What International Investors Should Know About The German Real Estate Market

With Achim Amann, CEO of Black Label Properties

Why is an Investment Period of 10 Years Important?

Why is a 10-year investment period so important in Germany? In Germany, private investors don`t have to pay capital gains tax after 10 years. Most of our investors therefore buy a property and rent it out, making sure that the interest rate is fixed for 10 years, and then sell it after that period. If you own more than one property, and a ¬ of our clients do, you just have to make sure that you’re not selling all your properties in the same year so won’t be classified as a professional property investor. If you need tax advice, please feel free to contact us and we will guide you toward the right tax expert and the right international lawyers to make sure that your concerns are being taken care of properly.

Is Investing in Germany a Sound Idea?

Is investing into Germany a good idea? Yes, of course, it is a sound idea – especially when you have cash available, which you don’t need at the moment and you have a long-term perspective. At the moment interest rates are going up and the number of properties for sale is going down, due to the fact that developers are supplying less properties to the market.

Developers have higher costs of construction, which means that the prices will go up. High inflation rates force many investors into real estate. However, German citizens usually have higher taxes to pay than you as an international investor, so they have less cash available for investing. In addition they usually don’t invest into a property for their retirement – which it’s not common to German culture, as it might be within your culture.

So yes, investing in Germany is a good idea for an international investor –  as long as you pick the right city, the right area, and you go for a 10-year fixed mortgage contract with considerably low interest rates. Usually, you get a 3 to 4% interest rate with a substantial deposit, so you have to come up with 30 deposits plus 10 for the transaction fees.

What is The Sales Process for Property in Germany?

Here are eight steps you need to know to sell your property in Germany:

  1. You find a proper agent who gives you a proper valuation based on his experience and a professional software.
  2. If you enter into a contract with the agent you are legally obligated in Germany to pay them a commission after they have sold your property.
  3. The agent will collect the paperwork for you if you don’t have it all available. That includes: energy certificates, measured floor plans, division declaration, minutes of annual owner meetings, land registry files, and many more.
  4. Producing professional brochures, taking professional pictures and a video making sure that everything looks fantastic.
  5. The agent starts marketing the property for you. In our case, we use our database of 40 000 contacts who are searching properties or buyers in Germany. Of course, we also work with many agents, nationwide but also internationally. It is very important for you as a seller that you get the maximum exposure to the market.
  6. We start negotiating the price with prospects who are doing the viewings with us and we preselect the clients and make sure they actually have the finances in place to purchase your property. This step is quite important for everyone involved. It includes the negotiation of the price and the right clients for you.
  7. The most important step: This is when the property is actually being sold – it is the notary appointment with you or your lawyers or us representing you. The buyer goes to the notary and we sign the sales contract, which is the only legally binding paper that you need to know in Germany when you want to sell your property.
  8. Now we make sure that after the buyer has paid the purchase price directly to your bank account, that we hand over the keys properly to the buyer. We ensure that everything is handled properly and you have nothing to worry about after the sale.

What could be the Return on Investment after 5 or 10 Years?

What could be the return after 5, 10 or 20 years? The best returns and the best stories we know are investors who have tripled or quadrupled their investments. However, they have bought property many years ago and they have bought small affordable apartments with appropriate tenants.

After the tenants left, they completely refurbished and then sold the apartment, so if you go back and look at the price development in the past 10 to 20 years, you will see that, especially in Berlin, the property prices have doubled or tripled in the past decade.

That means that we have certain apartments who went up much more and others that remained stable, so for you as an international investor it is important that at the beginning of your investment decision you consider a realistic time period. If you are the classical investor going for the hassle-free 10-year option after which you can sell tax-free, you should go for apartments within an already established neighborhood in Germany – Berlin or in Leipzig or any other city – where you go for a new building in a good area. Yes, you will pay a little bit more for it, but you have much less hassle.

Other investors want quicker returns, maybe after 5 years without doubling or tripling their money. They usually don’t go for a mortgage but come up with cash and aim at rural areas, or the suburbs of Berlin, Leipzig or other areas, where you still find a lot of cheap properties. However, you do need to renovate and refurbish them before selling. Usually this type of investor buys, renovates, rents out properties and then sells them to other investors after a certain number of years.

That’s the other typical investor we are serving. If you do want to know more about any property you want to buy, you want to rent, or maybe check if the rental income is realistic, you can use our online valuation tool getting a result within less than 3 minutes. You will directly get a valuation, both on the rental market and on the sales market and you can always double check if that price range is realistic for you.

Advice on What to Do to Sell German Property Quickly

Do you want to sell your German property quickly? How long does it take to remove the tenant? I am sure you have already realized that it’s very difficult to sell a property with a sitting tenant, so you always give a discount when selling a property with a sitting tenant who pays low rent.

The best option for you is the tenant buying the property from you for a realistic market price. This is basically our job, making sure that they have the opportunity to buy your apartment. We strongly advise to use a local real estate agent, to make sure that they know the rules of how to approach the tenant.

If the tenant doesn’t buy your apartment, the question is how quickly can you sell it and what price you will achieve, so you basically have two options: Either you pay them a compensation, give them some months rental free or provide them with a different accommodation. Once they have left the apartment you can refurbish it for the sale. The entire process usually takes between 3 to 6 or sometimes even up to 9 months. If you don’t want to invest further into your property you have to be realistic and accept the price drop when selling your tenanted apartment.

However, there is a big change between having a newly built or an old building. Usually, with newly built apartments, the tenants have a notice period of between 3 to 6, maybe 9 months, which is a realistic scenario also for property buyers. If it’s a sitting tenant with a low rent in an old apartment, usually they will not leave the apartment which means that you are not selling the apartment to owner-occupiers. You will purely sell it to capital investors and so you need to come up with a realistic yield in order to sell your apartment quickly.

What Mortgage Options Are Available?

Securing a mortgage or securing your property financing in Germany for non German tax payers: Property financing isn’t easy, because you can’t just use any bank or broker. You do actually need an international property broker, who has strong relationships within the German financing industry.

We usually suggest a 10-year fixed mortgage. Interest rates at the moment are about 3,5% and might go up to 5 percent: For you it is important that the realistic rental income will cover your cost of financing. You do need to have a neutral cash flow, because if it is negative you cannot offset the costs from your German income tax. If you only have 1 or up to 3 apartments in Germany, the taxes are very low. So that’s why it is so important to get a good financing in place via a good financial advisor.

How Do Interest Rate Predictions Affect Investors?

Why are interest rate predictions so important for you as an investor? First of all, we consider the interest rates in a six months or a year’s time. Our professional bankers and brokers are telling us, that we should expect rising interest rates for you as an investor. At the moment we’re looking at anything between 3 to 4 %. Those rates might go up to 4 or even 5 percent interest for a German properties.

However that’s pretty much the only negative thing. Everything else is positive: we have strong rents and a lot of Germans must keep renting because they can’t afford buying property. Developers have a big problem at the moment to build apartments because the cost of construction went up substantially since the start of the Ukrainian crisis and also due to supply chain issues in Asia.

So all of these factors are working in your favour as an investor because at the moment the stock of property being produced is declining. If you are projecting over a long period of time – we are looking at 10 years or even 2 decades – your investment should be safe as long as you make sure that the rental income will always cover your interest rates.

Tip

We offer you a free and non-binding valuation of your property. Our real estate experts are specialise in determining the current price of your property. We offer this service to you, as part of your initial consultation – at no additional cost.

info@blp-immobilien.com