Germany’s international and multicultural capital has always been a magnet for people from all over the world and is unlikely to lose any of its appeal – which is also noticeable on the real estate market. While demand is constantly growing, supply is barely keeping pace – the increase in value of a property in Berlin therefore puts many a traditional form of investment in the shade.
In the following article, we would like to make it easier for you to decide on a capital investment in the form of a property, focusing on Berlin’s exciting real estate market. Whether the investment object is a capital investment in the form of a house or a condominium – we will give you an understanding of your options and explain the advantages and disadvantages step by step. But this much we can already reveal – buying an investment property in Germany’s largest city should also be worthwhile for you!
What do we mean by an investment property?
Before we devote our full attention to Berlin’s real estate market, let’s take a brief look at the meaning of the term investment property. We could formulate a definition of investment property as follows: Investment properties are income-producing properties that stand in clear contrast to a property used by the buyer himself – in other words, they pursue the goal of earning money. Due to their tangible value, they are among the most popular forms of investment and, unlike shares, are part of a much more stable market.
Low interest rates promise cheap loans for the purchase of a property and have been leading to sharply rising prices for some time now, especially in major cities such as Munich, Frankfurt and Berlin.
How expensive can a property be as an investment in Berlin? - How to determine the market value
Assessing the market value of a property correctly is often not that easy, especially when prices continue to rise. However, you should never be tempted to make a hasty decision – even if an offer looks particularly attractive to you. So take your time to think it over!
Although we cannot provide a calculator due to the individuality of houses and apartments, the following rule of thumb will help you to gain a rough overview: Your future capital investment in the form of a property should have paid for itself after around 30 years, i.e. recoup the purchase price via rental income. In Berlin’s sought-after districts, however, up to 35 years is still acceptable.
Assuming you want to charge a rent of 900 euros per month for your property, the purchase price is calculated as follows:
360 months (30 years) x 900 (monthly rent in euros) = 324,000 (approximate price of the property)
You should therefore not spend much more than the amount determined in each case, but there are a few other factors to take into account when determining the price. With regard to the increase in value of your property, try to determine how the location will develop in the future, what the transport links are like and whether there are leisure facilities and green spaces nearby. However, Berlin’s infrastructure in particular is likely to be positive – the public transportation system is one of the most modern and efficient in Europe.
But also incidental costs when buying a property should not be neglected in your calculations – estate agent commissions, land transfer tax and notary fees are not insignificant cost factors.
What else do you need to consider when investing in real estate in Berlin?
Once you have given sufficient thought to the market value of your property as an investment, there are a few other points you should definitely consider to avoid unpleasant surprises.
You may have already determined a suitable rent, but the question arises as to whether this can be paid in the respective district. In Berlin in particular, there are significant differences between the individual districts. While you don’t have to worry about this in upscale neighborhoods such as Charlottenburg, in districts such as those around Görlitzer Park, you should take into account that there is a higher level of unemployment and therefore problems with paying the rent. A look at former tenancy agreements can also be informative here.
So at what yield is a property worthwhile as an investment?
A yield of four to five percent is a common figure – however, due to strong market dynamics, which cause purchase prices to shoot up faster than rental prices, this is almost impossible to achieve, especially in prime locations. So if your property is located in a sought-after and low-risk district of Berlin, such as Weißensee or Tempelhof, you can expect a lower yield.
A rough calculation of your gross yield can be estimated as follows – as before, we assume a rental income of 900 euros and a market value of 324,000.
10,800 (annual rental income) / 324,000 (market value) x 100 = 3.33%
However, a few other factors are included in the calculation of the actual yield – i.e. the net yield. To do this, you first need the net rental income, which you can calculate as follows:
Annual basic rent – non-recoverable operating costs – annual reserve = net rental income
In our case, for the sake of simplicity, we assume a net rental income of 600 euros – with this and the total acquisition costs, which we put at 350,000, we can now calculate the net return:
7,200 (annual net rental income) / 350,000 (acquisition costs) = 2.05%
However, this simplified example calculation does not include maintenance items or tax benefits. There is no general answer as to whether this return is worthwhile for your property as an investment, but the four to five percent mentioned above can be taken as a guideline as to when a property is very likely to pay for itself.
So how sensible is a property as an investment in Berlin? - The advantages and disadvantages at a glance
Of course, real estate also involves some risks – in this respect, it is the least different from traditional forms of investment. When looking for a property as an investment, it is therefore important to consider the advantages and disadvantages, which we have summarized for you in a brief overview.
The advantages
- The tax savings on real estate as a capital investment in particular make most other forms of investment look old – because any ancillary or acquisition costs, repairs and even the interest on the mortgage can be deducted from tax. If you proceed cleverly, you can save a lot of money in some areas.
- The aforementioned security compared to shares and funds makes investment properties particularly attractive for retirement provision – the income from the rent is a welcome addition to your pension.
- Monetary assets are subject to deflation and inflation, whereas real estate is practically exempt from this factor.
- The yield can be generated in the form of rental income immediately after purchase and continues to rise in cities such as Berlin – the forecasts for this are clear.
- However, the most decisive advantage of real estate as a capital investment is probably the prospect of a significant long-term increase in value, which, depending on the location, can be many times that of traditional forms of investment – here, too, you can expect a positive development in Berlin over the next few years.
The disadvantages
- Houses and apartments are subject to external influences and can incur considerable costs through repairs, renovations and other maintenance measures – if the property is part of a community of owners, you also do not have sole power to decide what and how much money you have to pay for such measures. Whether the property is a new build or an old building that requires more maintenance also plays a role here.
- Under certain circumstances, your future tenant may become a risk to your investment – depending on their behavior, your administrative expenses will vary greatly.
- In many German cities – including Berlin – laws also restrict you in setting your rent and thus indirectly also your return on investment.
- Finally, and probably most importantly, when investing in a property as a capital investment, the long-term nature of the investment is crucial – this dampens hopes of quick money – while you can expect to pay considerable sums for the purchase at the beginning.
And how do I finance my property as an investment?
Your equity is an important form of financing for a capital investment in the form of a property – because even if interest rates are low, they can become even more favorable if the term contractually agreed with the bank is shorter. You should make sure that you choose a loan amount that is 10 to 25 percent higher than the actual purchase price in order to prevent the risk factor of vacancy or costs arising from maintenance measures.
Another option is the full repayment loan. This form of real estate or construction financing requires the loan to be repaid in full during the fixed-interest period – the borrower is therefore completely debt-free at the end. Although this type of loan is quite cheap, it involves high repayment installments. You should therefore make sure in advance that you will be able to pay them.
Do you have any further questions about real estate as an investment in Berlin? Then our other Article on real estate as an investment in which we take a closer look at your benefits, provide further tips and tricks for choosing a property and a final checklist with the most important information for you.
