The most successful real estate investor I know is Christoph Kahl of the company Jamestown. The investment volume in terms of real estate this company acquired and sold in the United States over the years adds up to a total of 8.8 billion US-Dollars. Meanwhile, Kahl dissolved all letting funds, and his investors collected average returns of 19.7 percent per year. Time and again, Kahle has emphasised that real estate investments all about one thing: raising the net rental income during the time of your ownership of a given property.
So what does this mean for you as investor in Berlin’s real estate market? It means that you should not put your faith solely in the prospect of price rising apace with the purchase price multipliers. It may well be that real estate prices in some of Berlin’s locations still show “upward potential.” After all, why should real estate returns permanently exceed those of other German cities? But the decisive question is whether or not you will succeed in raising the net rental income.
Real estate investors with a long-term horizon will hardly try to achieve this goal through massive rent hikes on short notice – not least because this is unlawful anyway, except to a limited extent. Also, you will not want to antagonise your tenants, but maintain good relations with them, and in this sense you would do yourself a disservice by drastically raising rents.
What you should do, however, is to periodically check whether your apartment building manifest noticeable and unjustified differences in the rent levels of the various apartments. You ought to try to negotiate indexed lease with the tenants that are fair for both parties – because rent increase will neither exceed nor undercut the inflation rate.
Raising rent rates is but one means to leverage your income, though. It is at least as important to take a close look at the cost side of things. Today’s historically low interest rate level offers good opportunities even if the interest rate fixing for your property has not, incidentally, expired just now. If, for instance, you signed a loan agreement with a ten-year interest fixing eight or nine years ago, you should now negotiate a forward loan that will substantially reduce your future interest expenses – and raise your net rental income as a result.
Also, you ought to talk to your housing manager about a success-based remuneration. Most owners of apartment blocks in Germany pay their managers a fixed remuneration, creating very little incentive to do a good job. You should find arrangements that align your interests as owner with those of the manager. To show you what I have in mind, let me quote a provision included in several manager agreements I signed: “If, between January 1 and December 31, the loss of rent undercuts an amount equal to two percent that was calculated as allowance for the risk of rent loss, then the manager shall be paid an amount equal to said two percent minus the actual rent loss as a success premium.” A manager will accept a lower monthly fixed remuneration in return for the prospect of collecting such a bonus after ensuring a low loss in rent revenues.