Investment

Real Estate Investment - In the real estate sector, we define a real estate investment as the targeted purchase of a property that is not occupied by the owner but is used to generate rental income and build long-term wealth.

Why Invest in Real Estate?

Real estate is considered one of the most stable forms of investment because it represents a tangible asset that cannot be reproduced at will. Unlike stocks or bonds, investment properties offer two sources of income simultaneously: ongoing rental income (cash flow) and the appreciation of the property over the holding period. Together, these two factors determine the total return on a real estate investment.

A key advantage over other investment forms is the leverage effect through debt financing. While stocks are generally purchased entirely with equity, investors typically finance real estate with 70 to 90 percent debt. The rental income covers the debt service, and the appreciation applies to the entire purchase price, not just the equity portion. With an annual appreciation of three percent and an equity investment of 20 percent, this results in a return on equity of 15 percent or more.

In addition, investors benefit from significant tax advantages: Depreciation of the building portion (AfA), loan interest, maintenance costs, and administrative expenses are deductible as business expenses and reduce the tax burden on rental income. After a holding period of ten years, the capital gain is also completely tax-free.

Nevertheless, an investment property is not a sure thing. Key risks include vacancies, loss of rent, unforeseen maintenance costs, and rising interest rates during refinancing. A thorough location analysis, conservative calculations, and sufficient liquidity reserves are therefore essential.

Cash Flow Calculation and Return Metrics

Before we recommend a property as an investment, we review the key metrics. The gross rental yield compares the annual base rent to the purchase price and provides an initial indication. More meaningful is the net rental yield, which takes into account closing costs, management, and maintenance. The cash flow shows whether the rental income, after deducting all costs and debt service, results in a monthly surplus or deficit. Positive cash flow means that the property is self-sustaining.

For a comprehensive assessment, we also recommend calculating the return on equity and wealth accumulation over the planned holding period of at least ten to fifteen years. A key factor for a complete comparison is the inclusion of imputed interest on the equity invested: Only if the total return (ongoing cash flow + appreciation) exceeds the opportunity cost of equity is the real estate investment truly advantageous.

Difference: Direct Investment vs. Indirect Real Estate Investment

In addition to direct investment in real estate, there are alternative ways to invest in real estate:

• Open-end real estate funds: Broadly diversified portfolio, high liquidity, low minimum investment. Limited return potential (3-5% p.a.), but no administrative burden.
• Closed-end real estate funds: Higher expected returns, but long lock-in period (10-15 years) and limited availability. No influence on management decisions.
• REITs (Real Estate Investment Trusts): Publicly traded real estate companies, tradable daily, broad diversification. Price fluctuations similar to stocks; dividend yield 3-7%.
• Crowdinvesting: Smaller stakes in real estate projects via platforms; higher risk, no physical ownership.

In comparison, direct investment real estate offers the highest potential return, the greatest tax advantage, and the best control over assets-but it also requires the most equity and commitment.

Practical Tip for Investors in Nuremberg and Franconia

The Nuremberg metropolitan region offers investors an attractive ratio of purchase prices to rental levels. While purchase price multiples of 30 or more are common in Munich, they often range between 20 and 25 in Nuremberg, Fürth, and Erlangen, enabling significantly higher rental yields. Neighborhoods with good infrastructure connections and development potential, such as Nuremberg-Südstadt, St. Johannis, or Erlangen-Bruck, are particularly attractive.

We recommend that investors focus on two- to three-bedroom apartments ranging from 45 to 75 square meters, as these sizes have the most stable rental demand in the region. Our network of financing experts and tax advisors in the region provides support in structuring the investment optimally-from calculating returns to tax optimization.

Frequently Asked Questions

What level of equity is required for an investment property to be worthwhile?

As a rule of thumb, investors should be able to cover at least the incidental purchase costs from their own equity-in Bavaria, this amounts to approximately 7 to 10 percent of the purchase price for real estate transfer tax, notary fees, and, if applicable, real estate agent commissions. In addition, we recommend a liquidity reserve of three to six months’ rent to cover unforeseen expenses. 100% financing is possible with good creditworthiness, but it increases the risk associated with interest rate changes.

When is the capital gain from an investment tax-free?

If a rented property is sold at least ten years after the notarized purchase agreement, the capital gain is completely exempt from income tax. This holding period under Section 23 of the German Income Tax Act (EStG) applies to private individuals. If the property is sold within this period, the gain is taxed at the personal income tax rate. The period begins on the date of the purchase agreement, not upon transfer of ownership.

Which location factors are particularly important in Nuremberg?

For a successful investment in the Nuremberg metropolitan region, we look for proximity to subway and commuter rail stations, connections to employers such as Siemens, Adidas, or Friedrich-Alexander University, as well as the demographic trends of the neighborhood. Neighborhoods with a growing population and planned infrastructure projects offer the best prospects for appreciation and stable rental income.

As an investor, how much time do I need to set aside for managing my property?

That depends heavily on the number of units and tenant stability. A single condominium with a long-term tenant requires an average of 2-4 hours per month for communication, bookkeeping, and condominium association matters. For multiple units or frequent tenant turnover, we recommend a professional property management company that handles these tasks for 3-5% of the annual base rent.

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