Note: The following article is for general guidance only. For binding advice, we strongly recommend that you consult an expert. We will be happy to put you in touch with the right experts in our region.
Why does a capital investment protect against inflation?
In times of economic uncertainty and rising inflation, many investors are asking themselves how they can protect their assets in the long term. The answer lies in smart capital investment. Tangible assets such as property in particular offer protection against loss of purchasing power and are considered a safe investment. But why exactly does a capital investment protect against inflation, and what advantages does it offer over other investment options?
Increase in value instead of loss of purchasing power
Inflation means that money loses value - what costs 100,000 euros today may cost 120,000 euros or more in ten years' time. While cash and fixed-interest investments are devalued by inflation, the value of tangible assets increases with inflation. Property prices and rents adjust to the rising cost of living in the long term.
A practical example: a flat bought today for 500,000 euros could be worth significantly more in 20 years due to inflation. At the same time, the rental income grows in line with inflation, so that not only is the capital protected, but an inflation-proof income is also generated.
Stable income from rental income
In addition to the increase in value, property offers a continuous source of income. Rental agreements can often be equipped with index clauses that allow them to be adjusted to inflation. This means that rental income increases while loan instalments remain constant with a long-term fixed interest rate - a clear advantage for investors.
One example:
- Purchase price of the property: 300,000 euros
- Monthly rental income: 1,200 euros
- After ten years of inflation: rent rises to 1,500 euros
- Advantage: the loan remains the same, the return increases
As a result, the property not only retains its value, but also generates continuously increasing income.
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What advantages does a property offer as an investment compared to other forms of investment?
Security and long-term stability
Compared to shares or bonds, tangible assets such as property offer long-term security. While the stock market is subject to strong fluctuations, property is relatively stable in value. Even in times of crisis, they retain their value or increase in value in the long term.
Example: While the 2008 financial crisis caused stock markets to plummet, property prices in many regions remained stable or continued to rise.
Another advantage: the tangible value remains - even if the currency fluctuates or financial markets are unstable, a property remains a tangible and protected investment.
Tax advantages and leverage effect through debt capital
Property buyers benefit from numerous tax advantages:
- Depreciation on buildings reduces the tax burden.
- Interest on financing is often tax-deductible.
- In many cases, rental yields are optimised through tax incentives.
Another advantage is that the possibility of debt financing means that a high return can be achieved with a comparatively low equity investment. Through the so-called Leverage principle the return on the equity invested is often multiplied.
Example:
- Equity capital: 50,000 euros
- Borrowed capital: 250,000 euros
- Total investment: 300,000 euros
- Increase in value of 10 %: property now worth 330,000 euros
- Return on equity: 60 % (30,000 euros profit on 50,000 euros equity)
This principle makes property particularly attractive for investors who want to work with limited equity.
Which properties are suitable as investments?
Not every property is automatically a good investment. The decisive factors are location, type of use, potential for value appreciation and the possibility of secure letting. Particularly interesting are
- Residential property - Traditional rental flats or apartment blocks offer stable long-term income and benefit from high demand.
- Commercial property - Office and retail space can generate high returns, but harbour a higher risk due to economic fluctuations.
- Listed and older properties - Historic buildings offer tax advantages and great opportunities for value appreciation.
- Holiday properties as a capital investment - Holiday properties can generate high returns, especially in popular holiday destinations, but require professional management.
- Micro-apartments and student flats - Highly sought-after in major cities and often associated with above-average rental yields.
Choosing the right property depends on your own goals: Those looking for long-term stability are well advised to invest in residential property. If you are looking for higher returns and are prepared to take on more risk, you can invest in holiday or commercial property.
Financing of a capital investment
Financing is a decisive factor for the success of a capital investment. The right strategy can not only increase profitability, but also minimise risk. Here are the most important types of financing and aspects that investors should consider:
- Equity vs. debt capital - Depending on your financial situation, a property can be financed entirely from your own funds or via a loan. External financing with a low interest rate can increase the return on equity.
- Interest rate level and amortisation - Choosing the right financing depends heavily on current interest rates. A long fixed interest rate can be worthwhile in times of rising interest rates, while flexible loans are advantageous when interest rates are falling.
- Tax advantages - Financing a capital investment can bring tax advantages, e.g. through the deductibility of interest or depreciation.
- Rental income for financing - The property should be calculated in such a way that the rental income ideally covers or exceeds the loan instalments.
A well thought-out financing concept helps to build up long-term assets and minimise financial risks. If you are unsure, you can seek advice from a financial advisor or property expert.
Conclusion: property as an investment is a long-term hedge against inflation
If you want to protect your assets against inflation, you should invest in real assets. Especially Property as a capital investment offer sustainable protection against inflation, as they increase in value over the long term and generate regular income.
- Protection against loss of purchasing power through appreciation in value
- Regular income through rent
- Long-term security through real assets
- Tax advantages and External financing options
Especially in times of economic uncertainty, a smart investment is the key to financial security. If you invest early, you can benefit from long-term capital appreciation and maintain your purchasing power.
Take advantage of our expertise and let us advise you individually so that you can make the best choice for your property and benefit from the positive market development.
