Why Buying-to-Let is so attractive in Germany

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Dr. Christian Mulder

Jul 14, 2020
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Have you ever thought of buying a property to rent it out? If not – here´s your chance to think about it. Germany has an unusually generous system for Buy-to-Let properties!

Advantages of Buy to let

  1. After 10 years you can sell a property that has been rented without any capital gains tax

  2. For properties that have been built after 1925 you can deduct  2 percent of the value of the building for tax purposes and you can deduct your mortgage interest and maintenance costs from your rental income.

  3. Interest rates and repayment terms are very similar to domestic, own home buyers – these favourable conditions are not available to people that do not live or pay tax in Germany.  

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

As a result, investing in rental houses can be as attractive as buying one for your own use in Germany. We calculate a typical annual rate of return on the order of 5 percent of the house price if you hold a property for 10 years. 

sample-calcultaion-annual-return@2x

The total return for a relatively conservative appreciation of 3 percent is hence 4-5,5 percent. See for a background on appreciation, our deep dive in 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:

  • Purchase costs that can range from 5.5-15,5 percent, which need to be amortized over the holding period. E.g. a purchase fee of 5,5 percent reduces return by about 0,55 percent if the holding period is 10 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-to-let

Indeed as an investor leverage is a key consideration. Take the following example: if you bring just 20 percent of your own money for a house with a purchase cost of 10 percent, and borrow the remainder (90 percent), your return is much higher.

A quick calculation

Say your average return is 5000 Euro on a house of 100.000 Euro. Since you have put in only 20.000 Euro of your own money, your rate of return is 5.000/20.000=25 percent. Over time as you pay off your loan and tax increases this return goes down. We calculate compound rates of returns of about 12 percent for a 10 year holding period, declining to 8 percent for a 30 year holding period. 

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

High return on invest

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, the investment tends to be relatively safe. In Germany buy-to-let is hence a very attractive investment option.

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

Tax advantages

For houses built from 1925 onwards you can depreciate 2 percent per year. For houses built before the depreciation its 2,5 percent 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 value of the land. The land cost is usually determined based on local community land value tables. In the public Boris.de database you can find indicative values. 

Historic returns on house prices

The following paper calculates historic returns on house prices in Germany as 7,82 percent – based on the longest available series.

return-longest-sample@2x

Source: Jordà, Òscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor. 2017. “The Rate of Return on Everything, 1870–2015” Federal Reserve Bank of San Francisco Working Paper 2017-25.

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Dr. Christian Mulder

Chris is a former Senior Economist from the World Bank and IMF. He is a Hypofriend Co-founder.

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