How can you build wealth and invest your money safely at the same time? Experts recommend investing in tangible assets and preferably in residential real estate, for example, in the attractive German housing market.

However, real estate can have hidden flaws, even if they appear lucrative at first glance. Do you buy and hope for luck, or are there quality standards that you can use as a guide? With an investment in real estate, you’re tying up your equity for the long term. So that you don’t experience any negative surprises after your purchase, our SUKUUK experts have put together this guide for you.

Here are the seven points to consider when investing in residential real estate:

1. Sought-after residential area
2. Assessment of rights and encumbrances on the property
3. Good object condition
4. Good equipment quality
5. Reasonable purchase price
6. Strong rental yield
7. Creditworthy tenant

What’s behind this checklist, and how can you use it for your decision-making?

1. Sought-after residential area

Location, location, location: These are the first three most important criteria when choosing a property. To describe it more precisely, this means the macro-location, the micro-location, and the property location. The macro-location is the investment’s position (city/district) within a federal state, the micro-location is the investment’s position within a city or district, and the property location is the investment’s position within the surrounding properties. In particular, the following criteria are considered and evaluated for each of these location levels:

• population
• employment rate (or unemployment rate)
• purchasing power index
• shops for daily and long term needs 
• recreation area (green and water areas)
• transport connections (roads and public transport)
• parking space situation (cars and bicycles)
• structure of the surrounding buildings (construction method, number of floors, etc.)

In SUKUUK’s financing application, important key data about the property are provided free of charge.

2. Assessment of rights and encumbrances on the property

Rights and encumbrances on the property can be public, secured in rem, or under the law of obligations, and they can include, for example:

• construction law
• rights of way
• line rights
• housing tenure
• construction charges
• development contributions
• cultural heritage management
• contaminated land
• ordinance

A right in rem is a right that grants direct control over a thing and is effective against everyone (e.g. ownership, mortgage, building rights, obligations). The rights and encumbrances on the property must be checked in order to get an idea of the possible risks. The responsible authorities can provide information about public rights to the property. The rights secured in rem are entered into the land register (Section II), and the owner can provide information about the rights under the law of obligations. The land register is a limited public register in which land, rights equivalent to land, the ownership of such land and the rights and encumbrances associated therewith are recorded.

3. Good object condition

The condition of the property describes its current state of repair. To assess this, the following points are clarified:

• year of construction
• state of maintenance
• modernization measures
• construction defects and structural damage

Based on the year of construction, it can be estimated when major measures will again be needed. Each part of a housing structure has different reference values for how long its components will last. For example, depending on the shape of the roof, repairs will be required every 20–30 years. In the event of visible defects or damage, repair costs must be estimated and taken into account.

4. Good equipment quality

What equipment comes with the property, and how is its quality? The following components will be qualitatively classified to derive an overall assessment of the equipment standard:

• building shell
• façade
• roof
• floor plan
• daylighting
• doors
• windows
• floors
• bathroom
• restroom
• heating
• electrical wiring
• internet access
• garden
• sidewalk
• parking space

At SUKUUK, you can view an independent appraisal containing an overall assessment of the property that considers the listed criteria.

5. Reasonable purchase price

The task of public expert committees is to evaluate purchase contracts in a transparent manner. The results from the collection of purchase prices is published anonymously in the real estate market report and in the land value map. These evaluations help determine the appropriate market value of the real estate. In the SUKUUK application service, you can enter the key data for your property free of charge, and you will receive quick feedback on its approximate market value. This value is based on a statistical survey of similar properties in comparable locations.

6. Strong rental yield

The rental yield is the ratio between the annual rent and the purchase price. In metropolitan areas such as Berlin, Hamburg, Dusseldorf, Cologne, Frankfurt, Stuttgart, and Munich, only low rental yields can be achieved on a regular basis. This is due to the high purchase price in relation to the achievable annual rent. Real estate in the top seven locations is ideal for investors who value having a secure investment with a low rental yield. Outside from the top seven locations, up to double-digit rental yields per year can be achieved.

7. Creditworthy tenant

For you to enjoy your real estate investment for a long time, you must make sure that your tenant has an orderly financial situation. To get an idea of this, check the following points:

• credit score report
• their last three salary slips

A handful of providers can provide credit reports. Schufa is the best-known provider in Germany.

SUKUUK takes over the complex task of checking creditworthiness for you. Here, the creditworthiness of the users of residential properties is carefully checked in advance. In this way, real estate investment forms a strong and sustainable foundation for one’s future financial security.

How can you easily and efficiently implement these seven criteria for yourself?

With these seven points, you have a good basis for distinguishing between the multitude of residential real estate offers. In order to properly assess all these points, you must dedicate a lot of time to each investment and have some experience in the assessment process. Furthermore, a thick wallet is required if you don’t want to limit yourself to just one property.

The following table provides a comparison between SUKUUK and a direct investment in real estate.

In a typical example calculation, the savings in acquisition costs is about 10% and the annual savings in operating costs is about 10%. This amount can vary depending on the object criteria.