Investing in real estate? Here’s what your budget can buy

Have a budget, ready to invest? There are many options out there: apartments, hotels, offices; but what about a retirement home or a shopping mall? Smart choices depend on your budget, knowledge of the market and short/long-term strategy. This guide to investing by budget is here to help you figure out what’s the best option for your capital.

Budget from €500,000 to €1,000,000

To become a serious property investor, you need at least €500,000–1,000,000. This capital is best served by apartments or hotel rooms (one or several properties).

It’s common for first-time investors with a budget of €500,000–600,000 to suggest retail or office property first — but there are much better options. This budget is generally not sufficient to buy quality premises in these segments. For me, a “quality” investment is low-risk and earns solid income, which is determined by the location, tenant reliability, term and type of lease agreement.

Instead, we recommend starting small and targeting buy-to-let residential property with a focus on location. Of course, yields are lower, but actually you are choosing liquidity, reliable revenue and higher capitalisation rates.

This is a little known secret about good investments: property value grows faster on low-yield property than high-yield. At the same time, it’s a lot easier to sell on such a property, even urgently if necessary, because it is in a good location with high demand.

Anna Kurianovich Head of Commercial Real Estate Department

Apartments

A one-bedroom apartment in a popular middle class neighbourhood of a European city is the best option for buy-to-let investments. Another good option is flats targeting student tenants, located near a large higher education establishment. Alternatively, flats near hospitals attract workers, long-term patients and families, ensuring stable revenue and demand.

"You don’t have to purchase property in large cities, but consider factors that will impact the quality of your investment, like demographics, purchasing power of inhabitants, unemployment rate (10% max) and how good the local infrastructure is", says Anna Kurianovich.

There are two ways to generate profits: long-term or short-term rentals, via Airbnb for example. Long-term rentals earn 2–4% yields annually. Short-term lettings have higher earnings, up to 6–10%, but you run the risk of failing to fill the property to optimum capacity throughout the year.

For this reason, foreign investors should use a management company to take care of the daily tasks (e.g., cleaning, maintenance, repairs, greeting clients, etc.) for both types of lettings. These services cost 15–30% of the revenue for short-term rentals, depending on the location, experience and services provided. Management services for long-term rentals usually cost a fixed amount or a percentage of the income.

Hotel rooms

Hotel room units are sold and managed by recognised brand companies. It takes away the worry as the hotel management company is responsible for filling the rooms. The owner is paid either a guaranteed income of about 4% on a fixed rate or 6–10% on a variable rate.

The returns are higher but the market liquidity in terms of hotel suites is low, making them harder to sell.

Budget from €1,000,000 to €5,000,000

If you have one to five million euros to invest, aim for apartment buildings, retirement homes, retail space or offices.

A lot of investors with €2,000,000–3,000,000 often first suggest buying a hotel, but actually retail premises or apartment buildings are a better bet if you are looking for passive yields. For hotels to be successful, you need to be hands on and get involved with the day-to-day running of the business. It’s a great dream but the reality is quite harsh, and many people have lost money trying to make a hotel work. Succeeding in this business requires a lot of industry experience.

Anna Kurianovich Head of Commercial Real Estate Department

Apartment buildings

Choose residential apartment buildings in cities where housing is in demand. Check out the neighbourhood and the city, before getting into the property search. Criteria that should guide you are the history of rental rates and demand: they should be rising and the community should be growing. Stay away from places with large construction projects nearby.

Focus on the cities with a mature labour market. If there are jobs, there are tenants, which in turn, ensures stable demand and reliable income from your investment. Cities in Germany’s “Big Seven”, like Berlin, Hamburg, Düsseldorf, Cologne and Munich, or Vienna in Austria are good options. Rental yields on residential property are 3–5% on average in Europe.

Retirement homes

Quality retirement homes in Europe have high occupancy rates (90% on average), growing demand and are usually rented for the long-term (e.g., five years or more). Lease agreements are commonly fixed contracts without the right of withdrawal and in some countries, like Germany, they come with state guarantees to cover the payments if the tenant can’t.

Nevertheless, standards in this industry change quickly. The buildings need to be re-equiped and repaired every 15–20 years or so, which inevitably impacts on the revenue earned over that period.

Annual yields average on 5.0–7.5% throughout Europe. The best locations are in large or mid-sized provincial towns (or their suburbs) in countries like Austria, the UK, Germany, the USA or France. To make your choice, check out the local demographics to find out how old the population is and how it is evolving. Essential local infrastructure to make your investment work includes transport and access, local amenities, hospitals and rehabilitation centres nearby.

Retail premises

You have a few choices when it comes to retail property, just remember the average contract term is 10–15 years:

• Street retail: small cafes and restaurants located on ground floors of residential buildings, for which yields in central streets of large cities can reach 4–6%. The most popular high street properties have lower yields, but the cap rate grows faster. Retail real estate on Oxford Street in London earns 2–3% per year, but vacancy rates are only 3.5%, demand is high and it is one of the most popular retail investment and tourist destinations in the world.
• Supermarkets need to be well positioned to attract a stable tenant. Choose a location in residential urban districts with growing communities, near public transport, with road access and parking. Yields are about 5–6% on average. The largest supermarkets, with an area of 2,000–5,000 sq m, are classified as hypermarkets, meaning they carry both groceries and general goods.

Market liquidity for retail premises is determined by the location, design and interior of the property as well as access. In other words, you should buy something in a popular shopping street with high pedestrian traffic that has an attractive exterior and convenient access for visitors. Shop windows should be a showcase for merchandise and entrances should be clearly visible and unintimidating.

Anna Kurianovich Head of Commercial Real Estate Department

Office buildings

€2,000,000–5,000,000 is enough to buy several offices or a small office building. The extent of your participation in the property management determines the type of lease. When you are investing overseas, the most convenient is the NNN lease (Triple Net lease) where the lessee is liable for insurance, building maintenance costs and property taxes.

Office yields are about 4–7% per annum and contracts are usually signed for 5–10 years. In terms of location, target major cities, popular business districts with good infrastructure, especially public transport (rail and road access). Buildings should comply with modern engineering requirements and have a good layout.

Budget over €5,000,000

If you have over €5,000,000 to invest, consider your options in the following segments: large hotels, shopping or office centres, apartment blocks or construction projects.

Clients with money have the most choice, depending on how much risk they want to undertake. High yields on short-term investments, high cap rate on long-term investments, passive investment or hands-on management, safeguarding capital or actively growing it — these are some of the choices that such investors need to make.

Anna Kurianovich Head of Commercial Real Estate Department

Large hotels

Prices for hotels in the world’s leading cities like London, New York and large cities across Europe start at €10,000,000–15,000,000. To guarantee steady yields and increase the resale price, you will need a good operator and occupancy rates from 80–90%.

Location, property condition and the last major renovation/repairs are key aspects of this investment. There are two types of contracts with the operator: lease contracts and management contracts. A lease comes with a fixed rental rate, while the management contract offers a share of the revenue. The latter has higher yields, but it entirely depends on how good and consistent the operator is. Average yields for large hotels located in capital cities are approximately 4–6%.

Anna Kurianovich Head of Commercial Real Estate Department

Shopping centres

If you choose a shopping centre, keep in mind the purchasing power of the local community, the current infrastructure and transport access to the property. The best tenants are grocery stores, electronics, clothes shops, cafes, etc. Shopping centre yields are 5.5–6.5% on average.

Redevelopment or construction

If you buy a property to renovate or land to develop, yields could be 20–50%. This type of project is mostly undertaken by construction company owners who have the experience and knowledge to minimise costs and expenses. Without this experience, the investor must trust their team to know the market and the local laws as well as the contractors.

Ready to invest yet?

Property investments are not as complicated as they might seem — it’s just a question of common sense and doing your homework. The main choice you will be faced with is high yields or high capitalisation and that really depends on your appetite for risk. In any case, much like you wouldn’t build a log cabin without a carpenter, you shouldn’t invest in property without consulting a reliable real estate expert with solid experience and good knowledge of the local market — because at the end of the day, common sense is the main key to sound decisions and long-term wealth.

Yulia Kozhevnikova, Tranio