Buying Property in Germany: First, Find Out What you Want

Buying Property in Germany: First, Find Out What you Want

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Buying property in Germany will require careful preparation, especially if you reside abroad. There are several types of groundwork you will need to make beforehand, and the first one, in my view, is to decide what you exactly want to buy, especially in light of certain peculiarities you have to be aware of in the German property market.

Get to know an area, assess its potential

First of all, decide where you want to buy. You may already have chosen a specific place or city, either because this is where you need to live or because this is where you want to invest. In either case, make sure you do enough research about the local area, about the local economy, major planning or infrastructure projects, the neighborhood and its development potential. Before making my first property purchase in Germany, I walked around the whole Prenzlauer Berg area (where I ended up buying) multiple times, until I knew almost where every major street and intersection was. I studied the streets, the buildings, the shops, the restaurants, the people, how many construction sites there currently were, how many cranes, and whether there would be any major changes to the transport network impacting the area in the next few years. Back then (2009), Prenzlauer Berg was up-and-coming, with some buildings in the southern part of the district already refurbished or modernised and others still derelict and old. Some high-end fashion shops and elegant cafes were starting to pop-up, but most small shops were either still mom and pop or slightly alternative, low-budget but high-potential outlets. Now, five years later, gentrification has fully taken over – for the better or for the worse, depending on who you ask. For sure, the bet has paid off – and is still doing so – for property investors, with prices having at least doubled during that five year period.

Think of your time horizon

Secondly, decide what the purpose of your purchase is, and what your time horizon will be. If you are not an experienced dealer or investor, take a longer-term view. Flipping houses can be profitable but you should only consider doing so in markets you already know well. Unfortunately, there are quite a few regulatory and tax thresholds which will make it less attractive, this is why you will need to  learn that skill of flipping if you want to practice it.

Personally, I am a long-term investor and don’t flip houses. I believe that the long-term rental and capital appreciation return outweighs the short-term profits of flipping (and cost less time and headaches) provided you choose the right property in the right area.

In Germany, you will be able to sell a property without paying capital gains tax only 10 years after purchasing it (or three years if you live in it) – so here is your first incentive to act as a long-term investor.

Beware of German rental contracts

You will also have to decide whether you want to buy a property vacant, or if you are happy to buy a tenanted one.

It is very common for property investors in Germany to buy one of several apartments with their tenants and to hence step into the shoes of the previous landlord. This implies that the investors also have to accept the terms of the tenancy contract in place between themselves as new landlords and the tenants whose apartments they has just acquired.

Such property purchases can often occur at a significant discount to the actual value of the property had it been vacant at the time of purchase. This is mostly the case if the tenants pay a rent which, by now, is lower than the current market rent of the apartment were it to be rented out under a new contract today. Tenants in Germany are often strongly protected by the contract, meaning also that their below-market rent will be difficult to raise, and that giving them notice to move out can be extremely challenging.

If you wish to buy an apartment in order to move in within a few years, you may want to think twice about buying a tenanted one. The payoff could, of course, be significant, but you will need to closely analyse the likelihood that your tenants may want to stay forever, or be ready to move out by accepting your notice, or even be ready to negotiate a deal with you (sometimes, it is just about offering some cash). Alternatively, it could be a young couple likely to need more space a few years down the road (children, better income, etc), or an old person with only a few more years left to live. Very often, it can pay off to find students as your tenants, or to buy a tenanted apartment occupied by students. They will use the apartment for a limited amount of time, generally between one and five years. If the apartment has several bedrooms, it could be used as a student houseshare, with your tenants often finding new occupiers when they move out. If you are a long-term investor not interested in using the property for yourself, this could be attractive, as it will also save you the time and money to put the property on the market if tenants move out.

In Berlin, the notice period from landlord to tenant can be up to 7 years. An eviction will only be possible if the tenant consistently is in arrears with the rent, or if they haven’t paid for two months in a row. One option is to serve notice because you need the apartment for yourself (so called Eigennutzung or Eigenbedarf, if you are moving to Berlin, or you are there on a regular basis or need it for a family member), however that type of notice will often get challenged by the tenant – and potentially a court. You will need to show clear evidence that 1) this is your only apartment or the only one which you could use (if you have another apartment in the same city, you have to show evidence that the latter is too far from your new workplace, that it is too small for you, etc.), and 2) that you really will be in town on a very regular basis and that you need the apartment.

Last but not least, if the home you buy is vacant or your tenants move out through their own initiative, you could consider furnishing your apartment and making it a holiday rental. This has advantages and drawbacks though:

Advantages:

1. Your property revenues will be significantly higher as you can charge per night and have flexibility over prices.

2. You have full control over when the apartment is available for yourself or your friends and family.

3. When you decide to sell the apartment, you can sell it as a vacant property which will command a higher price than a property bound to a (generally below market rent) tenancy contract.

4. You might even meet some interesting and nice guests who might become regulars, who you could swap houses with or who you might just want to stay in touch with.

Drawbacks:

1. You will need to come up with the upfront investment for furniture, equipment, appliances, potential renovations, etc.

2. You need to manage the apartment yourself or have somebody managing it for you. This will cost time or money, or both. And, if you are looking for help, you will need to find somebody trustworthy.

3. You might be eligible for Value Added Tax (VAT) if your total revenues exceed the 17.500 EUR revenue in a certain year. This is not necessarily a negative, but it will complicate things.

4. There has been a clampdown on holiday rentals in Berlin and some other cities in the recent past, with the regulator making it difficult to impossible to rent out your apartment for less than two months.

5. Depending on where your apartment is, your neighbors might notice what you are doing and might not like it. So if you do it, do it legally, so you can defend yourself!

One you have decided whether buying property in Germany is really an attractive and viable option for you and what kind of property investment you are looking for, you can start exploring relevant property listings and contact vendors or agents.

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