Special Advantages of Real Estate Investment Properties in Germany

1. After ten years, you can sell a property that has been rented without any capital gains tax, unlike, for example, ETFs.

2. You can deduct 2-3 % of the value of a used building in addition to your mortgage interest and maintenance costs from your income tax! With energy efficient new builts you can now depreciate up to about 50% in 10 years and get 20-25% of the purchase price back from the tax office.

3. Banks give you excellent terms: Interest rates and repayment terms are very similar to those of German own-use home buyers. These favorable conditions are not available to people who do not live or pay taxes in Germany.

In an international context, these generous conditions are unheard of. Typically, mortgages need to be repaid in 20 years, and the interest rates are several percentage points higher for investors. Nearly everywhere, capital gains are taxable and rarely can build up costs to be depreciated.

Take advantage of the favorable conditions and become a landlord.

As a result, investing in rental houses can be as attractive as buying one for your own use in Germany. The return on the capital you invested (IRR) is, under reasonable assumptions, about 12 % in the first 10–15 years.

The assumptions are a 95 % Loan-to-Value Ratio, a rental yield of 3 %, annual rent and price gains of 3 %, 11,5 % purchase costs, etc. Of course, you run the risk on the capital invested, but these are very attractive returns also compared to a stock-based index where you have gross returns of 6-8 % (net often as low as 4,5 to 6 %) and need long holding periods to avoid the risk of loss of capital.

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The total return for a relatively conservative appreciation of 3-5 % is up to 5 % for an existing built. For new built-with high tax depreciation possibilities and special KFW borrowing conditions, the ROI (return on the money you actually put in) can be much higher, over 20%. Indeed, hard to believe, but this is what you get when a government stacks one benefit upon another.

For more information on the increase in value, please refer to our detailed report on German house prices. For a demonstration of return click on the above invitation to see our projects that qualify for the special depreciation and financing terms that make them so attractive.

The return for existing builts is, of course, a simplified summary – our customers can get a detailed spreadsheet to calculate their returns and check the cash flows under different scenarios. The same applies for the new builts with special conditions. Note that the simple calculation for an old-built above ignores the following:

• Purchase costs: They can range from 5,5 to 12,25 %. They need to be amortized over the holding period. For example, a purchase fee of 5,5 percent reduces return by about 0,55 % if the holding period is ten years.

• Taxation

• Compounding: Over time, all items, except the interest rate, will grow, adding to the return.

• Interest rate risk: After the end of the fixed interest rate period, interest rates will change.

• Leverage: The return on the money you actually put in, the ROI, is higher.

Calculate your investment property returns

Leverage Is a Key Consideration When Buying an Investment Property in Germany

Indeed, as an investor, leverage is a key consideration. Take the following example: If you spend only 20 % of your own money on a house with additional purchase costs of 10 % and borrow the remainder (90 %), your return is much higher.

A Quick Calculation for Existing Buildings

Say your average return is 5.000 € on a house of 100.000 €. Since you have put in only 20.000 € of your own money, your rate of return is 5.000/20.000 = 25 %.

Over time, as you pay off your loan and tax increases, this return goes down. We calculate compound rates of returns of about 12 % for a ten-year holding period, declining to 8 % for a 30-year holding period. 

This is still incredibly high. Of course, these are based on scenarios, and there are risks involved.

High Return On Investment

But the point here is that the returns are potentially very high. As house prices rarely decline in nominal terms, your rental yield is already so much higher than the interest you pay that the investment tends to be relatively safe. In Germany, investment property is, hence, a very attractive investment option.

No wonder many people in Germany use investment properties to supplement their retirement income. 

Tax Advantages

In addition to the revenue from rental income, tax breaks also increase the return on investment. The tax authorities grant them as depreciation for use (“Absetzung für Abnutzung”, short: AfA). With this building depreciation, owners can claim the acquisition and production costs of their property as part of a tax write-off property in Germany, helping to reduce their overall taxable income.

For houses built from 1925 onwards, you can depreciate 2 % per year. For homes built before the depreciation, it’s 2,5 %. There are limits on the costs per square meter you can deduct.  

You can only deduct the cost of the building. I.e., the purchase value plus renovation cost minus the land value. The land cost is usually determined based on local community land value tables. In the public BORIS-D database, you can find indicative values.

Especially attractive are properties that can benefit from the so-called Special Depreciation or Sonder AfA (§ 7b EStG). It applies to newly created rental properties that meet the energy efficiency standard EH40/QNG (Efficiency House 40; Sustainability Seal). It includes newly created apartments through roof extensions, rooftop conversions, or conversion of commercial space to new rental apartments. These properties should have an upper construction cost limit of 5.200 € per m²; 4.000 € per m² (of this amount) can be depreciated. You can linearly depreciate 5 % over 4 years. Note: Depreciation applies only after the building has been completed. You need to rent out the property (or have it available for rent out) for at least 10 years.

Discover your investment property options.

Historical Returns on House Prices

The Federal Reserve Bank of San Francisco paper “The Rate of Return on Everything, 1870–2015” calculates historical returns on house prices in Germany as 7,82 % – based on the longest available series.

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