Why being a landlord is so attractive in Germany?
Germany has an unusually generous system for investment properties, and the returns are high. Read here what you need to know.Updated on 26 February 2025
Special advantages of real estate investment properties in Germany
After ten years, you can sell a property that has been rented without any capital gains tax, unlike, for example, ETFs.
You can deduct 2-2,5 % of the value of the building in addition to your mortgage interest and maintenance costs from your rental income before you pay income tax!
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 more information on the increase in value, please refer to our detailed report on German house prices.
This is, of course, a simplified calculation – our customers can get a detailed spreadsheet to calculate their returns and check the cash flows under different scenarios. The simple calculation 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 is higher.
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
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.
Financially attractive is also 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.
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.
