Buying investment property in Germany

In the next article I will explain the procedure of purchasing an investment property in Germany (this procedure is different from purchasing a residential apartment because in this procedure you will have to calculate the future profit you will allegedly earn from the property, since you do not intend to live there).

Before we dive into the purchase procedure, it should be noted that housing prices have risen significantly in Germany in general and in Berlin in particular in recent years. In order to understand the price increase caused by inflation, I recommend you read my following article - Inflation.

There are two main advantages in purchasing an investment property in Germany. The first advantage is that it is the strongest economy in Europe and therefore the housing market is considered a very stable market.

A second advantage lies in the fact that Germany is not a 100% capitalist country and this is the reason that there is concern for the residents in all aspects including your rights as a property tenant (in case you rent a property, you sign a lease and therefore the landlord cannot evict you from the apartment without notice, because it really depends on the contract you signed).?

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Beyond that, the well-known term Flipping Houses, which exists mainly in the United States, does not exist in Germany. The meaning of this term is purchasing an investment property at a certain price, then renovating that property and improving it, and then selling that property at a significant profit from the purchase price. For this to happen, this procedure may take several years.

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The law in Germany states that if you have purchased any property, it will be quite difficult for you to perform Flipping Houses due to the fact that if you sell the property before 10 years have passed from the date of its purchase, you will have to pay a tax of 25% of the price of the property and then you will lose a significant amount during the sale.?

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Therefore, the German market is very stable in terms of housing prices, which by the way is a huge advantage because the prices are still fair compared to other countries. Remember that the German economy combines capitalism and socialism and this is actually excellent because it creates a balance and prevents a gap between the rich and the poor (this model is similar to the Scandinavian model).

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Therefore, due to this fact, you will be able to purchase an investment property (where there is already a tenant) at a very attractive price.

For example, in case you are interested in purchasing an empty residential apartment with the size of 60 square meters with two rooms (without a tenant living in it) you will have to pay an amount of 327000€ approximately. An investment property with the same size where a tenant already lives there, will cost you approximately 163000€ (This is a huge advantage for you as a property buyer).

In general,?the German mentality advocates equality and responsibility towards all residents and this is one of the reasons why many investors come to Germany.?Furthermore, since this is an economy with socialist characteristics, many German residents rent an apartment and do not buy an apartment, therefore those investors know that there will be a constant demand for investment properties, especially in the main cities in Germany.

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One of the biggest advantages in Germany as a tenant?(someone who rents an apartment) is having an old renting lease which actually does not allow the landlord to evict you except under certain criteria (I will explain the two main criteria in just a moment).

In addition, there is also an alert for your eviction as a tenant (in case you have an old rental lease as an apartment tenant and you are already living in the apartment more than 8 years). There are cases where the landlord can evict you within 9 months after the notice and there are some cases where he will have to wait at least 10 years.

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The 10 years case - Let's say that you are a tenant living in a certain apartment and at some point, the landlord of the apartment decides to divide it into several divisions (with a notary's approval of course). There must be a declaration of division for the property, especially If individual residential units of a property are to be sold, since it is necessary to prepare the division declaration for a house before the sale. This procedure is called Teilungserkl?rung. In case the tenant has moved into the apartment before the “Teilungserkl?rung”, the tenant is protected, which enables them to stay for 10 years.

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And here are the two main criteria for the evacuation of a tenant. These actually two main specific reasons when you will?be?able to?evacuate the tenant living in the apartment:

The first reason is that you decided to live in the apartment yourself for a specific reason (so of course it is no longer an investment apartment but a residential apartment).

The second reason is that the tenant who lives in the apartment does not pay you the rent and then after two months of non-payment of the rent you can initiate legal proceedings against him which will last many months, will cost you a lot of money and will also cause you a headache but in the end you will be able to evict the tenant for non-payment of the rent.?Other than that, tenants who possess unlimited renting leases are protected from evacuation.

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Therefore, this is one of the biggest secrets that you should remember when you go on and purchase an investment property in Germany. So you as a buyer save a significant amount by buying an investment property with a tenant who lives there and you are still considered the owner of the property. And guess what? In case the tenant decides to leave the apartment at any point, the apartment will be empty so you will be able to find a new tenant and rent it out with a higher price.?

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How high? For the purpose of the matter, instead of a monthly amount of 250€ (with an existing tenant), you will have an option to rent it out to a new tenant for more than 1150€ (according to mietspiegeltabelle). Once again, it is important to remember, only when the existing tenant decides to leave the apartment of his own accord, or (god forbid) passes away, you can search for a new tenant in his place and rent to the new tenant at the higher price that matches the market.

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What's the catch? As I mentioned, you will not be able to evict the tenant except for the two main reasons I have mentioned before and in addition, the amount of rent you will receive will be significantly lower than that of an empty apartment that you purchase and rent to a new tenant.

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It is important to remember that, despite the low monthly rent received from the tenant due to the fact that it is an existing tenant in an investment property, the rent can still be increased every three years by 15%, that is, for the purpose of this matter, if you have purchased an investment property and the current monthly rent that you receive each month is 250€ Netto (net profit).

After a period of three years, you will be able to increase this rent for the tenant in the investment property by 15% and then your monthly rent will be 287.5€ Netto (an increase of 37.5€). You can make another increase in the rent by 15% every three years and therefore, this is an advantage for you as the property's owner.

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Another huge advantage of buying an investment property with an existing tenant, is that in any case the value of the property will increase over the years, it will be owned by you, so you will be able to sell it after a few years at a higher market price if you decide.?

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This idea of a reduced price of an apartment with an existing tenant is an amazing idea in my opinion because it is good for both the tenant and the buyer. The tenant still pays a reduced rental price while the buyer still receives rent and the next time he wants to purchase an investment property with a tenant, he will not have to spend an astronomical price on the purchase asset (he can still sticks with this property concept and find a new investment property with a low price).

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In addition, you need?to remember that when you are searching for an investment property in Berlin there are significant price differences in the different areas. Investment properties inside the Ring area will be more expensive. And if you don't have enough budget to purchase an investment property in Berlin, you can also search for an investment property in other German cities such as Leipzig, Hamburg, Hanover, etc.)

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In case you are searching to buy a property in Germany, you can use the following platforms:

immowelt ,mcmakler, planethome, homeday, immobilienscout24, and my.homeday?(all of them German platforms of course)

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Before the purchase, I would suggest that you will create an excel file with the following criteria:

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• Living space (square meters) - What is the total size of the apartment per square meters?
• Company - The name of the real estate company/agency
• Contact name – The name of the real estate agent
• Phone number - The real estate agent's phone number
• Email - The real estate agent's email address
• Total price - The total price of the property (not the advertised price on the ad).?

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These following sections will be added to the advertising price:

• 6% Grunderwerbssteuer (property transfer tax) -?from the advertisement price

This amount will be transferred to the Finanzamt, more info about this institute you can find in my next article - Finanzamt

• 2.94 % Maklerprovision (broker commission) -?from the advertisement price
• 1.5 % Notarkosten (notary commission) -?from the advertisement price

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Keep in mind that these percentages can vary slightly (depending on the real estate agency and the notary).

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For example, an investment apartment with its initial cost (cold price, advertising price) costs 140000€. 6% of this price is 8400€, 2.94% of this price is 4116€?and 1.5% of this price is 2100€, so the total and final price of the property is 154616€

Therefore, you will usually have to add to the advertising price an additional amount estimated at 15000€ (approximately) and after that being calculated that will be the final price for your investment property.

• Number of tenants - How many tenants are living in the apartment? When there is more than one tenant in an apartment (for example a married couple) there is a certain advantage for the owner of the apartment because then the couple will be able to share the rent payment, and also this usually indicates a certain financial stability and responsibility on the part of the tenants
• Age of tenants - What is the age range of the tenants? The older the tenants, this is a better situation because then the term of the rental at a low price will be shorter (they will not rent for a large number of years)
• Keller (basement) included - Does the apartment also include a basement for storing things (most apartments in Germany have a basement, which is an advantage because it is an additional source of storage for the tenant)
• Location - Where exactly is the apartment located? Is it located within the ring area? Is it close to an U Bahn or S Bahn station? And if not, what is the distance from it to an U Bahn station? Is there a bus stop near the apartment or a tram station? Access to public transportation is critical due to the fact that it allows a quick way to get to the apartment.
• Monthly renting income net - What is the net monthly profit left for you as the owner of the property (the tenant's monthly rent payment is higher, but of course you must deduct the amount from other payments such as maintenance payments and other additional payments, so you as the owner of the property, will be left with a reduced amount)
• Kaution (deposit) - Do you have to pay a reservation fee in case you would like to purchase the apartment and if so what is the amount of the reservation fee? The amount of the reservation fee actually guarantees that the apartment will be sold only to you and not to anyone else.
• Renovation - What is the situation of the apartment? Does it need renovation? And if so, what is the amount you will have to pay for that renovation?

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It is important to remember that today in most cases there is no need for a reservation fee (in the past it was customary today no longer) and as in most cases there is no need for the services of a lawyer for the purchase (translation from German to English) because most notaries provide translation services themselves.

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Three more important tips:

The first tip is that you must remember that there is an exponential increase in prices regarding housing all over the world, so if you have the opportunity to purchase an apartment for investment, don't wait, make the purchase as soon as possible.

The second tip, if you do not have the amount to buy an apartment, do not take a loan/mortgage from the bank because in most cases you will pay compound interest which you will have to pay for many years, remember that the bank always profits in these cases at your expense. Therefore, in this case wait several months or years and only then when you have the entire amount make the purchase.

The third tip is even when you have the entire amount to purchase a property, it is better for you to purchase a cheaper investment property and leave 20K -30K amount aside because most likely over the years you will have to spend additional amounts on the property's maintenance and therefore you still have to take expenses for this matter or other emergency cases.

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And one last thing, remember that even after you have attended the notary's meeting, you will usually have to wait a few weeks before you can make the financial transfers for the purchase because the notary has to prepare all the documents for you so in total it is a process of several weeks.

Once you'll complete the purchase of the investment property the Hausverwaltung (Property management agency, that is responsible for property) should contact you and send you a congratulation letter for the purchase together with a power of attorney contract where they would actually charge an amount directly from your bank account every month (SEPA bank transfer). This amount includes a small management fee for the SEPA transfer each month (the fees from you to them the actual management fee and from the tenant to you, so that at the end you will have a positive financial profit for each month.