Analysis of a real estate investment #1


This article shows how to quickly evaluate a residential real estate project.

The goal is to come to the conclusion whether we should contact the broker for more information or whether we should look at other potential transactions.

The apartment shown in this example is currently (as of July 2017) live on, a highly frequented platform where people can search for real estate (not only for purchasing, but also for renting).

Pictures are shown for a better understanding.

Key facts

  • 1 bedroom apartment with 28 sqm
  • Purchase price: € 52.000
  • Built in 1970 within a 22 storey high-rise
  • apparently the apartment is renovated
  • underground parking spot for an additional € 13.000
  • location: in walking distance to the city centre (c. 15min)

Structure of the analysis

  1. Macro location: Research about the macrolocation gives answers to the questions such as (i) in which city the apartment is located or (ii) how the demographic outlook for the city is. In the end we want to know whether the city is attractive for people. The rationale is that a strong economy and an attractive city attract people that in turn need space to live. Demand and supply describe the residential market in a city. If demand for residential space is high, rents can be increased.
  2. Micro location: This describes the location of the asset itself and the quality of the direct surrounding. A good residential area is usually close to public transport and offers public institutions such as kindergartens, schools, doctors, etc.
  3. Financial analysis: The figures must make sense. We cannot trust our gut feeling about a particular investment. Besides the qualitative research of the macro- and micro location, the quantitative research is the core of any investment decision.

The three parts of the analysis form the basic structure to come to an early investment decision. If the result is to go ahead with the investment, further research needs to be conducted such as a detailed financial, tax, legal and technical due diligence.

Macro location

The apartment is located in Ulm, Germany, a mid-sized city in the southern part of Germany with c. 120.000 inhabitants. Ulm has a good economic profile with several large companies located in and around Ulm such as a Daimler research centre, Deutsche Telekom, Continental AG or EADS. Furthermore the University of Ulm with over 9.000 students ensures a constant stream of people moving to Ulm.

The southern part of Germany is quite known for its economy, which might be better than in the northern part of the country.

Demography: Increasing number of residents between 2011 and 2015 (c. +1.0% CAGR). An increasing population is always a positive sign and an indicator for an attractive city. The reason is usually a mixture of a good and strong economy with lots of jobs and a city worth living with a good infrastructure (kindergartens, schools, leisure opportunities around the city etc.).

We can look even more closely to the demographics. 4 forces usually drive the number of residents living in a city:

  1. Birth
  2. Death
  3. In-Migration
  4. Out-Migration

Assuming that the number of births and deaths offsets each other, the interesting part is the difference between in-migration and out-migration. If in-migration is higher than out-migration, the number of residents in a city is increasing.

Micro location

The surrounding: The asset is very close to the city-centre, which is definitely a plus. Not many people can literally walk to go shopping. Connections to the public transport are directly in front of the building. If we think of a possible tenant, we can easily access more or less every part of the city by public transport. The downside is that the high-rise sits next to a big street with 5 lanes. Although it is still close to the city and cars are only allowed to drive up to 50 km/h, noise pollution will be inevitable.

The Building: The asset is located within a high-rise tower with 22 storeys. The apartment is on the 18th floor. A good view across the city is guaranteed and with good weather you might be able to even see to the Alps.

The fact that the apartment is located within a high-rise tower however raises questions. These buildings are usually a bit harder to maintain that a usual 2-3 storey building. There are not only elevators, which are usually expensive to maintain, but also many technical components, which have to be built more robust. This fact is definitely a negative point.

The asset also hosts some 40 small retails shops on the ground floor. Most of them are in the food business (small Kebab stores are pretty famous here), but there is also a small travel agency and some betting shops. This information can either be good or bad news (spoiler: it’s bad news in this case).

Financial analysis


General: All blue cells indicate inputs. The cash flow is calculated on a 10 year basis. This means we buy the apartment, hold it for 10 years and sell it at the end of year 10. The respective cash flows are then used to calculate our returns.

Acquisition: The purchase price is € 52.000. Additionally a parking space can be bought for € 13.000. This sums to a total of € 65.000.

Ancillary costs are pretty straightforward. I use 1% for notary and the land register and another 1% for financing costs.


Net cold rent: In my opinion a conservative rent amount to € 300 per month. This is definitely on the lower end, especially when considering that the apartment is almost completely renovated. The parking spot can be rented for an additional € 20 each month.

Maintenance, Asset Management and Bad debt: I use standard assumptions. For maintenance I go with € 12 per sqm per year, which is € 1 per sqm per month. The asset management fee is € 30 each month. Bad debt is assumed to be 5%. All assumptions are pretty conservative. There is definitely room for improvement and I highly doubt that operating this apartment is so expensive. But we want to see whether this transaction would work out even with conservative numbers.

Renovations: Fact is that the apartment is newly renovated, thus I assume no extra costs will occur.

Tax: For simplicity, no personal tax on the cash flows is assumed

Financing: The financing section is very rudimentary. I assume a 70% leverage with interest and amortization of each 2.0% p.a.. Debt service is thus a 4% annuity. Why do I use a 70% leverage for now? Actually I try to generate a cash flow after financing of c. € 100 per month (thus € 1.200 p.a.). This cash flow represents a comfortable cushion for any unexpected expenses.

Exit: My exit assumption follows the general pattern: purchase price multiple equals exit price multiple. This basically tells us that the asset neither declines in value, nor increases in value but remains constant over time. Besides the exit price we also have to pay a little fee of c. 1%


The result shows a levered IRR of c. 5.0% and an equity multiple of c. 1.5x. Over a 10 year period and the above mentioned assumptions a profit of c. € 13.800 can be achieved.

Closing remarks

What did I show you? I showed you how to structure a first rough analysis of a real estate investment. In this case we looked at a small apartment.

My questions for you:

  • What do you think about the analysis? Did I miss something big? What would you do differently? Why?
  • Is my calculation correct? How do you calculate your returns?

2 thoughts on “Analysis of a real estate investment #1

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s