 I. What is
the current market situation and what are the most attractive places for
buying houses?
The demand of foreign investors is remarkably increasing due
to prices having hit their unsurmountable top in other parts of the
world, and still being at an attractive lower level in germany. Large
companies and firms are buying property in germany at multi-million
volumes. On the smaller scale, the individual investors are looking for
high yield offers at a range between 1 and 10 Million EUR investment
sum. Yield between 7 and 10% are much asked for, and are sometimes
attainable, but quality of the property offered plays a big role in this.
And good quality high yield offers are not long on the market.
In general, german economy is
recovering since mid 2006 now at a very good rate. First time since over
a decade the unemployment rate has come down under 4 Million and is no
longer above 10%. It came down from 12.2 in February 2006 to 9.6% in
November, which is indicating a remarkable improvement now on the german
economy. This shows up already in rents for office space reverting
upwards and at the same time more demand on the residential market. The
year 2007 is expected to become even better, and house prices may well
go up because in the past ten years very little new construction has
taken place - which means there is a shortage of houses.
But still that means that as
investor one has to strictly concentrate on cities and areas which are
most wanted for renting. But rents that were paid two or three years ago
in many cases will not easily be obtained again. In the past, many
companies rented dozens of apartments to have them available for short-time
staff or high-class apartments available for their directors and higher
management level staffs.
Looking at specific cities, the
most attractive and those with the highest rental level are as ever:
Frankfurt, Munich, Stuttgart, Duesseldorf, Hamburg, Koeln (Cologne).
Those are the key metropolitan areas which will also keep their
importance in the economical development. Berlin is much sought-after by
foreign investors but still is more a risk investment than other major
cities, even than Dresden and Leipzig. The price decline seems halted
and in better areas shows even a slight increase. The slump is also
attributable to the fact that in the whole of Eastern Germany, in the
90s, Real Estate investments were heavily supported by tax advantages,
this to a point where we now have thousands of flats in eastern germany
empty – and not rentable for yet a while, or only for a much smaller
rent than calculated.
On the other side, Cities like
Frankfurt, Munich, Stuttgart and the others named are pretty stable in
rent, especially in the very good city areas. With the perspective in
view that the number of new houses built per year has been decreasing
over the past seven years and is now on an all-time historical low, this
could mean a rise in rent in those areas where there are too few
apartments on the market.
Refurbishing old buildings and
either keeping them as rental income property or selling them apartment
by apartment as condos might be very worthwile, in view of the situation
that too few new houses are being built.
II. Market view by Real Estate
category
a) Single flats or apartments
They have been a market since three decades and will remain a market in
the next seven decades to come! Frankfurt and Munich are leading cities
in that aspect. Don't buy anywhere secondclass; the risk of losing is
too high. They can be bought as a one room studio or as one to three
bedroom flats. They can be rented furnished or unfurnished. The return
on investment can be expected to be somewhere between 4 and 6%. As the
rental law regulates rents in germany pretty strongly, one should not
play with the idea of putting higher and higher rents upon the tenant
every year. To let such an apartment unfurnished most of the time would
mean to give the tenant an unlimited lease contract. That does not need
to be renewed from year to year, it automatically runs until notice is
given by either party. The legal and regular notice period for the
tenant is three months, for the landlord the period is longer if the
tenancy is continued over five years. If one wants to use the apartment
or flat one day for oneself this should be exactly written down in the
rental contract when signed; the specific legal aspects to the wordings
an conditions of such contract should be left up to an experienced
agent. Furnished rentals can be short term and thus incur less risk;
however due to the general economic situation the demand for furnished
apartments has decreased over the last months and many of them are
rented for no more than they would be unfurnished. So be careful what
decisions to take and rather consult an experienced realtor than trying
to do it all alone or on the advice of friends.
b)
Rental homes
So called "Zinshaeuser" (Rental homes with 8-20 Apartments or flats)
are most attractive as investments in Germany. In Frankfurt they are
very hard to get at all; in Duesseldorf, Hannover and Berlin this seems
currently no problem. Most sought after are what we call „Altbau“;
buildings that were constructed at the beginning of last century or even
earlier and so are between 80-120 years old. If these houses are
modernized, they are unique with their high rooms, ceiling level at
about 3.60 to 4.00 meters (buildings after 1950 have ca. 2.50 meters
room height unless they are very new - now again higher ceilings are
often preferred).
A modernized Altbau is also a very good rental property. These
types of apartments are selected by us for sale because they are totally
newly refurbished with everything renewed, and yet have their old style
character of the early 1900s preserved. Such houses are the most sought-after
ones on the market here in Frankfurt and their value increase is
normally higher than that of newer or totally new buildings, just
because they are not multipliable.
Buying prices range between 500.000,- Euro and 1.5-5 Million Euro for a
8-20 apartment house in the good locations. Sqm prices range from
1.500,- to 2.500,- Euro for unrefurbished and 2.600-3.600 Euro for
refurbished and modernized flats.
Rent houses are preferred by so-called "Aufteiler"; this being
development companies that buy and divide such houses into individual
condos so that the apartments can be sold as single units. Sqm prices
being obtained in the sale then range between 1.000,- and 4.000,- Euro.
About 15% of the net profit have to be calculated to be sales costs.
On such houses as rental houses the
investment return rate ranges between 6 and 8% p.yr. in general.
c) Supermarkets and Malls
In general this is a very difficult market. Well-known supermarket
chains have been going very well in one area and bad in another. Having
rented out a supermarket to such a chain says not very much as of today.
The situation might change very fast. Supermarkets that have been going
well for many years if they are situated very centrally are a good
investment, though. But those opportunities are rare to get ahold of.
The capital investment return can be expected to be somewhere between
8,5 and 12% per yr. One needs to research very well where to buy and be
careful when buying in eastern Germany no matter which chain the market
is rented out to.
d) Mixed
Houses that have a mix between shops and apartments are most
recommendable when located very centrally. They still are of the best
investments possible. The value increase can be expected to be very good.
Investment return is somewhere around 6 and 10% p. yr depending on their
location.
e) New apartment house building
Difficult proposition, only recommendable to experienced building
companies which ally with a german house building company with some
experience on the German City bureaucracies and who know the sales
possibilities very well. Otherwise might wind
up as a big flop.
f) Single family homes
Very much asked for. But not interesting as a capital investment, as
of low return-on-investment rate (3-4%). Is of much interest for those
families who buy to live in the house.
Can be bought in several categories, single-standing, double-house (two
houses attached to each other), terrace houses etc.
Prices around Frankfurt range between 300.000 and 800.000 Euro, within
Frankfurt 750.000 to 2.5 Million Euro for a single-standing house or
bungalow or villa.
III. Steps to
take when buying
Depending on the size of
the investment a thorough research should be undertaken as of the
location, first of all. The price needs to be verified
thouroughly, preferably with a surveyor or estimator. Expenses for this
value estimation are usually borne by the party buying the Real Estate.
It is no must though.
Most important is to have the house inspected carefully, if not by
oneself, then by a knowledgeable person in the area. This can be a
broker or someone who knows what points to look for.
Another point is the study of the annual meetings of all apartment
owners in the house. The importance of these minutes cannot be
overstressed. Any and all problems relating to the house community and
the house itself which may incur future costs will be discussed in these
meetings and will be reflected in the annual meeting report which needs
to be done by the management company responsible for holding these
meetings.
Any rental contracts are to be examined. The actual rental situation has
to be examined carefully. Especially so-called non-payers amongst the
tenants have to be verified. Non-payment rates can be as high as 20-25%
sometimes in bad areas.
Any renovations or repairs of damages need to be checked into. The
ground sometimes is wet and the house needs to be dried out in the
cellar area which can become expensive. The roof should be checked by an
expert or a good eye before buying.
Age of the heating system is a very important point. Lots of
restrictions and new laws have been passed over the last years. New
standards have been set that must be met until 2005. It might be
necessary to renew the whole heating system by then if it is older than
ten years.
Next, the actual resale value needs to be estimated. Could that property
be sold well again and for what price? What would be the possible ways
and channels to sell the Real Estate again?
This being answered, the calculations of the living space (in square
meters) and of other areas presented on paper should be verified at the
actual location.
All factors being well aligned, the financing needs to be secured. In
Germany we request the buyer to present a so-called irrevocable
acceptance of loan financing by a good bank before going to sign the
notary contract or if he has the cash deposit, to bring proof of the
existing funds.
Then the Deed of Purchase and any accompanying papers (like the official
declaration of partition <Teilungserklärung>) should be checked into
thoroughly. If you are not german-speaking it is better to have a
professional translation done first of all even if that might cost some
extra bucks.
The notary public date for signing the Deed is being agreed upon. At
this meeting the Notary Public will read the Deed aloud for both parties,
with any needed translator present. After making any changes or
additions the Deed is being signed by both parties and the notary
public. This contract is irrevocable, it cannot like a usual purchase be
revoked within the next two weeks! What is written here is the agreed-upon
purchase and all conditions thereof, like the day of payment, the day of
handover to the new owner, any needed repairs or other actions to be
done by the seller, any other specifications as needed.
It is the Notary Public who will perform the next actions needed like
any and all applications in the so-called Grundbuch - the land
title register, without which no sale of property can be done.
At the notary date the Real Estate agent's or broker's commission has to
be paid. This ranges between 3,5% and abt. 6% of the buying price,
including VAT, depending on the federal country where one is buying in
Germany.
Between two to four weeks after the buying contract was signed the
purchase tax on Real Estate needs to be paid. This is exactly 3,5% of
the buying price stated in the contract. This tax must be paid within
short time when requested as otherwise the tax office will not issue the
clearance certificate - an important paper for transferring the
possession from the seller to the buyer. Without that paper that
transfer is not possible!
Within the same period of time the fee for the notary and registration
fees have to be paid. All in all they comprise about 2.0 to 2.3 % of the
buying price of the Real Estate.
The terms of the contract can be very variable. That is why a contract
needs to be checked by someone experienced in sales of Real Estate in
Germany. There are many legal obligations but also legal finesses which
can be to the advantage or disadvantage of the person buying.
At the notary public date all persons that are buyers have to be present,
and show their legal papers (valid passports!). If a company is buying,
the person(s) signing the contract need to bring their legalization
papers from the company (authorization and an excerpt from the Chamber
of Commerce entries showing the authorization status) plus passport. The
contract needs to be personally signed after the notary public has read
it aloud. It is legal procedure that the notary public reads the buying
contract out loud. If the buyer does not understand German language, it
will then be read in english by a qualified translator.
It is the task of the notary public to ensure that all parties
understand what they sign in the end. Any questions that come up need to
be answered.
IV. Financing
German Real Estate financing can be done
either with mortgage banks or with any usual bank or financing institute
(Sparkasse, Volksbank, Insurance company, Bausparkasse).
Financing usually is done for about 60-70% of the buying price by
mortgage loan. Anything above that up to 100% of the buying price needs
to be secured either by additional securities like insurance (with
actually that exact value) or other financial securities that have to be
deposited at the financing bank. It can sometimes be done based on the
income of the person or company alone buying but that case is very rare
as of today.
Financing foreigners not resident in Germany and not earning their money
in Germany is possible under certain circumstances but cannot be
expected to exceed 60% of the buying price.
Financing should be secured before any contract of purchase is signed.
Sometimes one can sign a reservation which holds good for an agreed-upon
period of time, enough time to get the financing secured. However, the
only binding document is the purchase deed.
V.
Frequently asked questions
Do I have to be german
resident in order to buy in Germany?
No. Anybody can buy in
Germany who has a valid passport and the purchase funds that will be
needed. Owning a property in Germany does not give one a right to
immigrate to the country. This point is vital to know. We had the case
of a person who already owned an apartment in Berlin and had a deposit
of about half a million USD at a german bank in Germany, and wanted to
buy from that money another apartment in Frankfurt. She asked for a
visitors visa for that reason – and got her application declined. The
german embassy in her country (somewhere in Asia) said: „The risk is you
buy an apartment and then stay in Germany and we do not want that.“ All
her assertions that she wanted to buy this apartment for investment only
– and the apartment was already rented out which we told the embassy –
were fruitless.
So if you intend to buy property in Germany in order to live here, make
sure first to get a Visa for being a permanent resident in the country.
What are the costs
accompanying buying property in Germany?
In Germany, the buyer
has to carry the following costs and fees:
1. Purchase Tax („Grunderwerbsteuer“): 3.5% of the buying price. Due
about four weeks after the notary deed has been signed by buyer and
seller.
2. Notary fees. These are about 1.2 – 1.5% of the buying price, plus any
fees for a needed translation of the deed. As they can vary strongly we
recommend to check especially the translation fees in advance. We have
seen differences from 300 EUR to 3000 EUR for the same type of work.
3. Agent fee. The buying fee for agents in Germany varies from Federal
country to Federal country slightly. In most federal countries it is 5%
plus the VAT.
4. Registration fees, these add up to about 0.8-1.2%.
5. If financing is needed, there might also be fees from the bank side
for the mortgage, plus any additional notary and registration fees for
that mortgage. Any mortgage needs to be secured in the land registry (Grundbuch)
and that can only be done by a notary public.
So the total fees on top of the
purchase price are about 10-12%.
How long will it take until I
own the house?
From the moment of
signing the notary deed until receiving the land title register
confirmation several weeks can pass. This however has no bearing on when
you can take over the house as your own: this is usually the moment when
the buying price is paid in full to the seller. That date is agreed upon
in the purchase deed.
What are the costs
accompanying owning property in Germany?
The costs that are to
be paid are property tax - this is different from town to town but very
small (between 150 Euro and 300 Euro usually for an apartment per year,
a bit more for a single-house; it depends on the size of the property
ground).
Then the building reserve fund which is mandatory when owning an
apartments as part of a community; it is usually about 0.75 to 1.5 Euro
per sqm living area per month;
Garbage disposal, water, common house electricity, housekeeping,
maintenance of the heating system etc. are additional costs which sum up
to about 0.5-2 Euro per sqm and month. All of these have to be paid by
the tenant if apartment or house is rented out. Even the property owning
tax normally needs to be refunded by the tenant to the owner or should
be made part of the normal utilities prepayments.
Who
takes care of the property when I am not in Germany?
Any house can be given into
the care of a property management. On apartments this is mandatory as of
today when these belong to a partitioned apartment house. Cost for
property management is about 25,- to 35,- Euro per month for an
apartment. Rental management is separate from general house management
and can be transferred to an agency for a fee that is agreed upon by
both parties.
Who would assist in selling
the property once I want to do this?
At any given point,
when you decide to sell the house or apartment again, you can give it to
a Real Estate broker or also offer it freely on the market. There are no
rules or laws saying that you must go via a broker. There are no shared
listings in Germany where all brokers would offer their houses, this is
a pretty individual market! It has the advantage that anyone has the
chance to get his house on the market. Usually you put the house into
local newspapers on the weekends and also would offer it on related
websites.
What are the tax implications
during the rental period?
We are not tax advisors and in any
single instance the tax issues should be studied and explored carefully.
Certainly as a private person you have to pay tax on the rental income.
The amount goes on a sliding scale which starts around 25% and goes up
to 42%, to which the so-called "Soli" of 5.5% has to be added. That
means an extra tax based on the tax you pay, which is meant for the
rebuilding of the eastern part of germany. It is considered by many
people to be unneccessary but the German government did not change that
so far. Depreciation, interest and advertising or management expenses
can be deducted. Depreciation is usually 2% per year, based on the
purchase costs minus value of the ground, as this is not depreciable.
Any private person who is receiving
rental income in Germany, even if not living here, must fill in and sign
his annual "Steuererklärung für beschränkt Steuerpflichtige", which is a
special tax declaration sheet for people who are not paying their normal
income tax in Germany. The effects this has upon your tax duties in your
home country have to be checked there with a competend advisor. A
certain amount of tax-free profit usually can be claimed, it used to be
around 6000 Euro for EU-citizens.
We can help you find an accountant
for your annual tax declaration.
If a foreign company non resident
in Germany purchases and rents out property, the tax issues are slightly
different, but for that you must consult a tax advisor.
What tax to I have to pay when
selling the property?
Currently, the
regulation is such that if you sell before ten years after the purchase
date, the profit is taxed. Again, this follows the sliding scale rule.
But watch it: there is a nice hook built in, because the depreciation
claimed in that period is voided or added to the sales profit. That
applies only to property which was rented out. Owner-used property
usually can be sold without tax on the profit after two years.
After the ten years holding period
the profit is tax-free as per the current regulations for private
persons - not for companies. There have been discussions since 3 years
to change these regulations and various proposals have been made. But up
to now - end of 2006 - no change has passed as law.
There is another tax-trap that you
must know about. There is a rule that if you sell more than three
properties within five years you are considered a commercial property
dealer. The consequence being that you have to pay commercial tax! And
your profit is not tax-free even if the ten years holding period is over.
Take the example of a multiple dwelling which you purchased as one unit
and want to subdivide and sell as several units after ten years. Selling
off more than three units out of that house makes you a tax payer on
commercial tax which is about 25%.
All this is without any warranty of
correctness or being complete. The best advise is really to hire a
professional who is familiar with the tax laws in both countries, the
one you live in and Germany.
Vit Klima
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