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What is Buy to Let (Rent Out) Investment and How Does it Work?

Because of sinking and historically low interest rates and a volatile stock market, buy to let properties have become very interesting investment objects. Due to growing demand for rental properties in Germany, renting out properties has become a great source of income. In addition, a strong German economy and growth in service jobs in urban cities including Berlin, Frankfurt, and Munich has resulted in rent increases in the city centers. You can find comprehensive overview of property price developments in German cities with LoanLink, a German mortgage advisor.

A Buy to Let Mortgage is designed for a landlord to buy a property and then rent it out to external tenants, allowing the landlord to help meet the mortgage payment with the use of the rental payment amount. LoanLink can advise and identify the best mortgage options.

What Taxes Do I need to Pay for Rental Income?

As the owner of the property, you will have to pay taxes on the rental income per German law. In Germany, the interest on mortgages for owner-occupied properties isn't tax-deductible. However, if you have properties for rent in Germany or if you invest in a buy-to-let object, you can offset any expenses resulting from rental income against your taxable income from rent. This includes mortgage expenses as well as costs for maintenance, improvements and repairs.

Rental income is subject to the standard progressive income tax rates for individuals and couples as well as the 5.5% solidarity surcharge.



Does the Timing of a Sale Impact my Tax Burden?

Foreign property owners that sell their property within 10 years are subject to capital gains tax. These capital gains are included in the annual income of the property owner in the same year the property was sold.

For example, if a property owner sells at a profit after 9 years, she will be subject to a tax rate of 42%. If the same owner held the property for at least 10 years, then she would not be subject to any tax. For more information on the tax specifics of Buy to Let, see the attached article here.

What are some Tips and Tricks for Buy to Let Investors?

To turn a buy to let mortgage into a profitable investment, it should be rented out appropriately. As the property owner, the design of the rental agreement is your responsibility.

  • Minimum tenancies can be very long
  • When creating the lease agreement, ensure it contains all the relevant details
  • In most cases, tenancies don't have a specified duration

What Rules Relate to Setting a Rent Amount for the Property?

The rent amount is specified in the rental contract. In case of a new contract, it can be negotiated freely (except for rent-controlled apartments) and can be above the customary comparative rent.

However, the rent shouldn't be more than 20 percent above the average rent. Later increases in case of existing tenancies are tied to strict legal regulations and the customary comparative rent as an upper limit. For more specifics on rent amounts, and designing the rental contract, please see this blog post.

Article contributed by LoanLink. LoanLink is a pioneer in mortgage brokerage for non-native property buyers in Germany.