The German real estate market
very attractive for investors looking for real estate exposure and low-risk yield. It is particularly well suited to absentee landlords as most properties are condominium style units, where the property is managed professionally. Rather unusual is the fact that the costs are generally passed on to the tenants.
This guide is meant as an overview of what to look for; as always please ensure due diligence.
Location Location Location!!!
This truism holds true anywhere you are, no matter where you buy. Basically, you want to buy a property in a location with a good supply of renters. East Germany may be really cheap and the yields may be huge, but if you aren’t able to find a willing tenant you’re going to struggle.
What is an eigentumswohnung?
When you buy an “eigentumswohnung” (an apartment rather than a house), what you are really buying is what we Americans (or Canadians) would call a Condo (condominium); meaning, you are buying an apartment in which the common elements are managed on your behalf for a fee, by a company. This fee also includes a reserve for major repairs and upgrades.
Majority of the costs are passed on to tenants
“Nebenkosten” or monthly fees covers more than just the utilities, it covers all aspects of maintaining the building. Normally these costs should be absorbed by the landlord, but in Germany, they are passed on to the tenant. On the annual bill will be two sections – “umlagefahige kosten” and “nicht umlagefahige kosten”. The first is passed on to the tenant along with property taxes, the latter is what you pay.
For example, for one property we bought, the Wohngeld or NK, was €165 per month, out of which €150 was passed on to the tenants. I viewed another property where the NK was €300 but the “nicht umlagefahige kosten” was €150, due to a special type of assessment. I didn’t look into it any further as the property would have been cash flow negative.
Another extremely important point to note would be better explained by my experience: I viewed a very attractive property with an excellent location, good monthly rental fee, and a below-market price. However, a closer inspection revealed they had no money in the reserve; moreover, they had borrowed money to do repairs. I had to disregard this property.
Once you’ve found some suitable properties don’t forget the universal rule of Real Estate comes in. Location Location Location!
Germany is a low inflation environment
Generally speaking, you are not allowed to raise the rent above the local average. Check Scout 24, to get an idea of what the local rental fees are. If the property you’re interested in is below the local average you shouldn’t have a problem raising the rent. However, if it’s above the local average, you may have to wait; and if this is a concern for you, your best bet would be to inquire at the Landlord Verein.
Kapitalanlage or Yield
Basically, this means annual rent divided by the price. Personally, I look for properties in the 5% range. I viewed two properties with an insane 8-9% percent yield, good location, a well-run building, good reserves, etc; but the problem was both properties needed some work. My lack of German and not living local meant it would have been a huge pain to manage them. Also, my German-speaking wife was unwilling to take on the job, so reluctantly I had to pass on both properties.
I can’t overemphasize the point that you need to speak with your tax accountant before making any monetary commitments. I’ve seen far too many people make investment decisions without understanding the tax ramifications!
Gross vs Net
If you are a German resident, any profits will be taxed at your marginal tax rate. Think of this as if you just got a pay raise of a 100€. You might only get 60€ of that in your pay. Same with extra income like this, you owe a portion of it to the government.
Secondly, if you earn more than €395 this number may be a bit out of date you will be liable to pay health care costs, which are currently €160 per month. However, any losses will be deducted against your current income. Fortunately, real estate is one of the few businesses that never needs to be profitable.
Superficial losses can be carried over to regular income
Oh, I get weak-kneed when I think about this and very few people appreciate the significance of this; even when they do, they usually construe it as a pretext to spend money.
Basically, this means regular everyday expenses can be deducted against regular income, such as the well-known home office expenses. The equivalent of the above for real estate businesses would be travel costs. To illustrate this, we live in Munich, with family and friends in Frankfurt; so several times a year we travel up to see them. Previously, when I didn’t own any apartments, these were costs that I had to bear from my pocket; now that I own properties, those costs now become tax deductible.
Another advantage is you can make trips to research and compare markets or view properties. For example, I’ve always wanted to visit Berlin to view a few properties; such a trip will be a tax deductible expense for me. Also, we’ve got friends in Spain, same deal – Tax Deductible Holidays; I love it!
This is a nice little gift from the German government to landlords. Roughly speaking, you can deduct 1% of the property price or about €1000 per €100,000 of value. Your Steuerbreater will know the exact numbers. I’m not sure if this applies to non-resident owners or not.
No Capital Cost Recapture (CCR)
Capital Cost recapture is a nasty element of the tax code. Essentially, it means if you depreciate a property and subsequently sell it, the government will add back the depreciation and tax you on it. One needs to tread very carefully in this regard. My understanding is that after 10 years this does not apply, but you need to confirm this with your Steuerbreater.
No Capital Gains Tax if the unit is held for more than 10 years – which is Very Nice!
You declare the income in Germany not in your country of residence (EU only) For more information on this see http://bit.ly/1JrYJXU
Managing the Property
Hire a Makler
My recommendation is to hire a Makler. I know this won’t be popular, but as a landlord, a Makler is your best friend. They have a fiduciary duty to look out for the owner’s best interest, not the tenant. The job of a Makler is to ensure that they the find a suitable tenant for the property, manage and manage handovers from one tenant to another. While this is not pleasant for the tenant, the amount of money the Makler makes isn’t much when compared to the amount of work involved (viewings emailing etc). When our last tenants moved out the whole process was handled by email and a few phone calls, this included getting some needed repairs done etc.