Should I buy a tenanted property for own-use in Germany? A trap or an opportunity?

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Nick Mulder

Oct 20, 2021
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With property prices rapidly increasing across Germany, many investors are seeing an opportunity to sell their rented properties for a handsome profit. But where does that leave you as a potential homebuyer? Buying a tenanted property can have its advantages and disadvantages. The following article will walk you through some considerations on how you can and should approach buying a tenanted property in Germany. However, before we get started, we want to clarify that from a moral point of view it's very important to be aware of the impact this might have on potential tenants. We only support the notion of buying tenanted properties where the tenants can find similar, suitable housing. 

When looking for your dream home on our property radar, on which you get access to properties from across Germany's property platforms, most people use the filter to exclude already rented properties. 

However, the dream home you're looking for might actually already be rented out. By activating this filter, you will be excluding properties that are tenanted and sold at reduced prices. When it comes to pricing, tenanted properties are often sold up to 30% below the average price of vacant properties.  

Why are tenanted properties sold for less? 

There are several reasons for this, including old rental contracts which make these properties relatively unattractive from the perspective of an investor. In major cities like Berlin, the rental yields of some properties have fallen to as low as 1-2%. Rental yield is the key metric that investors look at when evaluating buying properties and their investments. Since 2015, rental contracts in Germany have been regulated by the Mietpreisbremse, or rental brake, which helps ensure rental prices do not grow too fast. This has protected many tenants, but it has also made investment properties much less attractive from the point of view of an investor. Not being able to increase rents combined with already strong realized gains has meant an uptick in tenanted properties for sale, and expected yields that are rather low, leading to a large discount. As a homebuyer buying for own-use, you can use this as an opportunity to acquire your dream home for a lower price.

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Tenant Rights

Becoming a landlord in Germany comes with strings attached: you cannot simply terminate your tenants' rental contract without cause. Termination for the purpose of increasing the rent is also not supported. 

According to Section 573 (1) of the German Civil Code (BGB), the landlord may give ordinary notice of termination if they have a justified interest in terminating the tenancy. According to Section 573 (2) Sentence 2 of the German Civil Code, this arises, for example, if the landlord requires the premises as an apartment for themself, members of their family or members of their household. For this reason, this case is also referred to as a notice of termination for personal use, or in German, Eigenbedarfskündigung

Germany has some of the best tenant protection in the world. Tenants compose the majority of the population, especially in metropolitan areas, like Berlin, where about 80% of the population rents. However, tenant rights are also divided into a system that protects those who need it most. Since Eigenbedarfskündigung only applies to private landlords it forces large investors to sell their properties, especially when they can also not increase the rent beyond the legal limits. This leaves an opportunity for own-use buyers to buy discounted properties with the intention of self-use.

Cancellation for Own-use

Tenants are well protected by law in Germany. When a landlord rents out a rental property, the tenant becomes the direct third-party owner of the rental property. A landlord can only terminate his tenant's lease if he has a justified interest in terminating the tenancy for example for own-use (Section 573 (2) Sentence 2 BGB).

A notice of own need requires that the owner or the beneficiary (person in need) actually needs the apartment. The simple desire to occupy the property is not sufficient. A sufficient reason for a notice of need could be that the owner himself or his dependents are planning a family and need more living space in the future. A notice of own need for use as a retirement residence is also permissible. Similarly, it's sufficient if you are moving into the city and the property is close to your work.

What are the notice periods for own-use?

In the case of a notice of own need, the notice period depends on how long the current tenancy has existed. If the tenant has already lived in the apartment for several years, he also has longer to look for a new apartment. According to the tenancy regulations (Section 573c (1) BGB), the statutory notice periods are three to nine months, depending on the length of the tenancy:

Duration of the tenancy

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Extraordinary 10 year protection clause

However, in some cases, where tenants have lived in an apartment building before it was legally partitioned into individual apartments, then they have extraordinary cancellation protection of at least three years and in some cases 10 years, (Section 577a (1) Sentence 1 BGB) depending on the state. Buyers should therefore carefully check which period applies locally to the termination of owner-occupied use.

Exceptions for cancellation of own-use: Härtefälle

Härtefälle, or otherwise literally translated as Hardship cases, regard cases where the contractual termination of the tenancy would mean a hardship for the tenant or his family that cannot be justified even when taking into account the justified interests of the landlord (Section 574 (1) BGB). If such a case exists, the tenant has the right to object and may remain in the apartment and continue to occupy it under the previous conditions. The following circumstances may constitute such a case of hardship:

  • Old age

  • Illness/dependence on care

  • Pregnancy

  • Suicide risk

  • Deep roots in the residential environment or community 

  • In case a move endangers a graduation (school, study, training)

  • School-age children for whom a change of school is unreasonable

  • Insufficient income

We must stress that each case should be looked at on a case-by-case basis to understand the legal ramifications, both before you consider buying a specific property as well as before you inform the tenant of the termination. It is especially important that the termination letter is formulated correctly in order to be legally valid. In most cases, a lawyer will also be able to give you a better understanding of your legal claim, which can help you assess the likelihood of the court ruling in your favor. 

Reaching a Settlement before Court

In most cases, both the new owner claiming own-use as well as the existing tenant will argue that their claim is valid. To avoid a lengthy court battle, compensation can be offered to help negotiate and speed up the process. The amount can vary depending on the likelihood of the termination being supported in court as well as the time saved. Ultimately, it depends on how badly the owner wants to use it for own-use, but this can be anywhere from a few thousand euros to assist with painting or moving, all the way up to about 5% of the purchase price. 

For example, if you are buying a tenanted property for 400.000 euro, a 5% settlement agreement would cost you 20.000 €. Assuming you are buying the property at a 10% or 15% discount, you would still be paying a very fair price. 

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A moral dilemma

Due to the shortage of housing and high-demand in growing cities like Berlin, buying a tenanted property comes with a number of issues. It's important to realize that you will ultimately be displacing people. Even when a property is vacated because you're moving within the same city, it still often involves major disruptions. Despite any financial gains, we only support cases where the tenants are, for example, younger couples or young professionals and can easily find similar housing. We do however acknowledge that cancellation for own-use can and should be considered when researching and viewing potential properties for own-use buyers.

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Nick Mulder

Nick is Co-founder and CEO of Hypofriend

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