Your Guide to Maximizing Returns in the Austrian Residential Market

Austria's real estate market is a vibrant arena offering numerous opportunities for investors. In previous articles we have covered the specific benefits of investing in Vienna, along with other cities in the country with attractive real estate markets. Let's look deeper into different investment strategies that help maximize real estate investment returns.

Understanding Investment Strategies

Before diving into specific tactics, it's important to understand the different types of real estate investments and their associated risks and returns. (Please note that the expected returns for each type of different real estate deal below are indicative and should not be taken as precise measures. Actual returns can vary significantly based on market conditions, property specifics, and other factors.)

• Core Investments: These are low-risk properties with solid fundamentals and value, typically generating steady but lower returns. Think of high-quality, well-maintained apartments in central and other prime locations within Vienna, Salzburg, or other big cities. Expected returns could vary from 2% to 6% annually. Given the investment return, one could quickly estimate the projected years required for an investment to fully repay itself*.
• Core Plus Investments: Slightly riskier than core investments, these properties can increase cash flows through minor strategic improvements, including light renovation, management efficiencies, or by attracting higher quality tenants. They offer moderate returns with slightly higher risk. The expected return ranges between 6% to 10% annually​.
• Value-Add Investments: These involve properties that need significant renovations or repositioning. While riskier, they promise higher returns once improvements are made. Expected returns are between 11% to 15% annually.
• Opportunistic Investments: The highest risk category, these properties may be distressed, typically because of solvency or cash flow issues, or in underdeveloped areas that offer huge upside potential for big returns. Expected return exceeds 15% annually​.

There are several strategies that can boost returns on residential properties in a variety of ways, including leveraging financial resources, engaging in short-term rentals, and many more. Let's take a closer look at the main ones and assign each strategic action to a relevant investment type of deal - from core to opportunistic investments.

Leveraging

Leveraging involves using borrowed capital to increase the potential return on investment (ROI). Here’s the mechanism behind it. An example of leveraging is having €100,000 to invest in real estate. There are two options ahead:

1. Purchase a property worth €100,000.
2. Borrow a mortgage for €400,000 and secure a property deal for €500,000

Assuming the property appreciates by 5% for a year, option one gives a €5,000 return on the investment. For the second option, the equity increases to €125,000 (initial €100,000, plus €25,000 in appreciation). However, to get a more accurate picture of option two, let’s consider a mortgage interest rate of 4%. On a €400,000 mortgage, the annual interest would be €16,000 (4% of €400,000). To calculate the net return, we subtract the mortgage repayment from the appreciation: €25,000 (appreciation) - €16,000 (interest) = €9,000. Finally, calculating the investment return:

In conclusion, the example is an illustration of how the return on investment could be increased from 5% to 9% using leverage. The following are the most important points to consider: ROI = €9000/€100000​ = 9%

• Increased Purchasing Power: By using leverage, one can buy a more expensive property than with cash alone. This allows for greater profitability..
• Interest Rates: Securing favorable interest rates by maintaining a good credit score and exploring the most beneficial loan options is key for successful leverage operations.
• Risk Management: Be mindful of the risks, as leverage goes in both directions. In the same way it increases return, it can amplify losses in a market downturn. Ensuring a solid plan and a comfortable amount of mortgage given the personal financial situation and circumstances is important. Additionally, a rule of thumb is that leverage is beneficial only when the unleveraged expected return on investment is higher than the mortgage rate.

Leverage as a strategy is relevant across all investment types of deals, from Core deals to Value-Add and Opportunistic investments.

Short-Term Rentals

The short-term rental market, particularly in the central locations of cities and tourist-heavy areas like Salzburg and Innsbruck, can be a more profitable option than the long-term rent.

• Higher Income Potential: Short-term rentals often command higher nightly rates compared to long-term leases.
• Flexibility: Rental rates can be adjusted based on demand, maximizing income during peak tourist seasons. Additionally, the property can be used by owners when needed.
• Considerations: Pay attention to local regulations, as those can be limiting to the activity. For example, since July 2024, Vienna has limited homeowners to renting out properties to tourists for a maximum of 90 days per year, aiming to balance the housing market while still supporting local tourism. Moreover, consider all possible costs related to short-term rental operations, such as investment in renovations, platform commissions and cleaning fees, insurance and taxes, maintenance and management charges.