Their value as an investment – and when it makes sense to buy or sell

In Berlin, apartments available for immediate occupancy have become a luxury good – especially as an investment asset. The reason: they do not come to market all that often. But there is much overlooked alternative that is enjoying increasing popularity: rented apartments with tenants in place.

After all, when housing markets are strained, apartments with existing tenants offer certain advantages, both for buyers and sellers. It may sound contradictory, but a deal can be attractive to both – in terms of price and future potential. A real win-win. Nevertheless, both parties have a number of important strategic considerations to make.

The Berlin housing market: tight, yet full of potential

Supply is low, demand is high. There’s probably no more succinct way to describe the current market for owner-occupier apartments in Berlin, especially in the market for existing properties. And it is unlikely that the situation will change any time soon. After all, the city remains as attractive as ever and the creation of new housing continues to lag behind demand.

With scarce alternatives, hardly anyone is moving house. What’s more, the landscape has shifted in response to the coronavirus: More and more people are striving to buy property. Vacant units are snapped up in the blink of an eye. And anyone who sells, does well. Anyone who buys, on the other hand, always – and inevitably – secures a rarity.

Against such a dynamic backdrop, lots of investors have turned to real estate as one of the safest and most established investment assets. But when there is hardly any product available, the focus shifts all the more to occupied units: the market for rented apartments is booming. And this is largely because apartments with tenants in place offer a host of advantages that are otherwise easily overlooked, especially for investors working to long-term and well-planned investment horizons.

The outlook: bright with few clouds in sight

In terms of potential: In terms of value appreciation, rents in Berlin have risen by an average of 60 percent over the past ten years and purchase prices have more than doubled. Last year alone, condominium prices rose by a whopping 10 percent. Of course, this could all be over tomorrow, theoretically. In practical terms, however, there is still some room for improvement.

Compared to other major cities in Europe, Berlin’s prices still look quite affordable. And with the city’s economy delivering steady growth, incomes continue to rise. Inflation is taking care of the rest. And speculation about a real state bubble with overvalued, uncertain loans – as seen in the United States in 2007 – is an unlikely scenario in Germany. Banks are too strict with their due diligence for that. At the same time, German borrowers are famous for their conservativism and their “safety first” approach to all things financial. The market is developing soundly – and steadily.

Rented apartments: an attractive option

As an immovable material asset, real estate is generally less suitable for generating high, short-term returns. Nevertheless, it is an excellent asset for medium- and long-term value investment, for example to hedge capital against inflation, which is currently galloping away at 4.5 percent p.a. Real estate is certainly well worth considering as an inheritance, backup or value investment.

And rented apartments offer a particular advantage: the significant purchase price delta. Compared with vacant units, apartments with tenants in place tend to be 20 to 30 percent more affordable. That can make a difference of as much as €1,500 per square meter, which is good news for buyers thinking long term – or those that are particularly clever.

For buyers: invest at a lower price today, profit in the long run

It’s not only lower purchase prices, it’s also the low interest rates that boost the value development potential of rented apartments. Depending on the target repayment horizon, it could well be that rental income alone does not currently cover the monthly mortgage payments. But at the end of the day, almost every cent flows into the investor’s own pocket because borrowers rarely have to pay any bank levies at present.

And even the small amount of interest that does accrue can be deducted for tax purposes – as income-related expenses on the inflows of rental income. And once the mortgage has been paid off in full, it’s time for the continuous, secure monthly profit to kick in. A rewarding prospect.

Of particular interest to private investors with medium-term investment strategies: The apartment can be sold tax-free after just ten years. In order to ensure that they are mortgage-free at this point, many investors finance their rented apartments to a specific date just after this period ends. The individual term and holding period depends, of course, on the assumed appreciation in value. One tactical consideration.

For sellers: there has never been a better time to cash out

Anyone who wants to sell real estate now or in the near future is faced with the question: How long should I wait to secure the best possible price? The fact is, no one can answer that for sure. We’re all smarter after the event. However, the steep appreciation curve of Berlin real estate is sure to plateau at some point – when interest rates start to rise, if not sooner. In any case, the chances of achieving a high price for your property have never been as good as they are today.

Berlin is currently a seller’s market. Supply is tight. Interest rates are low. The supply of capital is very healthy. It’s a great time for anyone who wants to convert their “concrete gold” into a fungible asset as soon as possible – for example, to invest the returns in other, particularly high-performing fields. As with all major sales, there are a number of things to consider: taxes and incidental costs, for example. But it is particularly important to obtain confirmation of financing from the buyer to ensure a smooth transaction. This is where competent support pays off.

The purchase and its consequences: act thoughtfully – and always play by the rules

As the buyer of a rented apartment, it is important to remember that you are entering into a business relationship with your new tenants. That’s not a problem, it’s more a question of know-how.

However, it is important to assess the tenant and rental situation as you are negotiating the purchase contract in order to avoid any problems from the outset. Is the apartment tidy and well maintained? Can we communicate respectfully and amicably? What do the tenant files say? Have there ever been rent arrears? Requests for rent reductions? Legal disputes? This is where it pays to have experienced brokers and counsel at your side.

Our recommendation: the “steady hand” value development strategy

Once you have acquired the apartment, you can give your tenants notice of termination after a statutory waiting period of ten years – but solely on the basis of needing the unit for your own personal use. This option should therefore only be exercised if you actually have a reason to do so. Attempting to secure new tenants and substantial rent increases via this option would be punishable by law and is not an approach we would ever recommend.

On the contrary, if you act correctly as an owner, within the framework of the law and with respect for your tenants, everything normally works out for the best. After all, you don’t need any underhand tricks to profit from rented apartments. Rents usually rise on their own, analog to increases in land and property prices. In addition, there are numerous opportunities for good management, e.g., a rent increase after modernization.

And naturally, every tenant moves out at some point. Then, if not sooner, you’ll see a big jump in rental income. Patience and a long-term strategy are the cornerstones of a successful real estate investment. Many investors are doing extremely well from their real estate portfolios. And more and more are joining them every day.

What next? Ask the experts!

Over the last five years, David Borck Immobiliengesellschaft has brokered around 200 rented apartments in Berlin and its environs to buy-to-let investors. And the numbers are climbing all the time. Of course, buying real estate is not a simple investment and involves serious planning, not to mention a lot of red tape:

Which purchase options are the most interesting for me? What is the most affordable, what is the most promising? What do I need to know about managing a rental property? Or: What price can I, as the owner, achieve for my property on the current market?

Our property experts will be happy to assist you with all these questions and more. For an individual consultation, please feel free to contact us at any time on +49 (0) 30 887 742 50 or service@david-borck.de