Benefits of Tenanted Apartments
Introduction – Why invest in Germany / Berlin?
Germany is a proven safe haven for international finance, and boasts the largest economy in Europe. Whatsmore, the German economy rose for the 10th consecutive year in 2019, which is incredibly reassuring!
Germany currently boasts the largest rental market in Europe. In contrast, it has the second lowest home ownership rate of all OECD countries with just 51.5% ownership, Germany-wide, and around just 18% in Berlin (Bundesbank stat). This means there are a lot of people looking for an apartment to rent, which makes a rental investment even more appealing.
Berlin is the capital and also the political capital of Germany, which makes it the largest economic power in Europe. With Germany considered crisis-resistant, prices have been steadily rising for the last 20 years, even during the 2007 financial crisis, and rising again 6.6% during 2020, despite the COVID-19 pandemic. In the 1st Quarter of 2021 we have already seen over 3.5% growth, on an upward curve. As of June 2022, the market barometer for Berlin shows a moderate development of around 7.30% for the past 12 months.
Berlin is now considered to be the European equivalent of the San Francisco “Silicon Valley” tech and startup hub. Coined “Silicon Allee” – with over 70% of all German start ups choosing Berlin and also ranking Number one city in the new EU, post-Brexit, for start ups – Berlin’s GDP has risen almost 20% in the last 5 years.
Employee compensation in Germany has also risen by 23.1% in the last 5 years. This has helped German cities rank either first or second in the PWC European Emerging trends report for the last 7 years in a row for investment potential. Interest rates remain at an all time low, so it continues to be very attractive for leverage.
A recent study published in January 2021 (by statista) ranked Germany only the 13th most expensive country in Europe when considering buying an apartment in the most important city of that country. That is behind even the Czech Republic and priced 72% lower than the UK.
This upwards price trend has a long way to go! This means that now is the time to choose Berlin and make the most of a wonderful and secure investment that will pay dividends for years to come.
What is a Rented Apartment?
A Rented apartment is any residential apartment, old or new, that is offered for sale with a tenant who has an unlimited rental contract. These differ from rented apartments in other countries because you cannot easily remove the tenant without a valid reason and there is no finite end date to their tenancy. They make for fantastic long term investments & retirement planning, as they are sold significantly cheaper than their vacant counterparts.
What are the benefits of rented apartment investments?
There are many benefits to buying a tenanted/rented apartment. The main benefit of buying a tenanted apartment is that, typically, you are buying them between 25-50% below what is considered a fair market price for a comparable vacant unit. The dormant equity is realised when the tenants move out and the property is divested from the portfolio.
Unlike traditional residential real estate investment, where there is a large degree of uncertainty (rent income is hypothetical, no idea on vacancy rates or costs involved to find a tenant, having to find a property manager who is reliable, etc). These are fully stabilised turnkey investments – producing income from day 1.
There is full and complete yield transparency from day 1, meaning that you can calculate your yield and investment KPIs from the start with no uncertainty or unexpected extras. You have a clear and concise payment history from the tenant, a property manager in place who knows the apartment and house managers. It is hands-off and stress-free and, more importantly, completely quantifiable and accountable.
In addition to the positively geared yields when buying in cash (above the negative German bonds and often above even 30-year US treasury bonds – currently 1.85%), you also enjoy organic capital growth figures which are consistently above inflation. In 2020, Deutsche Bank produced a report estimating Berlin average capital growth to be an average of 5.5% per year until 2030.
Another benefit when purchasing with finance is that of Negative Gearing. In short; when an investment is negatively geared, you are technically making a loss each year for tax purposes. This tax loss can be offset against other positively geared investments in Germany, reducing your overall tax payment.
Whatsmore, after a 10-year investment period as a personal buyer, all profit from sales can currently enjoy 0% capital gains tax – the only investment and asset class offering this.
If Deutsche Bank is accurate, and the early signs in 2021 suggest so, if your Berlin tenant vacates in 10 years, you can enjoy, on average, 55% organic capital growth, plus the 20-50% you bought below market value, plus the equity released from mortgage repayments – tax free!
Just how much cheaper can a rented apartment be?
What better way to illustrate the possible benefits of rented apartments, than to directly compare two real life examples. Both the apartments you will see below are sold in the same year, in the same project, and are directly comparable in almost every single way. The exception is - one is vacant & renovated, and one is rented. In this example, there is over €300k dormant equity in the rented apartment.
8,893.57 EUR per m²
4,194.32 EUR per m²
Tax Benefits
There are also a number of tax benefits that can be derived from rental property. You can deduct any rental expenses – such as mortgage insurance, property taxes, repair and maintenance expenses, professional services and travel expenses related to management – from any rental income you earn. Another key tax deduction is depreciation. Essentially, the authorities assume that rental property buildings wear out over time and therefore become less valuable. As a result, property owners are permitted to take a tax deduction for that presumed decline in the form of a depreciation allowance, at 2% of acquisition costs over a 50-year period. Properties built prior to 1925 are excluded, as are historically-protected buildings.
Taxation
While the only thing certain in life is death and taxes, you will often find that taxation in Germany on rental properties is incredibly favourable. For more information on income tax, gift tax, inheritance tax and more – take a look at our taxation overview, provided by our legal partner, VPMK.
Myths about Tenanted Apartments
This is simply not true. If the tenant does not fulfil part of the rental contract, you can cancel the contract with the tenant. If they do not pay rent or if they damage the apartment significantly, then these are the two clear-cut ways to get an eviction. It is also not true that tenants stay forever if they can. Life is dynamic, situations change, families form, grow and shrink – housing needs change accordingly. Today's population is far more transient and are far more likely to move around for jobs, too. By analysing tenant profiles we can tailor a portfolio of apartments with the most likelihood of apartments becoming available within the 10-year investment period.
There is also a rule called eigenbedarf which enables the property owner to give notice to the tenant if they plan to use the apartment for their own use. For properties being sold for the first time after being split into individual titles – this is a 10 year notice period. For apartments being sold again for the second or third time, the tenants notice period is the remaining length of the original 10 year notice period. After 10 years have elapsed, the notice period is on a sliding scale, based on their length of tenancy.
“I can't ever get the tenant out.”
What is Vorkaufsrecht?
Vorkaufsrecht is a very important factor in rented apartment investing; it is the legal right of a tenant – when selling the apartment for the first time after the building was divided – to buy the apartment at the same conditions at which you are buying.
Immediately after you sign the sales contracts, the notary will write to the tenant presenting them with the same terms that you have purchased at. The tenant has 2 months from this date to say the wish to enter into the contract, and buy the apartment.
In the unlikely event that the tenant activates Vorkaufsrecht, your purchase is cancelled and all costs you have incurred during the notary process will be refunded to you.
It is important to note that as a company, ACCENTRO offers all tenants the opportunity to purchase the apartments they are renting before actively selling them, at a discounted price. Only once they have rejected this opportunity do we start actively marketing. It is therefore incredibly uncommon that a tenant would active Vorkaufsrecht at this late stage, at a higher price.
Also important to know, this only applys to the first sale after the building was divided. All future sales do not include Vorkaufsrecht.
What can ACCENTRO as a company offer
As the number one company in Germany for privatisation of residential portfolios since 1999, we have a huge selection of apartments to offer across many important German hubs with a long history of successful acquisitions and divestments.
We can build you a bespoke portfolio of rental apartments, depending on your needs. From super-prime-located apartments with high levels of dormant equity; to higher yielding but ultra low-cost/risk fringe city locations; to regional B-city locations or a combination of all the above.
Using our internal data, we are able to identify the best options from within our portfolio, based on apartment condition, tenant profile and rental conditions and then package them together for you based on your portfolio expectations.
We can offer single apartments from 150k EUR up too facilitating large portfolio and building acquisitions up to 100m+ EUR.
Our long term goal is to offer an unbeatable 360-degree service for our clients. From search and acquisition to the ongoing management of the portfolio, including finding value added opportunities, tenant management, rental increases and even the final divestment of the apartments from the portfolio at the right times to maximise your return.
We currently partner with a large number of local and international investors, private equity funds and family funds, including some globally recognised institutions.
Have you got questions? Get in touch with us!
We would be delighted to assist you in your property search, and to answer any questions you might have. For a quick chat or a full consulation, please get in contact using the links & information below. We look forward to speaking with you!
Michael Totman Director International Sales Advisory office ACCENTRO Berlin Phone: +49 (0)30 / 887 181-41 E-Mail: mail@accentro.de
Our hotline is available Mo to Fr, 9am to 6pm (CET)
