Making money from value-added projects in Germany
The prices for residential property in large European cities have been growing faster than rental rates, meanwhile rental yields have been decreasing over recent years. According to Wohnungsboerse.net, the average yield rate for a 60 m² apartment dropped from 4.4% in 2011 to 3.7% in 2016. This figure is even lower in the most liquid markets. For instance, a residential property located in the centre of Munich yields as little
To those who look for higher yields we recommend investing |
Other advantages
Where to invest
One of the most interesting markets in terms
- high real estate liquidity:
a high-quality apartment in the most popular markets, such as Munich and Frankfurt, attracts20–40 buyers; - affordable financing:
non-residents can obtain 50% LTV mortgages at 1.5% per annum in Germany, whilst residents borrow up to 100% LTV at a rate of 0.8% per annum; - high rental demand: on average, 50% of the population in Germany rent residential property, while in Berlin over 80% do so.
Buying apartments for renovation and subsequent lease is only recommended in the economically healthy cities of Germany, such as:
- Bavarian cities (Ingolstadt, Munich, Nuremberg and its surroundings area: Amberg, Weiden, Kümmersbruck, Lauf, Neumarkt, Pegnitz, Schwandorf, in addition to the city area between Roth and Erlangen) - the most affluent region of Germany;
- Berlin - the capital and the largest city in the country;
- Hamburg - one of the major port cities in Europe;
- Frankfurt - a banking centre of Europe and large traffic hub (Frankfurt Airport is one of the busiest in the world);
- Stuttgart - a global
market-oriented industrial centre (Bosch, Porsche, Ritter Sport and other companies are headquartered in the city and its outskirts).
How to carry a project out
Let us consider an example
In February 2017, Russian buyers purchased a 69 m² apartment next to the historic centre of Munich, in the borough
The property acquisition value was €610,000, whilst the new owners spent €43,000 on renovation, furnishing and interior design. This resulted in the property being assessed at as much as €828,000 by May 2017. After adjusting for all the expenses and the loan repayments,
Yield estimate for a value-added investment project in Munich
Source: Tranio
% | EUR | |
---|---|---|
Apartment price | 610,000 | |
Additional acquisition costs | 9.07 | 55,327 |
— Acquisition tax | 3.50 | 21,350 |
— |
3.57 | 21,777 |
— Notary and registration fees | 2.00 | 12,200 |
Repair costs (incl. VAT) | 43,149 | |
Loan expenses (interest and fee) | 5,000 | |
Total cost | 713,476 | |
Selling price | 828,000 | |
Net income | 114,524 | |
Capital gain tax | 30.00 | 34,357.2 |
Gain | 80,167 | |
Loan obtained | 52.00 | 317,000 |
Equity invested | 396,476 | |
Gross return on equity | 20.20 | |
Management company fee | 25.00 | |
Yield rate, less the management company fee | 15.15 |
Besides
This scheme is more profitable than renting out a newly built apartment to only one tenant. Each of the three tenants will pay €700 per month plus the utilities. The owners will receive €2,100 per month or €25,200 per year. The rental yield rate is 4.1% per annum.
If they had bought a newly built apartment and rented it out to just one tenant, the owners would earn €1,350 per month. Such an apartment would be smaller (as the price per square metre is higher
Rental yields for a new-build compared to a renovated residential property in Munich
Source: Tranio
New-build with one tenant | Renovated existing property with three tenants | |
Price, EUR | 610,000 | 610,000 |
Price, EUR/m² | 12,200 | 8,840 |
Space, m² | 50 | 69 |
Rental rate for one tenant, EUR/m² | 27 | 10 |
Rent per tenant, EUR | 1,350 | 700 |
Annual rental income, EUR | 16,200 | 25,200 |
Rental yield, % | 2.6 | 4.1 |
•
Renovation projects have their risks: budget deficit, schedule overrun, selling for a lower price than expected. However, they are justified, |
Yulia Kozhevnikova, Tranio
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