Apartment #2 – Real Estate Analysis

Here is another potential real estate deal that I am currently looking at. If you haven’t seen the first potential transaction that I analyzed you can check it out here.

Let me show you my thoughts about this asset. If you have any questions, please feel free to ask. I am especially interested to hear what you think about this deal and what your line of thinking is when analyzing a potential real estate investment.

So, let’s start with a quick run-down on the potential transaction. We are looking at a very small apartment, only 32 sqm of rental area in a suburb of a German B/C city. The apartment is currently rented which is a good thing because…

  • there is an existing cash flow from day 1 potentially and
  • I somehow know that this apartment has some demand.

    Apartment #2
    Apartment #2

Truth is that we need to check the rental contract to see whether the rent is in line with the market, or the apartment is under rented. Well, I guess it is under rented ;). For the avid reader, tenants have a quite strong standing in Germany, which means it is fairly difficult to terminate a lease contract.

What more to say…? The apartment is in a small to medium-sized apartment complex. I assume there are approximately 25-30 apartments in the building. Unfortunately the building is quite old (from 1972). My assumption is that at least some Capex will occur in the near future (that’s a bummer).

Micro location

The apartment is in a suburb of Ulm, a city with approximately 120k inhabitants. You can read more about Ulm here. 2 fun facts about Ulm: First, Ulm has the tallest church tower in the world with 161.5m and second, it is the birthplace of Albert Einstein.

So, Ulm definitely has enough economic strength to generate almost no residential vacancy. Even more, it is a highly attractive city. Especially the southern part of Germany (state of Baden-Württemberg and the state of Bavaria) tend to be highly attractive for companies and people.

Now, onto the details. We are talking about a suburb. The suburb is located slightly over 5km from Ulm’s city centre (the Ulmer Münster). That sounds quite good in my opinion. On the one hand the apartment is not too far away from the centre, on the other hand the location doesn’t suffer from the high prices paid in the city centre.

Who is this apartment for?

I can hear you asking me who the f**k is going to rent such a tiny apartment. Fair question to be honest. My best guess is that either a student, or someone who is single rents such an apartment. From my perspective, a student entering university might be quite happy about an own apartment. It is common to share a flat and everyone has his or her own room. This might be the cheapest way to rent. Especially if a student gets a room in the state-owned student apartments (subsidized, affordable housing). The second cheapest way is probably to share a flat followed by living in an own small apartment. The (not so) recent trend of purpose-built student accommodations usually offers a slightly more expensive experience. Companies charge an all-in rent and a furnished room with amenities.

Now that we analyzed two different potential tenant groups are

  • students and
  • singles.

I try to assess whether this particular apartment would be a good choice for them. Let’s start with students. Their top priority is to get to the university quickly, followed by night life (or the other way round!?). Let’s assess different ways of transportation:

  • by car c. 5km. Depending on traffic it will take between 12min and 30min
  • by bike c. 3.5km and will take c. 12min. But beware, there is a steep hill in between…
  • by public transport it will take c. 21min. Probably the most used way of transportation takes the longest. Yes true and this is because there is no bus stop near the apartment. Our student would need to walk for 10-15min to the next bus stop.

Our second potential tenant group is single but might already be working full-time. I assume that he/she owns a car and thus is interested to have a parking spot. Luckily the apartment comes with underground parking (is this actually a good or bad thing? We come back to that later).

In summary, I think both groups can benefit from the location. The apartment is near the university (between 3-5km) and close to the city centre (c. 5km). It even offers underground parking. Unfortunately there is no direct public transport nearby.

Facts & Figures

Now to the asset itself. Here are some key facts

  • 1 room apartment, 32 sqm
  • Purchase price € 69,000
  • Built 1972
  • Warm rent of € 340 per month (cold rent c. € 240 per month)
  • First floor with balcony and lift
  • Kitchenette

What do you say about these features? Does the apartment qualify for yourself?

Judging just from the pictures the apartment looks quite ok. Some things are in need of a renovation, some things would be ok for me.

Now it’s time to look at the nuts and bolts of such a transaction. In the picture you can see some KPIs of the transaction.

Key performance indicators for apartment deal #2
Key performance indicators for apartment deal #2
  • Purchase price gross tells me the purchase price of € 69,000 including ancillary costs. I assume to pay 12.2% of ancillary costs. This number seems quite high, however in Germany it is quite common to pay around 8-15%. The ancillary costs include real estate transfer tax (different for each state. Here it is 5.0%), costs for notary & land registry, costs for the broker and financing costs.
  • The purchase price per sqm is c. € 2,500. This is a very important figure for me because it tells me how expensive each sqm of rental area is. Additionally this is a very easy to calculate and almost always available number. By comparing different but similar transactions I can tell that € 2,500 is an OK-ish value. In the city centre you easily pay € 4,000+. A really promising value would be below € 2,000.
  • The purchase price multiple compares the purchase price to the annual net cold rent. Here, 22.4x is really high. This can have 2 reasons. The first one is that we overpay, the second one is that we are under rented (actually the third one would be a mixture of both). I personally think the biggest driver is that the current rent is below market.
  • Yield net tells me the ratio between the net operating income (NOI) and the purchase price. Here, 3.6% as a result depends heavily on the operating assumptions.
  • IRR should be clear – basically the interest rate that sets my present values to zero
  • Profit is just the number that I would get when I sell the apartment
  • Multiple refers to the equity multiple. Here it tells us that we get € 1.71 for every € 1.00 that we invested once we sell the apartment.
  • Yield day 1 refers to the average yield that I receive over time. It is measured by calculating the ratio of the NOI to the equity invested.

What do you think about the KPIs of the apartment? Would you still be interested in it and dive into the due diligence or would you just put it aside and look for the next one? If so, what are your reasons?

In the next episode I am going to show you how my actual calculations look like. I use a 10 year forecast model that I built from scratch in Excel.





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