Investing at the Neighbours

Investing at the neighbors - Learn German

When house prices rise so rapidly, various areas suddenly become (relatively) unattractive from an investment perspective. This also applies to our own local area and, realistically, most of the western portion of the Netherlands. Can you still invest in Real Estate, of course, but the ROI will be less favorable. What do you do? You start to look at investing at the neighbours: you start to look at Germany!

Investing at the Neighbours

We are still looking for the next Real Estate opportunity, but we noticed that we are much pickier this time around. Why? Because we want to make sure we get the best bang for our buck (well, Euro that is). This will likely be our last (big) purchase for quite some time, so we want to make it count. With the rapidly rising house prices in the Netherlands it is becoming much more difficult. There are still quite a few RE investments to be purchased, but the cap rates/ROI are “dropping like a brick”. Or we are just bad at finding the right deal, which could also be true.

Investing at the Neighbors - German Real Estate

Investing at the Neighbors – German Real Estate
Source: http://www.hydro.com/en/about-hydro/hydro-worldwide/germany/

A couple of weeks back we thought we have found our opportunity for 5 rental units, but this fell through on the price. We ended having a difference of €15.000 between our highest offer and the seller’s bottom price. Considering several unknown risks (condo board issues, tenant modifications to the units, backlog in maintenance, etc.) we decided to move on. We are willing to take some (calculated) risks, but this was too much.

In the following (continued) search for properties we browsed many RE investment and house sites. At some point I bumped into a section on investing in Germany. Considering we could not find anything to our liking in the Netherlands, Germany suddenly appeared interesting. You can find one of the many overviews of German properties here: https://www.beleggingspanden.nl/dynamic/panden/land/Duitsland.html (Dutch only).

However, we had many questions, as we are unfamiliar with this RE market. Time to start looking around for some answers.

The Basics

The German property market is, to a degree, very similar to the Netherlands. Property prices are on the rise, mortgage rates are low, rents are high and tenants are well protected. Some of these items are good, some not so much. However, for the investor there are some interesting differences.

In Germany there is a so-called “kaltmiete” and “Warmmiete”. With “miete” being “rent”, you probably can figure out that “kaltmiete” is the pure (“cold”) rent of the property and “Warmemiete” includes items such as certain utilities, condo fees, building management fees, etc. Now this is also where it gets interesting, as you as the landlord can apparently include quite a few things into the “warmmiete”, such as building insurance, property taxes, waste and sewage fees, building management, cost for common areas and snow removal costs (not only for a condo, but also for a house).

This is considerably different from the Netherlands where various of these items cannot be transferred to the tenant, they are indirectly (and only partially!) included in the rent. But this also means that the expense for you a landlord are higher, which weighs on your return on investment. In short, German RE yields appears to be similar on the surface, but when diving into it, the yields are actually a bit better due to a shift in expense to the tenants.

There are however 3 things you cannot include in the “warmmiete”:

  • Property management fees;
  • Maintenance cost, and,
  • Income taxes (go figure ;-).

When managing a property from afar, you will need a property management firm obviously. Rates appear to be very similar from what we are used to back home. One item is far more expensive in Germany, which are the closing costs. Depending on where you buy in Germany, the total closing costs range between about 10-15% of the purchase price. This is primarily caused by higher land transfer taxes and costs for the realtor.

Investing at the Neighbors - German Real Estate - Castle

Investing at the Neighbors – German Real Estate – Castle
Source: http://www.planetware.com/tourist-attractions/germany-d.htm

Taxes

Now,  rental income from various German properties does appear to be appealing, but then taxes have not been paid yet! We don’t know much about German taxes. It was therefore time to talk to some experts, so we reached out to Mr. and Mrs. W from http://whatlifecouldbe.eu/. They lived in Germany for the longest time and currently own 6 properties that they rent out. They have relocated to Romania and are technically FI on their Real Estate investments.

We had a great call for nearly 2 hours on Friday night about German RE and FIRE in general, which was great fun indeed. We also got some interesting tips to check out. However, there is lots more to discuss and we are still to setup another chat to continue the discussions. Thanks again Mr. W for your time, much appreciated!

In the Netherland you have to pay wealth tax on your RE investments. This is a rather favorable system in the sense that you can keep your tax bill limited (you can use your debts/mortgages and the assessed value of the property in rented state to limit your wealth and therefore taxes). But when investing in Germany, it appears you will have to pay source taxes. The system in Germany is different and income from RE investments is considered under income tax, for which the tax rates are much higher (starts at around 10% and goes up to 40% in steps).

Because our primary country for tax purposes is not Germany (but the Netherlands), there is also no tax exception on the first €8.500 p.p. In short, we would start to pay taxes on every (net) euro we would earn from RE investments. There is a tax treaty between Germany and the Netherlands, so we might still be able to limit/avoid double taxation. That being said, we have lots more homework to do here.

Other Items to Consider

There is definitely some work to be done on the taxes side of things, but there are also some other things to consider (good and bad):

  • The properties are not “around the corner”, you need to manage them from afar (added risk);
  • Our German is not that great right now, so the language barrier plays a part too (added risk);
  • Finding a good property management firm that you can trust is a must (difficult);
  • Local by-laws and their implications;
  • How do the tenant protection laws work in Germany (added risk);
  • Insurances, currently we don’t know if they are similar to the Netherlands, in terms of coverage and price;
  • You might need to make the occasional trip to Germany to check out the property (yeah, holiday opportunity too!);
  • You will need to make sure contractors are not screwing you over for renovations and/or repairs (ties in with note above on management firms);
  • The property purchase costs are relatively low per square meter, however, this also means that you will have to consider a higher maintenance budget per property (i.e. a higher rate than say 2.5-3.5% of the property value). For example, you can buy a large house for €250.000-€300.000 (with 8 rental units), which is in good condition. In the Netherlands you might make a maintenance reservation of say €6.500-7.500 per year. But with a large German property with 8 kitchens, 8 bathrooms and a large exterior surface, this reservation is likely too low. Especially since labor and materials cost are about the same in Germany as in the Netherlands. Again, some homework is in order to find out what is appropriate.

 

How about you? Have you been triggered to consider (RE) investments beyond your borders? What do you think about our ideas? What have we missed?

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16 comments

  1. We like your idea of pursuing RE investments abroad. If a good opportunity presents itself this can be successful. Me (Belgian) and my girlfriend (German) are currently on the road to become FI. We are well aware of the ongoing increase in prices, also in Germany. However, there will always be hidden gems ready to be discovered.
    We are new on the scene and our adventure can be followed on themelondeal.com.

    1. Well, at least you have the language side covered! That should help a lot in investing in Germany 🙂 Perhaps we should have a chat. Best of luck on the journey, will make sure to check out your blog.

  2. Pretty cool to explore! We don’t have any RE investment at the moment but in the future we might.. The distance wouldn’t really attract me to the German market, but I really like the fact that you are exploring other options… The western part of NL is so expensive at the moment..

    1. No kidding eh? House prices are going up really fast, that was also the trigger to start looking elsewhere, which meant further east. Just happen to hop the border too in the search. The distance is not so much the issue, a good property manager will fix that, more worried about taxes and the language barrier.

  3. Interesting way of thinking! As a RE starter, this is a step were not (yet) willing to make. You’ve already found a lot of info, opportunities and risks combined. Very curious how you guys will proceed in this.

    1. We are primarily concerned with the tax risks and still need to perform a few calculations on the maintenance reservations. But you never know, it might still be interesting!

    1. Yes it is, but it’s fun (or at least we think it is). That being said, the workload is primarily done upfront, the rest is relatively passive.

  4. Kudo’s for investigating these new opportunities ad keeping us posted so we can learn along. I am tempted by the lower tax burden on RE compared to ETF’s as you commented on my site but hesitant due to my lack of knowledge of RE investing and the risk of renter hassle/maintenance etc. But maybe I will overcome these somewhere in the future and diversify towrads RE..

    1. Hey Mr FOB, there are definitely some tax benefits with RE investing above ETF investing. Fortunately, RE investing is not rocket science and can be learned pretty quickly. The real trick is to stay critical and be happy putting in some time and efforts up front. We like that, which makes RE investing interesting for us. If you have any particular questions, don’t hesitate to reach out, you got my number 🙂

  5. Interesting idea! It’s probably a lot of work, but once you get the hang of it, it should become easier. I also have family who explored the German market a bit for a rental, but they backed out at the last moment. Mostly because it wasn’t very handy to have a property really far from home. I can imagine though that some properties might be a great find. They were looking for something like a B&B, but an appartment would be a whole different story, I think.

    1. It will have to be a passive investment for sure, not planning to open an AirB&B in Germany any time soon 😉
      The workload is really centered up front, like you wrote, once you have that sorted that out, the rest should be pretty smooth sailing.

  6. Interesting idea, but it certainly ads to the risks. I’ve known a few people who own RE in a different country than they reside, and it worked out OK.

    They do have very intricate knowledge of that local market and it’s laws, not to mention friends or family members that check on the property from time to time. Those things make all the difference I think.

    1. They absolutely do make a difference. This is for us not more then fun homework with potential, once we have made some progress and calculations we can assess if the risks are worth it or not. Time will tell!

  7. Keep going…! I like the attitude that you are on the outlook for other horizons to do investments. Curiosity is key to discover new interesting sources.

    Keep us posted and say hey to the WLCB folks!

    1. Curiosity is definitely key, but there is still a lot of work to be done before we know if this is something we want to pursue. The language barrier is a bit of a problem here as very few sites in Germany offer English translations……Getting my German back up to a reasonable level is going to take some time, and probably too much time for our investment horizon!

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