Investing in German Property

Updated May 2019

The Essentials you need to know

Simply put: Property can be one of the best investments you can make and at a time of ultra-low mortgage rates. If you are considering to invest in German property our guide can help you all the way.

Know why you want to buy

To make money! Right? Well maybe - but for most people buying property is for a long-term hold. Chances are that you will rent out the property before selling for profit. So knowing what kind of landlord you want to be is a good first step. If for instance you want to rent out short term furnished property to corporate clients then buying in Rostock or Bremen may not be your best choice. Frankfurt, Munich or Dusseldorf would be better for this type of market.

Knowing what you want as a landlord will help you target tenants and choose the right areas to maximize your potential gains.

Research your Market

Before you even start looking for property, research your desired areas first. It stands to reason that an expanding population and infrastructure build-up will be good for most property investors.

Consider if the local transport links, shops, schools and cultural amenities are what your type of renter is looking for and can the area continue to attract more people to live there. A good example for this would be Neu-Isenburg (very near Frankfurt). This is a town that we are personally investing in for all the above reasons.

It is always worth checking with local estate/rental agents as well as online web portals such as Immobilienscout24.de or immowelt.de etc., to help gauge if an area is right for you. Local banks and builders can also be a good source of information.

Location, Location, Location

Success in property investing is very dependent on where you buy. Not only is it about the right country, city, resort area or the right community, it even comes down to buying in the right street. For example if you wanted to buy a short-term furnished rental in Frankfurt you would want to make sure you are no further than a two block walk from an underground station. If you want to buy in one of the best areas Frankfurt it gets reduced to just a handful of streets.

Success in property investing is not a matter of luck but about careful research. Buying the best location for your investing needs will pay dividends.

Check your Finances

Closing costs can be high on German property:

• Notary fees (Notar) = 2%
• Property Purchase Tax (Grunderwerbsteuer) = 3.5-6.5% dependent on area
• Estate Agent fees (Makler) = 3 to 6% plus VAT dependent on area
• These costs are generally paid by the buyer

Most German lenders like to see that you can cover these costs yourself. However 100%plus mortgages are available for domestic purchasers but having these upfront costs tucked away can significantly reduce interest on your mortgage.

(See our mortgage article.)

If you are buying for a rent yield, check out the local property prices against typical rents to help calculate your profit. Always make sure you can carry all the cost should you find the property is empty at any time.

If you are buying an older property consider maintenance and renovation costs such as windows, electric wiring, plumbing etc. that may come up soon. Should you buy a property that is dependent on communal reserves to finance maintenance costs it is very important to check out what savings (Ruecklagen) are shown in the balance sheet (Jahresabrechnung) against upcoming or projected costs.

Get the best Mortgage Deal

It is wise to check out financing options as broadly as possible. Never just settle for what your own bank may offer.

Contact us for a no fee mortgage check-up

Think about how long you need your financing to run and discuss this with an independent mortgage advisor.

100% plus mortgages are available to German based investors and up to 55% to non-domestic (EURO-currency countries only). In most cases there should be no set up or handling fees.

Remember it costs nothing to check out the market and with rates so low it is well worth doing the research.

When Opportunity knocks - open the Door

With interest rates very close to negative for depositors in Germany you will not be the only investor looking for the perfect property.

In cities like Frankfurt, Dusseldorf, Munich etc. demand for good central property is so strong that sellers often look for buyers in a strong financial position and. It is again advisable to have checked your financing first so that you can move quickly.

Do your research first - including speaking with an independent mortgage advisor and local estate/rental agents. If it makes sense, then try to secure the property with a reservation agreement and deposit.

Tax Benefits^*

Any property investor, no matter where in the world, should always seek appropriate qualified tax advice before buying.

Germany offers interesting tax incentives for investors buying residential property to let.

Most input costs can be written down in either the year created or over a number of years against rental income. This can include the interest on a loan attached to the property as well as notary, estate agent or management-fees.

There is also a large incentive in the form of a depreciation write down of 2% pa over 50 years on the purchase price of the physical property (not land) for properties built after 31st December 1924. Buildings built before this date are depreciated at 2.5% pa over 40 years.

Any profit from the sale of a residential investment unit is tax-free provided the property has been held for at least ten years.^*

^*Please Note: FIRST Financial Direct Group OHG are not tax advisors and the above passage should not be taken as construing any form of tax advice. All Investors should seek qualified and appropriate tax advice before investing.

Consider the Negatives

Buying property may not be for everyone. Consider if you can tie up your money long term and what can happen if prices fall or renters are hard to find. You could find yourself having to sue for eviction.

Is your German language up to dealing with German bureaucracy?

Many, but not all, problems can be handled in advance by careful planning. Always do your homework first. Speak with professionals in the market and remember that using a reputable and recommended property agent can really help.

How “hands on” will you be?

Some property investors handle the day to day running of their units themselves but many defer this to an agent.

Should you handle matters yourself remember to increase the rent every time you legally can. You can seriously limit the upside resale price of your property by not doing so, especially if you have a renter who does not wish to move at the time of sale.

If, like many people, you use a property agent make sure that you shop around. What services will you get for what fee? Make sure you get real referrals and that you can get out of a contract easily. Remember that having a good property agent can be a big plus.

German Property Market Perspective

After decades of dormancy property prices of German key locations are have now risen and continue to do so. This is in large part due to very low mortgage rates and an overall disappointment with deposit rates. Germany is attracting a large amount of foreign and domestic investors looking for good quality, high yielding property, especially in areas such as Frankfurt/Rhein-Main and other key cities.

How long Germany will remain in this mode is hard to predict. Many cities are experiencing a sharp increase in population but lack the space for expansion of residential property which is leading to rise of rental and property prices. Interest rates look set to stay low for some time to come, which is good for those wanting to buy and hold in key locations!

© FIRST Financial Direct Group OHG, Neu-Isenburg, 2019

Article contributed by FIRST Financial Direct Group OHG
FIRST Financial Direct Group OHG is an independent mortgage broker & property manager. We specialize in helping English speaking clients set up their mortgage in Germany with access to over 300 German and international lenders.

info@firstfd.de
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