Buying a single or multi unit apartment building in Germany as an investment project. Is it a good or bad decision?

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Buying an apartment whether it is a single or multi-unit could be relatively a profitable and reliable investment in Germany nowadays. In general properties in Germany are sort of an inflation-proof asset investment which are attractive especially in this time because of an unprecedented very low interest rate of the bank loans. Therefore, if you are interested to invest your money in real estate in Germany, a single or multi-unit apartment is not a bad idea if spotted, analyzed, and selected properly.

Now why exactly investing in this section is a rational decision and what are its pros and cons are something we will explain in this short article.

The benefits of buying (an) apartment(s)

Low interest rate: The interest base rate of the central bank which is almost zero has kept the mortgage interest rate quite low too. 10 years ago this rate was circling around 5-6 % and now it is 1-1.5 % and if the condition is very right, you can sometimes expect to get an offer from German banks below 1% too. 

Low loan costs: the German banks generally impose a very low cost (almost nothing) in the process of loan contract and the sum of other variable costs such as repayment fee and interests are usually lower than the monthly rent price of the property.

A proper pension insurance: the least benefit of such an investment is that you secure yourself financially in the time of retirement while you are in Germany. 

If the property will be occupied by you for the rest of your life, you have immuned yourself from increasing rents in future which has happened quite often over the past 10 years, and also the freedom you get from living in your own home, (when compared to living as a tenant) 

But if this is an investment project for you, you have created yourself a fine source of income when you are a senior since due to the high population density and incoming immigrants the demand for renting apartments have been increasing over the past years. The most important thing is to find the right project.

Property price growth: the price of properties has been unprecedentedly increasing over the past 10 years in Germany. This rate has been from 30% to 100% in some places and yet it is growing. 

Tax deduction opportunities: real estate side costs such as notary, brokerage, renovation, management, maintenance, depreciation, and bank interests are all tax deductible in Germany for every single investment. 

The risks of buying (an) apartment(s)

In addition to the benefits we mentioned above, there are always risks involved like many other investments such as the following: 

Lack of flexibility: an apartment ownership can foreclose some freedom and flexibilities. Some properties or parts of them in Germany have been owned jointly by several people and thus in these cases any decision for the use or change of these properties should be made also jointly which can impose some direct or indirect costs. 

For example, sometimes a boiler room or the top roof could be renovated. This matter should be normally voted and if you do not agree with it and you see it , especially as an investor, as an unnecessary spending you are imposed to contribute your share if you are outvoted. 

You can and you should minimize the possibility of these happenings or manage them well to get the most benefit out of your investment in Germany. You should perfectly pay attention to the detail of the property deed, Exposé and several other enclosed documents that will be usually handed by the broker or seller to the potential buyer. Only by studying and analyzing them very carefully, you will be able to make the right choices. We can help you with this procedure. Simply contact us for more information.  

Side costs: Other risk factors in purchasing apartments especially multi family residentials is the time and energy you spent in the maintenance and repair of the property. 

Clearly you should again verify the year of construction, property value growth and its potential, and the current and potential income that the property generates.

Also bear in mind that when a property needs some renovation or redevelopment, it doesn’t necessarily mean that it is a bad investment. In many cases, this can give you the opportunity to buy the property below the market price, and sell it with a very reasonable profit by undergoing some minimum repair costs.  

However, this requires a good knowledge in evaluating properties in Germany. You should perfectly analyze the potential costs of the apartments before the purchase and reflect it on the final price that you would like to offer to the potential buyer in the future. Also seeing the future growth of the property both in terms of value and rent price are significant factors in determining a value for your target property. You may use our service in value assessment of any property in Germany

Renting out an apartment in Germany

There are some important factors in buying an apartment with the purpose of renting it out as an investment project as follows:

On the one hand, the rental yield (Mietrendite) which is the ratio of the rent income to the purchase price plays an important role. For example, the rental yield of a property which is worth  200,000 € and generates a monthly income of 800 € for the investor is about 4% which means it takes 21 years for the property investor to earn back what he has invested and to reach the break-even point. Of course this is not a precise calculation because it doesn’t consider the value growth of the property over time, increasing rent,  and other side costs but still is a very important index for property investors in Germany to evaluate the worth of the object they are dealing with.

As already mentioned, there are other factors such as the city itself in which the investor would like to invest, the area, the future rent price (rent growth rate) and future property price (value growth rate) that are the determinants in calculating the return of investment and should be taken into account when investing in Germany in the real estate segment. For example there could be a property with very good return (Rendite) in some cities or regions of a city but experts will not estimate much of a growth in property value in those areas. 

Despite all above, one of the most important criteria for selecting a property for an investment in Germany is its rental yield (Mietrendite), which indicates what percentage of the investment cost will return through the annual rental income. To compensate for the purchase price, you should preferably get to 4% rental yield after deducting the fixed and variable side costs of the real-estate investment. In some cities with more competitive real estate environments such as Munich, Frankfurt, Cologne, etc, finding Rendite with a minimum 4% is a bit more difficult. 

But with a lower rental yield, you can still benefit from your investment in Germany if the property value grows with a relatively high rate in future. However, these factors cannot be easily predicted for the future and thus are considered risk variables in investment. 

Please bear in mind that even by the growth in the rent rate in Germany, if you have made an unlimited rent contract (Unbefriestet) with your tenant and she/he is paying you the rent with causing no difficulty to you, you are not able to easily terminate the contract and get the new tenant with a higher rent price or request your current tenant to pay more rent. But still your property is available for sale any want you want.  

In many cases, the rent’s terms and conditions which are established between the landlord and tenant in Germany, and the rent price are significant players in determining the value of the property.

If you would like to have a very safe and risk-free property investment in Germany, try to spot and select the properties that have nowadays more demand in Germany. To get a better picture of your potential rent income, the regional rent index (Mietspiegel) beside the local papers (Tageszeitung) is considered to be a very authentic source of information for investors. 

Should we invest on properties with or without down payment?

Often, you might get some advice from financial advisors in Germany that in order to keep your business cash flow high, you can get the full financing package from the German bank. This is called Vollfinanzierung meaning that you can get the mortgage for the price of the house and you should only cover the minimum accessory charges including notary, broker, tax, and if needed renovation between 12.5% to 15% in total of the property price. 

Before we explain whether this is a right or wrong decision, we should point out that this is usually possible if only you can prove that you have a relatively adequate net income and you are investing in a relatively good property (with low risk). Also in addition to a good income, having a fixed salary under a long term contract (like an employee) always looks better to the bank. 

Now get back to the main point, whether it is a right decision or not. Well it completely depends on the person who wants to apply for the loan. Obviously if you get the full finance package, there is a risk that you don’t get the best interest rate from the bank as the bank finds this investment riskier than normal. So the more your interest rate, and your debt to the bank, the later the contract with the bank will terminate which might be worrying for some people because they will have to pay more accumulated interest.  

But it also has its benefit, because it gives you the opportunity to keep your cash flow high in your business or for other investment opportunities. This can also be beneficial and less risky for you as an investor especially if the property you are investing on has a secure situation in future such as a long term and reliable lease contract. 

For example, due to the high demand, if you lose your tenant for your residential property, you won’t face big problems to replace her/him with another one in Germany in the shortest amount of time. So you would say that investing has no risk, and you are sure that your tenant will pay off your debts to the bank, so you don’t care about being debtful to the bank for a long time. But this might not apply to commercial real estates where finding reliable tenants is a bigger issue. 

Also there is the concept of leveraging, meaning the more you get the mortgage with a fixed down payment, the bigger your investment on property could get which can finally lead to a better return on the fixed amount of investment. This could also work reversely sometimes but we explain more with an example as follows:

For example, imagine you have 100,000 € capital and you would like to invest it in an apartment in a city near Cologne in Germany. You have two options either buy an apartment with this price (100,000 €) or buy another flat with the price of 500,000 €, 80% of which is the mortgage loan.  

Now imagine you got an offer from the bank with 1,5 % Zinsen (mortgage interest) for the second flat meaning that you should pay yearly 6,000 € as interest to the bank. Now again imagine one year has passed and the property in Cologne has a growth rate of 2% in value. 

Your 500,000 € flat is now worth 510,000 € while your small apartment is worth 102,000 €. By deducting the interest cost of the bank that you paid over a year, you have still earned 4,000 € in value for the flat versus 2,000 € for the small apartment. Don’t forget that bigger flats give you higher net rent income too. 

This is the concept of leveraging that you can use while searching to hunt properties in Germany. However, you should note that it might work reversely too, meaning that when the property value drops you will lose more money when investing with a bigger amount. But we are talking about Germany whose properties value has almost never decreased over the past 10 years.

Also bear in mind that by taking the bigger amount of loan you will always have the fixed costs of interest and redemption which will be updated usually every 10 years in Germany. So if your tenant goes bankrupt or for any reason is not willing to pay you well, you will still need to pay your share to the bank. And this is the risk of investing through bank loans. 

Although, usually if the investment was risky and the bank noticed that, it would not offer you any full finance package in the first place. But yet it doesn’t mean that, even if the bank approves it, you should not assess its risks properly on your own. 

Another important thing is that the smaller your down payment is, the less attractive the bank offer could be. It means you usually get an offer from the bank with a relatively higher interest rate when compared to the situation where you start with a higher down payment. Now as already explained  there is a trade-off as to how much you need your cash flow in your business operation. Some people in Germany are still willing to pay a higher interest rate to the bank as long as their business cash flow is high enough to secure their business performance or be able to wait and hunt for other investment opportunities with their money. 

Generally speaking if everything is under control in your business, and your already-made contract with the bank has imposed a high interest rate, it is recommended that you compensate this problem by paying back yearly a part of the redemption to the bank which is called Sondertilgung  in Germany. This makes your loan and consequently the bank total interest smaller over the course of time. (because interest is a percentage of the bank loan).  We will explain this in more detail in upcoming articles.

Due to the risks mentioned above, the general assumption in most cases in Germany is that the investor should be able to cover at least 20% of the investment to be able to get a relatively good offer from the bank and mitigate other risks involved. 

Think about future

Before you do any investment in German real-estates, you should create an investment plan for the next 15 to 20 years to calculate the potential returns and break-even points. In this plan, all predicted expenses for your property investment are deducted from the income for each year.  

The amount of money you should pay as the deficit, or you receive as the surcharge should be calculated. Remember that the amount of interest (Zinsen) will change over time (although the rates are fixed) and this should be updated in your investment plan. It is recommended that you predict several scenarios in your investment plan and consider all risks and opportunities.

Clearly if your plan is based on such a robust calculation, nothing can get in the way of your profitable real-estate program in Germany. You should note that property investment in Germany could be a very good business idea if you select the object and make your investment plan properly and there are many reasons behind it such as, a robust economy, High population density and its high growth rate due to the immigrants, high purchasing power, and attractive interest rates on bank loans.

A few tips for newcomers in Germany

Buying a real estate property in each country may call for different strategies and tactics. That’s why you should get a good consultancy in this segment if you are quite new in Germany or into this business segment. Many factors which are the determinants in your decision making process such as interest rates, loan costs, required capital, the property value and its growth rate, and the rent amount and its growth rate might differ from one country to another, thus your general idea about the real estate and how it works can be completely different in Germany from what you are doing in your home country. 

On the other hand, for almost all cases, you – as a person who does not have a permanent residency – have a way more difficult situation to get a bank loan than a person with permanent residency, and the reason is quite clear. Because bank loans are very long term contracts and the bank in Germany cannot be 100% sure if you will stay in the country or in other words will be allowed to stay in the country after some years. 

For this reason, even if you get an offer from the bank, you might not receive something attractive in terms of interest rate and bank fees. Also the financial consultants who provide such services might charge you more because of the difficulty of the task for him to convince the bank to give you any loan. 

In addition, among the people who have temporary residency, the type of residency also plays an important role. For example, if you are employed in a company in Germany with an unlimited employment contract or a contract that will be most likely extended, you have a better chance of getting a loan when compared to a person who is staying in Germany with his self-employment program. This also applies to people with permanent residency, as in general, people with secured fixed incomes (employees) are more attractive to the banks than self employed persons who might have different incomes in different seasons. 

Another important factor in Germany (like many other countries) is your credit history (Bonität) to the bank. Your income and your expenditures and obviously your records of paying your debts are all significant factors to the bank to decide to grant you any loan for your investment in Germany. 

Therefore in the case of working as a self employed with temporary residency and not a great credit history, you may consider investing on properties in Germany either with full cash (without loan) or partnering up with a permanent German resident with a good credit history to increase the chance of getting a loan or improving the offers of banks (better interest rates or lower down payment) 

Our team in Germany, will help you assess your investment decisions (due diligence) especially on real estate properties, the ways you can distribute shares with your potential partners and investors, and how to prepare contracts and notarize them. Also, real estate financing has been one of our very first services in Germany since 2000. For further information, you may contact us by filling out the following form:

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