Are rental properties attractive investments?

Many private households in Germany take it for granted that rental properties are an attractive investment category for themselves, i.e. for so-called “small landlords” (jargon of the Federal Statistical Office) in terms of returns and risks. We question this truism and come to a different conclusion. It is noticeable in this context that neither science nor the real estate industry publish reli

able figures on the historical returns on equity of private real estate investors.

Almost 60% of the more than 24 million rented apartments in Germany belong to private individuals or "small landlords", as the Federal Statistical Office calls those landlords who only operate the residential property rental business in a modest way - by renting out only one or a few residential units as a non-full-time occupation. The other ten million or so rental apartments are owned by professional and commercial providers, including the largest, Vonovia SE, based in Düsseldorf. Vonovia is a listed real estate company, a member of the DAX index and manages around 500,000 rental apartments, most of which it owns.

estate professional

Such I-make-you-rich messages and books flood the investor market in a flood after a certain asset class has experienced a few above-average years in a row. At the beginning of the 90s it was tax-driven "builder models" in the new federal states, at the end of the 90s it was technology and internet stocks, from 2008 to 2012 it was gold and today it is (again) residential real estate. These get-rich-quick publications and the underlying investments are mainly consumed after the largest part of the boom has already passed and entry takes place at a more expensive and thus also riskier and lower-income level. For late entrants, this risk materialized badly in the first three examples mentioned from the mid-1990s (builder models), from the beginning of 2000 (technology shares) and from the beginning of 2013 (gold).

In view of the high proportion of private landlords in Germany, one could assume that the rental of residential properties by private individuals, i.e. small landlords, is a lucrative business. After all, the four million private real estate investors cannot be wrong. Or maybe yes?

Back to rented residential properties: In the case of apartments and single-family houses, there is always a truly unique property that is therefore outside of the competition. Most properties, however, compete against dozens, hundreds, and sometimes even thousands of other properties and are accordingly traded in a highly competitive market. Business students learn in their undergraduate studies: The price of a good in a functioning market tends towards the price of the cost leader, i.e. the cheapest price on the market. All more expensive providers have to follow the cheapest provider downwards in terms of price, otherwise their goods will not be accepted or not be accepted in full - this is no different on the housing market either. The cost leader dictates the market price, and on the rental housing market these are commercial landlords - not private ones. Why?

Quite simply, commercial landlords have enormous cost advantages due to the much larger volume of their property purchases and property management compared to small private landlords. [1] Therefore, it is they who tend to determine the market price (the rent amount), which everyone has to orientate themselves by. Since markets are constantly changing and cannot be influenced by any small market participant, private landlords can only keep up in this rabbit-hedgehog race if they are satisfied with a lower return than commercial landlords.

With all of the following influencing factors that affect the acquisition costs and running costs of rental properties, large commercial landlords have considerable economic advantages over small landlords. In detail this concerns:

Purchase price / construction price

Brokerage fees



Interest rate

Legal advice (Taxes [2])

I hope this article will help you when anyone think to invest in Real estate. If you want to invest all over the world you should think about New Lahore City and the Park View City

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