment when you know what to look for. Strikingly, most people want the same thing: passive income from a reliable and low-risk market with a modest investment budget. And that is the advice we stand by at Tranio.com for anyone with a budget under €1m (£770,000).
We recently sold a rental flat in Germany to one of these clients who put it better than I ever could: “We had a very tight budget and mini-hotels are significantly more expensive than regular flats. We also excluded commercial property as it requires a lot of attention and time. We are busy all the time working in a completely different field and do not have the resources or time to spend on managing a business, especially abroad. Also, commercial property has higher risks, even though it comes with better yields.”
The benefits of buy-to-let property
Residential property is the easiest asset to sell (far more so than a hotel or a shop for example) and the most popular property type. The truth of the matter is that residential property is a promising long-term investment vehicle. The world is going to change a lot over the next two decades with new technologies, robotics, innovations in the logistics sector, 3D printing and more that will affect commercial property significantly. Owners of retail and logistics property will have to address these new challenges, reshape their businesses and adapt to a new reality.
Residential property will not be faced with the same challenges because people will always need a place to live. Unfortunately, it produces low yields because it benefits from high demand (about 3−4 % of the investment per annum): everything is interrelated, what sells the most costs a lot, and, therefore, earns less. Conversely, high demand guarantees lower risks because the property is less likely to be vacant and, as shown by Tranio research, price growth on property in low-risk and low-yield locations compensates for low revenue. So you might earn less from tenants, but the capitalisation rate makes up for it.
Residential property in a good district of a big European or US city generally offers 3–4% gross yields and a cap rate of 2–3% to make a total of about 5–6% per annum in foreign currency. This is one of the best vehicles in the world for guaranteeing yourself a comfortable pension and the financial future of your children.
Many Europeans have the same attitude to property now that interest rates on savings are zero or even negative and earnings on the most reliable securities are not much higher. The most competent and active residential property investors can raise yield rates through effective management: buying property for daily or mid-term rentals (for 3–6 months). This approach has a whole number of extra advantages:
+ Property available for personal use
+ Rental rates adjust to market growth (contrary to long-term rentals where local laws can limit rate increases like in Berlin)
+ No tenant eviction issues (in Europe it is difficult to evict tenants without their consent and sometimes it can cause problems for the landlord).
Where to buy
Over the longer term, residential property in big European and US cities, like Berlin and Germany’s Big Seven as well as Vienna, London and New York are attractive options. Berlin is especially promising for long-term rentals as 85% of its residents are tenants.
The population of big German cities increases by 1% every year and in 20 years, Berlin is will probably look more like today’s Tokyo where most people live in small flats and there is not enough property.
According to a forecast by the Berlin Senate Department for Urban Development and the Environment (Senatsverwaltung für Stadtentwicklung und Umwelt), the capital's population is going to hit 3.8m people by 2030 (from 3.6m in 2014). Not to mention that the number of inhabitants has actually grown at twice the anticipated speed, leaving little doubt that demand for residential property will spike.
When clients ask us how to invest€100,000–€500,000 (£77,000-£384,000), we suggest small flats in good districts of big European cities with year-round tourist and business flows, good universities and well-developed infrastructure, preferably not far from the city centre.
You can also take out financing for €50,000 (£38,400) to enhance your budget. For instance, in Germany you can take out a loan for 50% of the property value at an interest rate of just 2%.One of our clients was even ready to buy the property remotely just to get a monthly income, which is actually possible. Nevertheless, we still advise coming to the country at least once to understand what your property looks like, compare the different optionsand evaluate the potential and liquidity of your future asset.
My recommendation to investors is the following: buy low-risk residential property in reliable markets like Europe orthe USA. Don't chase high yields or assume too many risks. This way you will be able to protect your investment from an economic downturn while guaranteeing the financial future of your family
The advantages of buy-to-let property
Stable income: investing in long-term residential rentalsin a good European city district can bring in €9,000–15,000 per annum. The income will be stableas the average European citizen rarely moves home (e.g., a German family usually rents the same flat for at least 12 years).
Price growth potential: low-risk and low-yieldlocations (high-end and central districts of big cities) grow faster inprice than those with higher risks and yields. For instance, a flat in a central city district yields 2% p.a.with price growth as high as 5% p.a., compared to the outskirts where the yield rates are up to 10% but price growth can be as little as 3%. Not to mention that it is more likely to lose in value if there is a downturn.
High liquidity on project exit: a flat in a gooddistrict often sells as soon as it goes on the market. According to one of our partners, residential property near Kurfürstendamm, Berlin, sometimes sellswithin three hours of advertising the listing with up to 4 prospective buyers bidding on it.
By George Kachmazov, managing director, Tranio.com.