A couple of years ago we used to recommend to buy a block (one full multifamily house), but nowadays the market is flooded with money and hardly anyone owing a block sells. On top, the prices climbed and today one or two million will get you hardly a multi-family-house in a promising area.
What is the way-out?
Our advice is to buy a portfolio of flats with the following parameters:
- Location: urban/downtown at least a well known district
- Condition: brand new development / building
- Contractual: furnished rental, on a 6 month plus contract
- Risk spread: small units
As always in real estate location is first. In Berlin good and very good locations are relatively cheap compared to anything else in any western capital city. And the difference between central and decentralized location is only around 1.000 EUR/qm. The higher price is typically justified by a much higher land value in the central areas. Demand in central location will always be high, as most people prefer short commute times over long commute times. As in all civilized countries the trend in Germany is to move from the country side to the cities. This said, please take additionally into a count that Germany is a aging society and senior citizens are afraid not to be able to drive and fear völkisches with bad infrastructure. Same accounts for families, as new born rate is low more and more small cities have to close schools. The list goes one, but you understand the point.
Always remember this property speak: Prime property/location is the last to go down in a crisis and the first to come up.
2. Condition: brand new development / building
A new building has a lot of benefits combined with a relatively small premium payment. Attention I might be single sided here as I’m a property developer. First of all the new buildings are build according to the newest technical and legal standards this helps to keep maintenance low and ensures a high standard and floorplans that are market conform.
On top you buy into the best legal situation as new buildings are partially exempt from certain (socialist) laws to „protect“ renters. According to the law for newly erected buildings there is no “Mietpreisbremse”. The conclusion is that you can ask any rent accepted by the market. In other words the rental hight is not restricted.
3. Contractual: furnished rental, on a minimum (!) 6+ month contract
Furnished flats help to attract a certain type of renter that I call „young urban professional“ and insures to be exempt from certain legal traps. Furnished rentals should not be misunderstood with AirBnB-Style day-to-day rentals. In fact, AirBnB-Style rentals are not legitimate under most condominium rules anyway and every contract with a rental period of less than 6 months will rise up VAT issues. If you intend to rent shorter than 6 month you have to face complicated book keeping and invoicing rules together with VAT claims for and from the IRS “Finanzamt”. If your tenant insist on period shorter than 6 month, than rent it for 6 month and tell him that by law he can channel the contract every 3 month with a 1 month notice. You can even agree to shorten those periods. Please understand that the cancelation police is solely for the renter. The landlord can only chancel from his side inside very strict rules.
4. Risk spread: small units
Small units ensure a high tenant turnover and therefore a steady potential to increase rents. The rule is: the bigger the flat the more lifestyle situations it might cover on the renter side, this leads to a longterm stay of the renter and minimizes rental income optimization on the middle to long run. On top small flats will sell even if in the future the prices double or triple. The rent price tag, as well as the sales price tag, will stay more affordable compared to bigger flats. The risk of vacancy or non-paying renters is lower if the investment is spread over more and therefore smaller units instead of fewer and bigger units. Try to stay in the 35 m² up to 65 m² region.
Hope this helps as a first overview, let me know if you would like to go deeper.
Please start our conversation with an email and give me your full contact details including your cell phone number and the minimum equity you would like to invest.
Best regards, Alexander Korte