Why is it profitable to invest in income properties in Germany?

An apartment building, which may also be called a mehrfamilienhaus (mfh), is a structure comprising a number of separate apartments intended for long-term rental, with rental periods that can range from six months to many years. Unlike apart-hotels, such facilities do not offer hotel services. Such buildings are often owned by a single owner, but there are also cases of joint ownership by several individuals or legal entities.

Management of income-generating properties

The management of income properties can be carried out either by the owner themselves or by specialized companies that professionally handle this area of real estate. In Germany, there are many agencies that focus on managing such properties, such as the company Moll & Moll. Investing in income properties in Germany has many advantages: among them is stable economic growth, which makes Germany one of the most economically stable countries in Europe.

Demand for rental

The demand for rental housing remains high: more than half of the country's population, specifically 57%, prefers to rent apartments rather than buy them. As a result, the demand for income-generating properties is also significant, as they make up about 30% of the total housing stock in Germany. The laws regulating rentals are clearly defined, which adds transparency and security to the relationships between landlords and tenants.

Income stability

It is also worth noting the high stability of income: the average duration of residence in a rented apartment in Germany is approximately 12 years. Furthermore, the profitability of such properties is increasing at a rate that exceeds inflation, creating positive expectations for investors. The occupancy rate of rented apartments ranges from 90 to 100%, which means that most homes are constantly occupied.

Ways to invest

When it comes to ways of investing in residential real estate in Germany, three main directions are highlighted:

• Acquisition of one or more apartments for future rental.
• Becoming an owner of a revenue house;
• Investment in shares of real estate funds specializing in such properties.

In conditions of comparable capital, investors often choose between purchasing an entire income-generating property and a set of apartments, based on factors such as location and potential rental income.

Expert opinion

According to Mikhail Epstein, a real estate expert from Epstein Immobilien,“If the property is located in a good area but its yield is low, a more sensible decision would be to purchase the entire building.”Creating your own combination of apartments on a limited budget, but with high returns and increased risks, it is more reasonable to invest in individual apartments. In such circumstances, selling one or two apartments proves to be quicker and easier than an entire income building." For example, in the center of Düsseldorf, where profitability is between 4-5%, locals make up the bulk of tenants rather than immigrants, so it makes more sense to consider buying an entire building. Whereas in cities such as Wuppertal, Dortmund, Duisburg or Essen, the high yields and low liquidity of local properties make the purchase of individual apartments a more sensible choice.

Risks for owners of income-generating properties in migration cities

In cities with a large number of migrants, property owners of income-generating real estate face new challenges. For example, when refugees from underdeveloped economies settle in a building, it can lead to other tenants wanting to leave the property. As a result, the owner loses rental income and faces difficulties in finding new tenants.

Selection of property characteristics

When choosing characteristics for purchasing real estate, an investor focuses on their goals. If the main objective is to protect their capital, then the right decision would be to buy properties with low yield in areas with high liquidity.

For those seeking a quick income and return on investment, the most successful option would be to purchase one or more apartments in less liquid neighborhoods, where there is an opportunity to get a significant return, as reported by theMikhail Epstein.

Recommendations for passive investing

Georgy Kachmazov, Managing Director of .ru, recommends investing in residential rental apartments for passive investment, focusing on capital preservation and minimizing time management costs. He believes that the yield on such apartments is usually slightly lower than that of income houses, but at the same time the time costs of their management are significantly lower.

Moreover, apartments generally have greater liquidity, which makes it easier to sell them later.

Sale of income-generating properties

Alexander OrdenatMr. König, sales manager at Epstein Immobilien, notes that an income house can be sold as a whole or divided into separate apartments. The process of division may cause additional costs for notary services and valuation, but in most cases the price per square meter in the individual units exceeds the value of the entire building.

It is important to note that according to German law, tenants have the right to purchase an apartment if it is registered as a separate unit, whereas buying in an undivided house is not possible.

New income-generating properties and their appeal

New income-generating properties are also attracting the attention of many investors, thanks to a five-year warranty from the developer. This period allows for the rectification of any construction defects that may be identified. Currently, the market is showing high demand for both newly constructed properties and apartment units in new buildings located in city centers.

General trends in the income property market in Germany

The income house market in Germany is now in an active growth phase. The number of investors entering this area has increased in recent months. More often than not, private individuals are investing in properties with an appraised value of less than 2.5 million euros, while larger companies are interested in buying buildings with an appraised value of more than 5 million euros.

According to information from CBRE, in 2014, the total investment volume in income-generating properties in Germany amounted to13.3 billion eurosThis indicator includes portfolio investments that cover more than 50 apartments.

Overview of real estate investments in Germany

In 2013, real estate investment in Germany amounted to 13.8 billion euros, the highest level since 2009, when the financial crisis began. This result surpassed the data from 2009 to 2011, which is encouraging for future trends. Forecasts for 2015 also predicted further investment growth.

Currently, the market is mostly controlled by local investors, who account for about 80% of the total number of transactions. However, foreign participants, especially from Austria and Switzerland, are also showing activity.

Prices for residential real estate

In recent years, there has been a significant increase in residential real estate prices. For example, according to statistical data, in 2011, the price per square meter of housing in Berlin was 1,404 euros, and by 2014, it had risen to 2,191 euros. The cost of housing varies depending on its geographical location and potential rental yield.

Investors looking to purchase properties in high-demand regions are willing to pay an amount that exceeds the annual rental income by 20 times. In less popular cities, this ratio is around 11-12. An example is the sale of real estate in the Hamburg district of Barmbek, where a property sold for 1.2 million euros, which is 18 times higher than the expected rental profit for the first year.

Investment attractiveness issues

The question arises whether it is worth investing in such properties. Germany, as a country for investments, does not always guarantee high returns in the short term. The main motivations for purchasing real estate are the desire to preserve capital and enhance personal status.

The overall return on investment is made up of two parts:

• rental yield,
• capital gains.

A critical factor for these indicators is both the specific location and the overall economic development of the region.

Expert opinion

Alexander Ordenat emphasizes that rental yield should not be considered the only indicator. For example, in a small town, the square footage of an apartment costing 20,000 euros may provide a yield of around 10% per year; however, after accounting for management expenses and taxes, this figure can significantly decrease, leading to an almost zero income.

On the contrary, in Düsseldorf, despite lower profitability, property owners benefit from high liquidity and rising prices. Thus, if the property is resold in three years, its value may significantly increase compared to the original price.

Statistics on profitability

According to data from CBRE, in the fourth quarter of 2014, the average yield on residential real estate in Germany was 4.26%. Depending on the region, rental income ranged from 4% to 7% per year. This means that with stable rental rates, the property will only pay back the investor after 20 years. However, with rising rental prices, the payback period for investments may shorten.

Munich: difficult profitability situation

In Munich, which is the most expensive city in Germany in terms of housing, the annual yield rarely exceeds 5.5%. Sometimes this figure drops to 2-2.9%, highlighting the challenges of investing in real estate in the German market, where the focus is now shifting to future capital investments rather than just current income.

Investment attractiveness of Bavaria

Real estate in Bavaria attracts significant attention from investors due to its price growth potential, especially in Munich.

Population decline and the state of the real estate market

In some regions of the country, there is a decline in population and a downturn in industrial development. One such place is the Saar region, where investments in income-generating real estate are becoming unfeasible.

Housing prices in Eastern and Western Germany

In East Germany, housing prices are noticeably lower than in the western part. For example, in prestigious areas of Dresden, the average cost of a rental property is 1,930 euros per square meter, while in Leipzig it is 1,570 euros. In comparison, in the central part of Berlin, prices for similar properties can reach up to 2,980 euros per square meter.

In the western regions, the conditions are completely different. In the elite areas of Munich, the cost of housing ranges from 4,600 to 16,000 euros per square meter. In Düsseldorf, the average price is up to 3,170 euros per square meter, while in Frankfurt it is up to 3,830 euros.

Statistics on transactions in the income property market in 2013

If we look at the statistics of transactions in the income property market in 2013, there were 1,516 transactions registered in Berlin, where prices for properties ranged from 1,120 to 2,980 euros per square meter. Rental rates in prestigious locations varied from 12 to 23 euros per square meter per month, providing yields from 4.9% to 5.9%.

• Bremen:288 transactions, price range from 800 to 2,340 euros per square meter, rental rates from 9 to 13 euros, yield from 6.2% to 7.9%.
• Hamburg:411 transactions, prices ranging from 1,450 to 3,500 euros, yields from 4.9% to 5.9%.
• Dresden:381 transactions, prices ranging from 890 to 1,930 euros and yields from 5.6% to 6.5%.
• Düsseldorf:390 transactions, prices ranging from 1,125 to 3,170 euros, yields from 5.3% to 6.3%.
• Cologne:592 transactions, rental prices from 1,090 to 2,980 euros, yields from 5% to 6.2%.
• Leipzig:794 transactions, prices ranging from 620 to 1,570 euros, yields from 6.3% to 7.7%.
• Munich:171 transactions, prices ranging from 2,100 to 16,000 euros, returns from 4% to 5.5%.
• Frankfurt:318 transactions, prices ranging from 1,360 to 3,830 euros, yields from 5% to 6.1%.
• Stuttgart:140 transactions, prices ranging from 1,560 to 3,300 euros, returns from 5.5% to 6%.

Trends in the rental market

Interestingly, in 2012, when purchasing apartment buildings, most investors chose Berlin. In this city, rental rates have shown steady growth: in 2010, rents ranged from 8.5 to 16 euros per square meter per month, while by 2014, they ranged from 12 to 23 euros.

One-bedroom apartments on the outskirts are rented for 200–300 euros per month, while in the center, the rent reaches 700–1,000 euros. In just the first half of 2013, Berlin's population increased by 19,000 people.

The market for income-generating real estate in Berlin

According to information from Engel & Völkers, in 2013, Berlin took the lead in the value of sold income properties, with a total amount of 3.8 billion euros from 1,516 transactions. One of the reasons for Berlin's success is the lack of supply in the real estate market in the Bavarian capital.

Recommendations for investors

Experts recommend purchasing income-generating properties in markets with stable rental rates. As Ali Arnaut, head of Engel & Völkers, points out, it is becoming increasingly important to anticipate the future income prospects from investments. A key aspect is the right choice of city and neighborhood for investments.

It is recommended to focus on areas with a developing economy, rising rental prices, and stable demand for real estate. Suitable regions are characterized by an increasing population and a lack of large-scale construction projects, which creates favorable conditions for investment.

Investment in real estate

Investing money in real estate is becoming an important step for investors as they try to minimize potential risks. Berenberg Bank expert Christian Wittke reports that the lowest likelihood of problems is observed in the most popular areas, such as Prenzlauer Berg in Berlin and Falkenried in Hamburg. In these locations, rental properties are always in high demand.

Despite the common belief that there are many unoccupied apartments in Berlin, this statement does not apply to elite neighborhoods, which, on the contrary, continue to maintain their appeal. According to experts, in Prenzlauer Berg, only1.2%The housing is not occupied by tenants, which is a very low indicator for this market.

Economic stability of cities

In addition to Berlin and Munich, experts recommend paying attention to the economic situation in Hamburg, Cologne, and Düsseldorf – these five cities have stable and predictable rental income.

Expenses for maintenance and profitability

When analyzing the costs of maintaining real estate and their profitability, aspects of value play an important role. Prices for income-generating properties in Germany start at250-300 thousand eurosFor example, in Dresden, the average selling price isin 2013compiled988 thousand euros.

It's interesting that in Hamburg, the average cost of income-generating real estate is about2.89 million euros...while in Munich, prices range from...2 to 3 million eurosIt's astonishing, but almost10%Buildings in Munich are valued higher.10 million eurosIn Berlin, the average cost of income-generating real estate reached in 20132.5 million euros– this is the highest figure since1995.

Example of purchasing a rental property

For example, for440 thousand eurosIt is possible to purchase a rental property that contains two two-bedroom apartments and two one-bedroom apartments, located near the center of Stuttgart. However, it is important to consider additional expenses related to notary services, real estate agents, and purchase taxes, which will amount to approximately50 thousand eurosTherefore, the total amount needed for the purchase will be489,544 euros.

Let's take a closer look at the expenses:

• the market price of the real estate property –440,000 euros
• notary services –6,600 euros(1.5%)
• tax on acquisition –22,000 euros(5%)
• real estate agents' commission –20,944 euros(4.76%)
• annual maintenance costs from the management company –2,400 euros(6%)
• accounting services for a year –400 euros
• income tax on rental income per year –2,528 euros(15.825%)
• annual rental income (before tax) –40,000 euros(9.09%)
• net annual income –34,672 euros(7.88%)
• the payback period is12.7 years

Owner's liability

It is important to consider that the responsibility of the owner of income-generating properties is usually higher than that of those who own several apartments. The main function of a landlord is to maintain the property in good condition. To reduce maintenance costs, some owners decide to install solar panels and insulate facades.

Nevertheless, the responsibilities for timely payment of rent, utility bills, taxes, as well as expenses for cleaning and gardening services often fall on the tenants. In certain circumstances, property owners may also cover the costs of a management company, whose share of expenses often amounts to approximately6%from "cold" rent, excluding taxes and additional costs.

Taxation for legal entities

If there is a need to purchase real estate through an existing legal entity in the country, such as a GmbH (limited liability company), then the rental income tax rate will be15.825%.

Conclusion

The conclusion of this article summarizes a rather interesting and multifaceted topic regarding investments in income properties in Germany. I outlined the pros and cons of this type of real estate, demonstrating how important it is to carefully select an investment property based on market conditions and personal goals.

Stability of the German economyThe high demand for rentals and well-thought-out legislation create an attractive situation for investors.

Choosing a real estate property

As I mentioned before, it is important to consider the location of the property. For example, in large cities like Düsseldorf, the absence of immigrants ensures stability, while in other cities with a higher proportion of migrants, the situation can be more risky. This highlights the need for a thorough market analysis and understanding of the local situation before making investments.

Investment strategies

My hope is that this research will help both novice and experienced investors to approach the real estate acquisition process in a more informed manner. Different investment strategies, whether buying a single house or a bundle of apartments, allow for a customized approach to each individual case.

The market for income-generating properties

Today, the market for income properties in Germany is indeed on the rise, and many investors see this as a significant opportunity for generating stable income. I am confident that with the right approach and in-depth market knowledge, it is possible not only to preserve but also to grow capital.

I hope that the information and advice presented in the article will be helpful for everyone who intends to enter the world of real estate investment.