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Invest in Real Estate

Learn how to invest in Real Estate

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Investors have many different investment options open to them for their finances, and investing in real estate is just one of them. As part of our series of instructions on Investing for Beginners, we will take a look at how to invest in real estate to build your wealth.

Investing for Beginners

Advantages

Real estate is often referred to as concrete gold because it generally means security and value retention. Investors are always on the lookout for inflation protection, especially in times when central banks are pursuing an expansionary monetary policy. Low fluctuations in value and attractive income distributions, e.g. via rental income, also motivate many investors to invest in real estate.

Investing in real estate can offer a number of benefits:

  • Long-term yield.
  • Inflation protection
  • Diversification versus traditional asset classes such as cash, stocks and bonds.
  • Income and distributions from rental payments, whereby this income may be higher than for other asset classes.

Benefiting from real estate investing

Advantages of real estate investing

Source: VanEck.

Listed Real Estate Has Delivered Higher Returns Than the Global Equity Market

Past performance is not a reliable indicator of future performance. Source: VanEck. Global equities are represented by the MSCI World Gross Return Index. Listed Real Estate by the GPR 250 Gross Return Index. Data starting at 1 January 2000.

How to Invest in Real Estate?

  Definition Advantages Disadvantages

    Real estate (concrete gold)   Real estate (concrete gold)

Purchase of a house or flat as a home or to rent out
  • Co-determination
  • Tax advantages possible
  • Higher yields possible
  • Credit leverage possible
  • High expenditure (repairs, change of tenants, etc.)
  • High acquisition costs (broker, land transfer tax, notary, etc.)
  • Money tied up for the long term
  • Cluster risk
  • High capital investment required

    Real estate shares/REITs   Real estate shares/REITs

Investment in shares of a company from the real estate sector
  • Money quickly available
  • Little effort
  • Low costs
  • Low capital investment possible
  • Little co-determination
  • No credit leverage possible

    Real Estate Bonds   Real Estate Bonds

Acquisition of a corporate bond directly related to a property
  • Money quickly available (if traded on stock exchange)
  • Little effort
  • Low costs
  • Debt security
  • Little co-determination
  • No credit leverage possible

    Open end real estate funds   Open end real estate funds

Purchase of fund shares invested in various real estate projects can be sold at any time
  • Money available relatively quickly
  • Little effort
  • Wide spread possible
  • Partially low capital investment possible
  • Little co-determination
  • No credit leverage possible
  • Higher costs

    Closed end real estate funds   Closed end real estate funds

Purchase of fund shares that are invested in defined real estate projects and can only be sold under certain conditions
  • Little effort
  • Wide spread possible
  • Tax advantages possible
  • Little co-determination
  • No credit leverage possible
  • Higher costs
  • Money tied up for the long term

    Crowdinvesting in real estate   Crowdinvesting in real estate

Association of many private investors to invest in individual real estate projects.
  • Little effort
  • Low costs
  • Low capital investment possible
  • No tax advantages
  • No credit leverage possible

    Real Estate ETFs   Real Estate ETFs

Purchase of a diversified portfolio of real estate shares, which in turn can invest directly in real estate.
  • Money quickly available
  • Little effort
  • Low costs
  • Transparent
  • Wide spread possible
  • Low capital investment possible
  • Little co-determination
  • No credit leverage possible

Invest in Real Estate Funds

Investing in real estate is something many people associate with buying a property for investment purposes, such as a residential building or even a commercial rental property. But there are other options.

Although less well known, you can also make an investment in real estate through a mutual fund. There are many different varieties of real estate funds as well as Real Estate ETFs. With some of them, your investment may be tied up for a long time. For others, the minimum investment is very high.

Due to sharp price increases in the real estate market, it is almost impossible for most people to profit from this boom through direct investment. Real Estate ETF offers the opportunity of investing in real estate even with small amounts and has a much higher degree of flexibility compared to a traditional real estate purchase. Real Estate ETFs take advantage of easy access to the stock market to make investing in real estate easier, as opposed to the traditional purchase of a home or flat, which comes with much higher overhead costs. Purchase price negotiations, notarial certification, land register entry and even searching for tenants are not necessary.

To invest in real estate, passive Real Estate ETFs offer an attractive alternative to actively managed real estate funds. The reasons for this are that they charge higher fees, often tie up the invested capital for a long time, and may require an extremely high minimum investment. Compared to actively managed real estate funds, Real Estate ETFs are characterized by higher liquidity, flexibility and lower costs. You can also find out more about real estate on the external pages of the online broker 1822direkt

Investing in Listed Real Estate Shares (REITs)

Listed real estate shares include companies that invest in real estate primarily and whose shares are traded on the stock exchange. These real estate shares are often referred to as Real Estate Investment Trusts or REITs. You will often read terms like REIT funds or REIT ETFs or REIT investments in various financial journals.

A REIT is a company that owns one or more income-producing properties. 

REITs are often exempt from paying taxes on operating profits to avoid double taxation for investors. When you buy a share in this type of company, you are effectively buying a share in a real estate portfolio.

Outline of how REITS work

Explaining how REITs work

Source: VanEck.

There are two types of REITs – listed REITs, also known as exchange-traded REITs, and unlisted REITs. Unlisted REITs are not listed on the stock exchange, but are one of the available investment options.

Advantages and Risks of Listed Real Estate Assets

Listed real estate shares offer a number of advantages and risks of investing in real estate compared to their unlisted alternatives:

 Advantages

Liquidity Due to the listing of the real estate shares, you can enter and exit at any time when the stock exchange is open and bid and asking prices are offered.
Low minimum investment volume The minimum investment is very small and corresponds to the price of a share, which is usually in the range of a few dozen euros.
Investing in real estate brings diversification by country Real estate shares as well as Real Estate ETFs usually invest in a specific region. Investing in different real estate shares allows you to diversify your investments across sectors and regions.
Diversification by sector Aspect of Investing in real estate is diversification. There are several hundred listed real estate shares worldwide. For example, there are real estate companies that specialize in a particular sector:
  • Residential
  • Office buildings
  • Shopping centers
  • Logistics areas
  • Factories
  • And many more

 Risks

Market risk Investments in real estate equities may be affected by developments in the capital markets, in particular with respect to interest rates.
Concentration risk The underlying properties may be concentrated in certain regions, sectors or currencies. Consequently, real estate shares may be particularly vulnerable to local economic, market-related or political developments.
Currency risk The value of an investment can be negatively affected by exchange rate fluctuations.
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