Unpaid rent: how to minimise tenant risk in Germany
Tenant rights in Germany are well protected by law and contain clauses that limit landlord rights. Here are some of the main things to look out for:
- Tenancy contract (excluding holiday rentals). These contracts are generally established for an indefinite period. However, the owner can limit the duration of the contract if they plan to take it back for personal use upon expiration of the agreement or if the home is going to be renovated.
- Early termination of a contract. A tenancy contract concluded for an indefinite term can only be terminated by the owner on two grounds: either the landlord wants it for personal use or the tenant has violated the terms of agreement. Eviction must be presented three months prior to contract termination. A tenant does not need a reason to move out, they are simply required to give the landlord three months warning.
- Unpaid rent. Landlords cannot evict tenants even if they fail to pay their rent, meaning that they run the risk of losing several rent payments if this situation arises.
Minimising default risks
The following measures can minimize the risk of income loss:
1. Choose reliable markets
The following criteria determines reliability of rental markets:
- unemployment rate below national average
- standard of living above national average
- active business in the area
- good economic growth forecasts locally
Tip! Bonn, Hamburg, Munich, Oldenburg and Stuttgart are among the best cities to invest in residential property for sale in Germany.
2. Formalise the tenancy contract
When leasing a property for more than a year, get the contract notarised and add a clause that stipulates the tenant’s obligation to pay the utility bills. The agreement usually contains passport and contact details of the tenant, stipulates rent and payment terms. A properly executed tenancy contract enables owners to defend their rights in court if the tenant fails to pay rent.
Tip! If there is no clause regarding the payment of utilities, the owner can be held liable for unpaid bills.
3. Seek legal advice
It seems simple and yet many owners would rather avoid the extra effort and expenses it takes. A lawyer can perform a criminal and civil liability check — they also draw up tenancy contracts. Full legal due diligence for real estate costs about €2,500, depending on the scope of services.
A good real estate agent will refer buyers to a trusted and reliable lawyer who can perform these checks.
4. Require a deposit from each tenant
When concluding a tenancy contract in Germany, property owners can require a deposit (Kaution), the value of which cannot exceed three months of rental payments. So, if the rent is €500 per month, the landlord can request a deposit of €1,500. These funds can be used to cover losses if the tenant stops paying rent.
Keep the Kaution is a separate account as it will be reimbursed to the tenant when the contract is terminated.
5. Check the tenant’s financial solvency
Property owners can check a tenant’s financial solvency by requesting a copy of their employment contract, a credit reference (Schufa Auskunft) from credit securing company (Schutzgemeinschaft für allgemeine Kreditsicherung, Schufa) and a certificate proving the absence of unpaid rent (Mietschuldenfreiheitsbescheinigung).
Tip! Get all these documents before signing any lease agreement to make sure the tenant is reliable.
6. Buy property that’s already rented
Even when the owner changes, the tenants often remain, making it a good way to test for reliability. Look for properties with tenants that have been there for several years and have a good reputation.
The main problem with
long-termrentals is that you can’t increase rent in accordance with the market, so the property value grows but the rent remains the same. However, there is a ”lifehack” we share with our clients: buy one-bedroomapartments because they are usually for single people. Sooner or later, they will get a family and move to a bigger place. This approach allows the owner to get a new tenant about every five years and adjust their rental rate to that of the market.
Yulia Kozhevnikova, Tranio