The capital market is divided into different classes or investment segments. These asset classes represent the group of investment properties in which you can invest. Real estate, shares, bonds and investment funds are among the most important asset classes.
If you want to use real estate as a capital investment, you can first of all invest directly in a single property, i.e. buy a house or an owner-occupied flat. Investors who do not wish to make such a direct investment can also invest in real estate indirectly by subscribing to shares in a real estate fund.
The term “real estate fund” is an umbrella term for various company structures that collect the capital of several investors in order to invest it in real estate. A distinction must in principle be made between open and closed real estate funds. The fund assets of open-ended real estate funds are always invested in a number of properties, whereby investors are able to deposit or withdraw capital from the fund on the stock exchange every day.
Public funds are accessible to every private investor, while special real estate funds cater to institutional investors such as banks or insurance companies. Only a single real estate project is financed with the shares in closed real estate funds. Once the required capital is available, the fund is closed. It is then no longer possible to subscribe to further shares or to withdraw capital from the fund.
Private investors also have the opportunity to participate in a real estate company and its yields by acquiring participations, bonds, securities or beneficiary rights.
The term agio refers to a premium that is charged when purchasing a profit participation right. This premium usually covers the provider’s consultancy services and sales costs. The agio is expressed as a percentage.
Listed properties (or listed buildings) are buildings that the German federal states’ office for the preservation of monuments has classified as architectural monuments that deserve protection due to their historical, architectural and/or cultural significance. The protection of historic buildings and monuments is a sovereign task of the state and pursues the goal of preserving monuments in the long term and preventing any related damage, impairment, destruction or falsification.
All measures for the preservation and/or restoration of monument buildings are funded by the state. However, the condition for this is that the future use of the building is permanently guaranteed - and, if possible, in its original form. Not only is the financial investment in the so-called individual monuments fiscally rewarded, which are entered in the local monument registers, tax credits are also granted for investments in properties located in the restoration areas identified by municipalities.
A real estate investment is also worthwhile from a tax perspective. In principle, the purchase costs of leased residential properties can be deducted from taxes at 2% for 50 years. For buildings built before 1925, a depreciation rate of 2.5% applies for a period of 40 years. Incidental acquisition costs such as notary fees, loan interest and depreciation can also be claimed.
Investing in a listed property allows even higher depreciation: The state has created tax incentives to promote the restoration of listed buildings and monuments by means of the so-called monument protection “depreciation for wear and tear” (AfA). Acquiring a listed property gives investors the right to deduct 100% of the restoration costs eligible for grants from the purchase price for a period of twelve years - provided the property was acquired before being restored. Specifically, 9% of the eligible production costs can be deducted from taxes in the first eight years and 7% of the eligible production costs in the following four years. The same applies to real estate in designated restoration areas. All the basic conditions of the monument protection depreciation are regulated in paragraphs 7h and 7i of the Income Tax Act.
The return is the yield of an investment sum within a fixed period and is expressed as a percentage. To calculate the so-called gross yield, the annual cold rent is first multiplied by 100 and then divided by the purchase price of the property. The net return is nevertheless more informative since it is decisive for an investment’s yield. It is calculated as the gross yield minus all additional costs, such as the building management costs, the maintenance costs or any financing costs.
As investments in tangible assets, real estate not only offers solid returns. It also protect your assets against the effects of inflation. While monetary investments securitise a certain amount of money, by investing in tangible assets the investor acquires a certain share of a material asset, i.e. a materially existing asset. Such material assets may be real estate, shares or even precious metals.
As a long-term investment variant, investments in tangible assets have the following advantage compared to monetary investments: they are less affected by cyclical and stock market fluctuations. As a rule, their actual value does not decrease during a period of inflation, but rather can sometimes even increase. In contrast, money gradually loses value due to inflation. For example, the Deutsche Mark lost about two-thirds of its purchasing power between 1949 and 2001. Since tangible assets such as real estate cannot be multiplied at will (unlike money) they offer effective protection against inflation.
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