Financing and taxes
What you should avoid
If you have any questions regarding the purchase of a property as an investment or your real estate project, please contact us. As specialised lawyers for all questions concerning real estate law, we will be happy to advise you competently.
If you have any questions on this topic, please contact us. As specialised lawyers for all questions regarding real estate law, we will gladly and competently advise you.
Especially in times of uncertain capital markets, an investment in real estate can be a sensible investment. A real estate investment should be seen as a long-term investment whose return depends on various factors. It is therefore advisable for investors to deal with the intended investment as comprehensively as possible before deciding to buy. Comprehensive information on the property increases the likelihood of a profitable transaction and protects against a wrong purchase.
Location and condition of the property
Since the profitability of an investment property depends crucially on the amount of rent that can be achieved and the resale value, location is of particular importance. Only in areas with a high demand for housing can good rents be achieved in the long term. A well-rented flat regularly also brings with it good marketability in the event of a resale. Investors are therefore well advised to get an overview of the development of the housing market and the general population development of the property they are considering.
A property investment should not be made without a prior inspection. Get your own impression of the property and the surrounding area.
Check the contracts.
As the owner of a property, you not only have rights, but also numerous obligations. The first thing you should do is check the draft of the purchase contract. When buying a condominium, also pay attention to the obligations and regulations listed in the declaration of division. In the case of condominiums, it can also do no harm to ask to see the minutes of the last owners’ meeting and the property management contract. This will give them additional information about the condition of the property. Check the tenancy agreement! Especially important are the duration of the tenancy agreement and the regulations on the tenant’s assumption of cosmetic repairs. If you are unsure about the contract, seek professional advice.
Particularly in the case of newly built properties, you should also pay attention to any costs for adjoining tenants.
Decisive for the economic success of a property as an investment is not only the investment property itself, but also the financing as part of the overall concept. In general, in addition to a favourable interest rate, both a reasonable redemption payment and the contribution of equity capital can increase profitability in the long term.
You can find the currently most favourable interest rates for real estate loans (so-called “construction money”) HERE [link], among other places.
It should also be taken into account that the term of the financing depends on the amount of repayment. The more you repay, the higher the current burden, but the lower the total amount of interest over the term. A healthy middle course should be found here.
Contributing equity capital also reduces the need for (interest-bearing) borrowed capital and also increases the attractiveness of the financing for a bank. The interest rate at almost all institutions is also determined in relation to the equity ratio; a higher proportion of equity may bring a more favourable interest rate.
Compare several offers
Get several offers and compare the purchase prices and the rents. A low purchase price combined with a high rent is regularly advantageous for the investor. By comparing several offers, you can also better assess the respective contract conditions and more easily identify possible disadvantageous provisions.
A particular attraction of investing in real estate is the tax advantages that may be associated with it. Investors subject to taxation can claim 2% of the construction or acquisition costs for buildings constructed on or after 1 January 1925 and 2.5% of the acquisition costs for buildings completed before that date. The acquisition of a listed property or a property that is located in a redevelopment area and is to be redeveloped is particularly attractive. The costs incurred for the renovation can be deducted separately. Of the redevelopment costs required to preserve a listed building or for its sensible use, 9% can be claimed against tax in the first seven years after construction and 4% can be deducted in the following four years.
It should be noted, however, that the assertion of such tax benefits may be restricted under § 15b EStG.
Obtaining the increased tax benefits is subject to a number of conditions, so it makes sense to seek professional advice before purchasing a listed dwelling.
If you have any questions on the subject of “investment property before purchase”, please contact us. As specialised lawyers for all matters relating to real estate law, we will be happy to provide you with competent advice.
To make sure that you have not made a bad deal with the purchase of your property, it is advisable to regularly get an overview. You should therefore draw up an initial balance sheet about a year after purchasing the property and thus get a first overview of your income and expenses. In any case, it is advisable to clarify the effects of the capital investment after receiving the tax assessment notice for the year of the property purchase.
Is the purchase fully implemented?
Make sure that the purchase of the property has actually been fully completed. In particular, you should check whether you have already been registered as the owner in the land register.
Also check whether the ancillary purchase costs (land transfer tax, notary, etc.) have already been paid and whether the costs and fees charged to you correspond to the information given before the purchase or your own calculation.
Check your income and tax benefits
In order to determine whether the investment will develop for you in the way presented, it is necessary to get an overview of the income side. You should therefore compare the rental income and any tax advantages already achieved with your calculation. If the income has remained below your expectations, you should have it checked whether the reasons for this were already apparent before the purchase. If this is the case, claims in your favour may be considered.
In order to improve the yield, you should also check the possibility of a rent increase. Find out whether there is a new rent index.
Check the running costs
In addition to income, expenses are of course of considerable importance for the profitability of your investment. When purchasing a condominium, you should therefore pay particular attention to letters from the property management company and, if applicable, the special rental management company. If there are costs about which you were not informed prior to purchase, you should ascertain whether you may have been wrongly advised. If this is the case, you may have a claim.
If you have purchased a condominium as an investment and there has not been an owners’ meeting one year after the purchase of the condominium, you should ask the property management. According to § 24 section 1 WEG, the meeting must be convened once a year.
If you financed the purchase of the property, you should check your interest and redemption payments. As a rule, there will be no negative surprises here if you have familiarised yourself with the loan conditions in advance. If you have the option of free unscheduled repayments, it may make sense to take advantage of them.
Special features for listed buildings
If you have acquired a listed property in order to obtain increased tax benefits according to § 7i EStG, you should regularly inform yourself about the status of the refurbishment and check whether the certificates required to obtain the tax benefits are available or have been applied for. It is important that the authorities ultimately recognise the renovation costs as necessary. If problems arise here, you should seek professional advice. Please note that the final recognition of the tax benefits depends on both the responsible monument protection authority and the tax authorities.
In the end, the one-off costs should have been compiled and the current income compared with the current costs. If necessary, compare your pre-purchase planning [link to pre-purchase checklist] with the implementation.
If you have been advised before the purchase and a liquidity or profitability calculation has been prepared for you, you should now compare the available figures with the forecasts. If you find negative deviations, you should seek professional advice to protect your rights. Please note that claims for damages and warranty claims are generally subject to the statute of limitations. Timely examination and early recognition of possible problems is therefore of particular interest if you wish to have your rights legally enforced.
If you have any questions on the subject of investment property after purchase, please contact us. As specialised lawyers for all questions relating to real estate law, we will be happy to advise you competently.
Even if the purchase of real estate can generally be a good form of investment, bad investments cannot be ruled out. In the past – and in some cases still – cases have gained a certain notoriety in which buyers have purchased so-called junk real estate. Characteristic for these cases is primarily that the initiative for the purchase usually did not come from the later buyers, but was deliberately persuaded to buy a condominium by so-called structural distributors, especially low- and middle-income earners. Often the later buyers were contacted in the form of “cold calls”. Tax advantages were promised in order to persuade them to take supposedly independent advice.
In these cases, it is often found that the advice given was not sufficient to inform the buyers correctly and completely about the costs and risks associated with the purchase of the flat. The focus of the advice was usually one-sidedly on the tax advantages associated with the purchase. The long-term burdens resulting from the necessary financing were usually not presented correctly and the buyers were left in the dark, for example, about the fact that house fees have to be paid and the necessity to build up a sufficient maintenance reserve. For a large number of flat buyers, the transactions therefore turned out to be unprofitable and quite a few got into economic difficulties due to the financial burden. The fact that the flats were often sold at overpriced prices also plays a role here.
In many cases, courts have had to deal with these flat purchases. The case law on this has become more specific in the past decade. Buyers of condominiums who have not been properly advised should therefore have the advice they received checked for errors. Claims for damages may exist if the advice was faulty or if the purchase prices of the flats were immorally excessive, meaning that the buyers had to pay almost twice the actual value. Typical advisory errors include a lack of information about the value of a rental guarantee or the negative aspects of a rental pool. Claims for damages can be directed against the advisor, the seller and in certain cases also against the financing bank.
If you want to have questions answered on the subject of a “failed real estate investment”, please contact us. As specialised lawyers for all questions concerning real estate law, we will gladly and competently advise you.