What is learned from landlords

propertyTicket booth: How to become a good landlord

In Preißelpöhl near Plauen there are still returns, and right: five rented apartments, 416 square meters of living space, 21,744 euros in rental income per year - and that at a purchase price of 400,000 euros. The property offers a “sustainable return”, promises the advertisement. So on to Preißelpöhl!

The reality, however, is often much more complex. According to a study by the German Institute for Economic Research, not even every second private landlord achieves an annual return of two percent or more. After deducting all costs. Renting out is a zero-sum game for one in four. And about one in ten landlords even makes a loss.

This is mostly due to the fact that private landlords rarely increase the rent because a good relationship with the tenants is more important to them than the maximum return. And because they have high running costs for repairs and the removal of blemishes. Or because the tenants change more often than expected and then a complete renovation is often due. All of this does not mean that a property cannot pay off as an investment. However, significantly more criteria play a role when buying a house than when buying an apartment or house that you use yourself.

On the one hand there is the financing. Anyone who wants to buy a property in order to rent it out does not enjoy the top interest rates that private individuals are currently getting for their own homes. Investment real estate is not a standard business for banks, which is why investors have to include surcharges of 0.5 percentage points per year in their calculations. Such guide values ​​always depend on the region and the creditworthiness of the buyer.

The location is also decisive. In contrast to the owner-occupied apartment, other locations are of course possible in addition to your own place of residence. However, investing in rural, structurally weak regions is risky because people there are more likely to migrate. Popular metropolises, on the other hand, are now usually so expensive that it can take decades to earn any money with a rented property. The most interesting are therefore medium-sized cities and municipalities, which are developing well economically and which attract a large number of young people.

But even with a property that is not too expensive in a prosperous region, landlords are still not on the safe side. On the one hand, as with every location decision, the transport connection plays a role. On the other hand, the buyer should pay close attention to what type of apartment is actually in demand. Many families dream of a little house in the country, but most people in Germany live under completely different conditions. Two to three-room apartments with 60 to 80 square meters are most sought after in large cities. In smaller places this area can be a little larger.

Old buildings are popular

The most attractive properties for landlords are, of course, properties that are in such good condition that they can be rented out immediately. White bathrooms, simple kitchens and lots of white walls are an advantage. With flashy 70s colors in the bathroom or dark wood paneling, the question is: How easy can they be removed? Or is the rental market so tense that interested parties can easily ignore such idiosyncrasies?

The type of building is also not unimportant. According to the findings of a research group at Chemnitz University of Technology, real old buildings and Wilhelminian style houses are much more popular with tenants than modern high-rise buildings or even designer properties.

However, that poses another problem. Old buildings are beautiful and popular, but they can also result in higher costs because it is more difficult to maintain them. Anyway, anyone who buys a property for renting should calculate very precisely beforehand how much these costs will amount to in relation to the expected income.

The starting point is the gross rental return. It is obtained by dividing the annual rental income by the purchase price and multiplying the result by 100. On average, it is currently around three percent in major German cities. The following applies: the more stable the real estate market, the lower the return and vice versa. In Hamburg, Berlin or Munich it is less than three percent in many quarters, in Magdeburg, Chemnitz, Cottbus or Dortmund landlords often come to five percent.

Narrow return

In net terms, the figures look less favorable: operating costs, maintenance reserves, provisions for repairs and administrative costs reduce the annual rental income. Loan interest must also be deducted from this amount if a loan has been taken out for the apartment. The whole thing is divided by the purchase price plus ancillary costs (including the ten percent for broker, notary, property tax and land register entry) and the result is multiplied by 100. For most landlords, this net rental return is often well below two percent.

In view of the already tight calculation, the owner has to choose his tenants very carefully, because every change in the apartment costs money. For every vacancy, ancillary costs and house money must still be paid. And often you still have to hire a broker to re-let. Since the ordering principle came into force in 2015, the landlord usually has to pay for it himself.

Certain target groups are best addressed directly in the advertisement: those who advertise their apartment as barrier-free will inspire older people. Those who emphasize the proximity to the university receive a lot of inquiries from younger people. And no matter how friendly a tenant may seem, landlords should always obtain as much information as possible about rental candidates - credit reports, copies of ID cards, salary slips and confirmation that they are free of rental debts are the minimum. After all, many tenants now have the documents to hand quickly.

The broker can then also take over the final selection and contractual formalities. It costs up to two months' rent, but knows exactly what to look out for. Some agents even offer all-round carefree packages for a few hundred euros and guarantee that a landlord does not have to worry about anything.

When it comes to rent, landlords should consider whether they want to opt for graduated or indexed leases: Both are not popular with tenants, but offer landlords the advantage that the rent is regularly adjusted without any major dispute. In the case of graduated rent, it is determined in advance that the rent increases by a certain amount at fixed times. With index rents, the rent is linked to the index of living conditions, i.e. to the inflation rate, which can be found at the Federal Statistical Office. If the cost of living increases, the rent also increases by the respective percentage. The adjustments can be made annually, but the rent must remain unchanged for one year. However, the cost of living can also go down.

The deposit may amount to up to three net monthly rents, and it usually flows into a special account. A bank guarantee, the creation of a joint savings account or the pledging of a tenant savings account is also possible.

Speculation is expensive

There are of course buyers who are not so keen on future rental income, but prefer to resell the property after a few years at a significantly higher price. Given the recent price hike in metropolitan areas, this may be a model.

However, caution is advised: In order to make a profit, the property value must increase by at least 15 percent, because the ancillary costs alone are that high when buying and selling. It is around ten percent for purchases through real estate transfer tax, land registry entry and notary. With a broker more like 15 percent. And another five to seven percent for the sale for brokers, energy certificates and cancellation of the land charge. With a market value of 300,000 euros, this makes around 30,000 euros for purchase and 15,000 euros for sale.

If you do not use a property yourself and sell it within ten years, the speculation tax is also due. With a profit of 30,000 euros, it amounts to around 12,000 euros at a tax rate of 40 percent.

Careful, tax!

Long-term landlords also have to pay attention to taxes. Rental income is generally taxable at the individual income tax rate. Advertising costs such as manufacturing and ancillary acquisition costs (for brokers and notaries) can be deducted; they are depreciated over a period of 50 years. And maintenance expenses (they can be claimed in full in the year of issue).

Directly deductible are, among other things, expenses for repairs, property management, property taxes, interest on loans, account management fees and trips to the apartment as well as membership in landowners' associations. Those who use expenses skillfully and offset income can optimize the total return.

The bottom line is: If you only invest in real estate because you are hoping for easy money and high returns, you should look for less expensive forms of investment - especially in times when cheap real estate is hard to find. However, if the investor seriously calculates the costs, it can certainly work out.

 


The article was published in the Capital Special Real Estate “The great dream of the house”