Investing in Real Estate in Germany

Real Estate Investment Model

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Investment in 3 Phases

Purchase

The total investment amount consists of the purchase price and relevant closing costs.

Growth

Over the lifetime of the investment, its value appreciates.

Sale

When the investment is sold after 10 years, no tax is owed on the capital gains.

Phase One: The Purchase

The first step in investment is to purchase an investment property. Let's say you buy your property for €300,000, with closing costs of around €24,000 (8% of the purchase price). That brings your total investment to €324,000. Let's say that 40% of your investment is your own equity--meaning the cash you have saved as a downpayment is €130,000. That means that your opening loan balance is €194,000--a debt of 60%.

Phase Two: Growth of Investment

The second phase of investment is the growth of the property's value. If you have purchased an investment property with the intent to buy to let, you will have ongoing cashflows over the holding period. Meaning, you will have rental income, as well as expenses. It is assumed that rental income covers all expenses that are involved with the property's maintenance, while the loan repyaments increase the amount of equity invested into the property. Every year your investment grows, and increases in value (in the current Berlin market, investment properties have a projected annual growth rate of around 5%). This means that your equity will only increase over the 10 year period, and when you sell on the tenth year, your porperty will now be worth €490,000. While you still have outstanding debt of €150,000, your own equity has grown to €340,000.

Phase Three: Sale of the Property

The third phase of property investment is the sale of the property. When you purchased the property 10 years ago, your opening loan balance was €194,000, and your initial cash investment was €130,000. Now, when it's time to sell, your ending loan balance is €150,000, and the cash you will accrue on the sale is €340,000. The yearly value appreciation of 5% has nearly tripled your equity. Even better, since you waited 10 years to sell, you won't have to pay German capital gains taxes on the property. In this example, your total loan repayment was €44,000, and your total rental surplus was €20,000. Your total capital invested was €142,000, and your total capital gains is €210,000. You multipled your cash by 2.4, giving you a return on equity per annum of 9%.

Cash on Sale €340,000
Ø Capital Invested €142,000
Cash Multiple 2.4x
Return on Equity 9%

Now is the time to profit from one of the fastest growing real estate markets: Berlin.

Legal & Taxes

Legal Aspects

Germany has an airtight legal system, boasting a strong rule of law with highly protective property rights, a strong institutional property registry and streamlined notarization process.
When investing, there is no need to travel to Germany. Power of Attorney (POA) can be granted to an independent solicitor who can exercise the contract and sign in person with the notary.
Investors are not required to have German citizenship or have a German domicile to own property in Germany.
In accordance with the German Constitution, expropriation of property is nearly impossible and the property value will always be compensated.

Taxes

Non-resident tax payers are liable for German income taxes for German real estate.
Rental income is subject to German personal income tax.
Typically, all capital gains on the sale of real estate in Germany are taxed in Germany.
Gains from disposal of real estate held for more than 10 years are not subject to capital gain taxes, this is determined on a country-by-country basis.
There are international double tax treaties entered into by Germany which allocate the right to tax income derived from real estate levied in Germany, to Germany.
Taxable depreciation rates for an investment in real estate range from 2-3% per year.
Interest expense on the loan is tax deductible, and largely offsets rental income.
Other ongoing expenses associated with the investment are tax deductible.

Relevant Rental Laws

Tenant Rights

In Berlin, a landlord can only serve tenants notice that the owner will be moving into the apartment 10 years after the purchase, if the current tenants were occupying the apartment before the ‘Teilungserklärung’ (declaration of division) came into effect. If the current tenants moved in after the ‘Teilungserklärung’ came into effect, they can be served notice in under 10 years. In Leipzig, this period is limited to three years. Only unrented flats can, with certainty, be moved into at will.

Rent Ceiling

A rental ceiling was introduced in Germany in 2015. This means that rents cannot exceed 10% of the local average rent for a current or new tenant, according to the Mietspiegel (rent index). Additionally, rents can only be raised by a cumulative 15% every three years, or 4.77% annually. The legislation does not apply after a renovation or furnishing of the flat.

Milieuschutz (Social Preservation Statutes)

This federal construction law allows municipalities to issue social preservation statutes to spare them from negative consequences of urban development, if a certain area’s population structure changes significantly. The law is aimed at dampening rents to protect the population structure in a certain area by mandating approvals for several modernizations and other changes to property.

Umwandlungsverbotsverordnung

The state of Berlin has issued a directive prohibiting the private purchase of entire apartment buildings and converting them into single units within the boundaries of social preservation areas. Together with the Government Neighbourhood Protection, the two directives have already shortened supply on the property market in Berlin and led to a price increase for property in the respective areas.

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Lilly Yakusheva

Real Estate Consultant

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