Risks of Investing in German Real Estate and How to Manage Them

Key takeaways

• Investing in real estate is lucrative. However, like any investment product, real estate investment has risks. The key is to learn how to manage these risks.
• You should meticulously vet the tenant to avoid failed rent payments or other issues.
• Create a financial reserve to cover unexpected costs, such as rent loss, repairs, etc.
• We have written a book on buying a house in Germany. It explains the complete buying process, how to invest in German real estate, and offers expert tips that’ll save your thousands of euros.

Table of Contents

Investing in real estate also comes with risks. However, you can learn how to manage them. Here are the most common risks and how to manage them.

Risk 1: The tenant stops paying the rent

One risk in real estate investment is problematic tenants. The consequences of a bad tenant can range from financial losses to prolonged legal battles. 

Issue

Non-payment is the most common and immediately impactful tenant problem. According to the Deutscher Mieterbund (German Tenants’ Association), in Germany, approximately 2.2% of rental payments are delayed or missed. 

Prevention

Screen the tenants thoroughly using these methods.

• Request and verify a SCHUFA report (German credit assessment). The Schufa should not contain a negative entry, ensuring that the tenant has no past arrears.
• Obtain confirmation of no rent arrears from previous landlords (Mietschuldenfreiheitsbescheinigung) and a character certificate. Would you issue a good certificate for a tenant who gave you trouble in the past? Most probably no. So, asking for such a certificate reduces the probability of ending up with a problematic tenant. 
• Verify employment status (unlimited work contract) and income (typically, income should be at least three times the rent). 
• Request bank statements from the past three months or last year’s tax statement (Steuerbescheid) to verify income.
• Conduct a personal interview to assess compatibility. 

Legal rights

Knowing your legal rights as a landlord in Germany is essential. This will give you peace of mind and help you prepare for the worst-case scenarios.

• According to Section 543 of the German Civil Code (BGB), if a tenant fails to pay rent for two consecutive months, you can terminate the tenancy without notice.
• If the tenant pays partial rent for a few months, you can terminate the tenancy without notice. However, the outstanding amount must be higher than one month’s rent. 
• From a legal perspective, you don’t have to give a prior warning in such situations (see Section 543, Paragraph 2, No. 3). However, it’s always best to talk to the tenant and issue a prior warning.
• Suppose the tenant pays the outstanding rent. In this case, the termination becomes invalid. However, if the tenant pays the rent late more than once within two years, the termination is again legal.

The termination should be in writing and sent via registered mail with a return receipt. It should also include the termination reason.

Suppose the tenant doesn’t leave the property after the termination notice. In this case, you must file an eviction suit. The termination notice doesn’t give you the right to evict the tenant.

Risk 2: Property Damage or modifications by the tenant

Issue

When you rent a property, wear and tear is normal. However, some tenants may cause substantial damage to properties. Fixing these damages costs money, time, and sometimes lost rent.

Sometimes, tenants also modify the property structure, such as by creating or removing a wall. Tenants must restore the property to its original state unless you (the landlord) agreed to the modifications in writing.

Prevention

• Vet the tenant thoroughly as explained before.
• Ensure the tenant has personal liability insurance (Haftpflichtversicherung) that covers damage to the rental property. You can also add a clause in the rental contract asking the tenant to get liability insurance.
• Save at least 8% of the cold rent for property repairs and renovations.
• Get three months’ cold rent as the security deposit.
• Prepare a detailed handover protocol (Übergabeprotokol) when renting the property and when the tenant moves out. You must meticulously check the property for defects and document them in the handover protocol. Suppose the protocol shows no damage was present when the tenant moved in. In this case, all damages mentioned in the protocol when the tenant moves out are the tenant’s responsibility.
• Pass on cosmetic or minor repairs to the tenant in your rental contract. 

Legal rights

If the tenant caused the damage, they are liable to fix it or reimburse you for the repair costs. You have six months to claim the damages. 

The six-month period begins as soon as you take over the rental property. This means from the moment you take sole possession of the property.

Risk 3: Noise Complaints and Neighbor Conflicts

While not directly affecting the property, tenant conflicts with neighbors can create unnecessary management headaches. Every apartment building in Germany has house rules, which are noted in the house rule document. You must provide this document along with the rental contract to the tenant.

The tenants must follow the house rules, including quiet hours (when you are not allowed to make loud noises).

If you vet the tenant properly, you’ll avoid this problem altogether. However, you have the legal right to terminate the rental contract if a tenant breaks the house rules repeatedly after a written warning.

Risk 4: Unexpected costs

Every property has operating and maintenance costs. We have divided these costs into three categories based on their predictability.

• Fixed costs: These are the costs you know before buying the property. They are clearly mentioned in the property documents, such as monthly maintenance fee (Hausgeld), property tax, mortgage payments, etc. You must pay these fixed costs every month or year, regardless of your financial situation. If you don’t pay these costs, you’ll have serious consequences.
• Visible renovation costs: When inspecting a property, you can identify visible defects or areas that need renovation. You can estimate the approximate costs to fix those defects or renovations. You can also get a renovation loan from the bank on top of the mortgage. However, these are approximate costs and may exceed the amount you initially assumed. Thus, keeping a 10 to 20% buffer is recommended when creating a cost estimate.
• Unexpected costs: These are the costs you can’t plan. For example, a working boiler suddenly breaks down and needs to be replaced, you discover another problem when renovating the property, etc. Many things can go wrong. So, you must prepare yourself mentally for these unknowns and have a financial buffer to cover the unexpected expenses.

Unexpected costs are a risk that comes with owning a property. However, you have full control over managing these risks. Moreover, by fixing the issues, you increase your property’s value.

Prevention

• Check the fixed costs when buying the property. Consider them in your calculations and review whether the property is still a good investment. 
• Inspect the property thoroughly and ask questions, such as
  • What has been renovated in the property and when?
  • What needs to be renovated in the near future?
  • How old are the high-cost repair objects, such as the roof, electrical, toilet, windows, boiler, etc.? In the section below, we mentioned the timeline for replacing these things. Knowing this will help you estimate the future costs.
• Add the estimated renovation costs to your purchase price and check if the property is still attractive.
• Read the minutes of the apartment owner meetings (Eigentümersversammlung Protokoll). They contain the topics that the owners discussed. They also mention the planned, finished, and postponed renovations. This will give you insights into how well the property is managed and what costs you may expect in the future.
• Contact the Hausverwaltung and ask.
  • What repairs does the building require?
  • How much will these repairs cost?
  • Do they have enough reserves to finance the repairs? If not, what’s their plan?
  • Are they planning to increase the Hasugeld? If yes, by how much and why?

Knowing the plannable costs can help determine if the property is the right investment. Once you are comfortable with the planned expenses, you can check if you have enough buffer to cover the unplanned costs. 

Two types of reserves you should maintain

• Short-term reserves: Maintain “6 months of fixed costs” as a reserve to cover unexpected repairs, rent loss, etc.
• Long-term reserves: As a rule of thumb, set aside between 12€ and 15€ per sqm every year. You should save it for infrequent major renovations, such as roof, electrical, etc.

You should have already saved the short-term reserves before buying the property. You can build long-term reserves over time after buying the property.

You can keep these reserves in a savings* (Sparkonto) or daily account* (Tagesgeldkonto) to earn interest over time. However, we don’t recommend investing them in stocks or other forms of investment.

Timeline of major repairs

Beyond routine maintenance, every property eventually requires major system replacements. These capital expenditures include:

Item	Lifespan	Renovation cost
Electrical replacement	Every 50 to 70 years	85€ to 130€ per sqm
Roof replacement	Every 40 to 60 years	190€ to 560€ per sqm
Heating system replacement of a house/apartment building (not an individual apartment)	Every 15 to 20 years	Gas heating system: 10,000€ to 20,000€ Heat pump system: 20,000€ to 45,000€
Bathroom replacement	Every 25 to 30 years	around 20,000€ The estimate may vary drastically based on your material choice.
Exterior painting/siding	Every 10 to 20 years	7€ to 25€ per sqm
Windows and doors	Every 20 to 40 years	Window: 1×1 – 250€ to 600€ plus labor Inner door: 200€ plus labor Outside/main door: 1500€ pölus labor
Flooring replacement
Hardwood and tile typically	20-50 years	30€ to 200€ per sqm
Laminate and vinyl	10-15 years	10€ to 50€ per sqm
Linoleum	20-30 years and more	20€ to 50€ per sqm
Cork	15-20 years	30€ to 70€ per sqm
Carpet	around 10 years	10€ to 50€ per sqm

Create a table and note when to make the major repairs and how much they will cost. This information will help you determine how much you must save monthly to cover these costs.

You can decide whether and when to make these repairs. You can also get a renovation loan to make these repairs. What’s important is that you know and have considered these costs when buying the property.

Risk 5: Refinancing the mortgage

Buying an investment property only makes sense when you finance it with a mortgage. However, taking out a mortgage comes with a risk: the change in interest rate over time.

You can fix your mortgage interest rate for 10 to 15 years. There are also options to fix your interest rate for longer periods. However, the risk arises when you have to refinance the remaining loan.

You usually don’t pay the complete mortgage within the loan term of 10 to 15 years. Thus, you must refinance the remaining loan after the loan term ends.

The risk is that the interest rates change multiple times every year. So, you don’t know what the interest rate will be after 10 or 15 years. No one can predict that.

There could be two possible scenarios. 

• Interest at the time of refinancing is the same or less than before: This is the ideal situation. Your monthly installment will reduce as the remaining loan amount is less. Hence, increasing your cash flow.
• Interest at the time of refinancing is higher than before. Your monthly installment will increase and negatively impact your cash flow in this situation. Suppose you took a mortgage in 2021 at 1% interest. After 10 years, the mortgage interest rate increases to 4%. This is a 3% increase and will drastically increase your monthly mortgage payments. This is a risk that you must know and learn how to manage.

Prevention

The best way to manage this risk is to buy multiple smaller apartments instead of one big house. Here is why.

Small apartments cost less than bigger apartments, keeping your loan amount low. After 10 or 15 years, you have reduced your original loan amount by 23% or 39%, assuming a 2% repayment rate.

Thus, at the time of refinancing, the remaining loan is low. This means that even if the interest rate increases, the impact on monthly installments will be less drastic than a large loan amount.

Other benefits of buying smaller apartments ( one or two-room apartments) are

• Easier and quicker to rent as compared to larger apartments.
• Less maintenance and renovation costs.
• Easier to sell.
• Buying multiple smaller properties is easier as you build your portfolio, and you enjoy the benefits of diversification.

In other words, buy a property in a range of 100,000€ and 200,000€, rather than a 500,000€ property. 

Another way to manage this risk is to monitor interest rate development. Suppose you observe that the interest rates are rising and you need refinancing in a couple of years. In this case, consider using special payments (Sondertilgung) to reduce your principal amount. This will help you reduce the impact of the interest rate increase on your monthly installments.

Lastly, contact different banks and brokers to get the best mortgage offer. A 0.1% decrease in your interest rate can save you thousands.

There are many mortgage brokers in Germany. The major players are Dr. Klein* and InterHyp*. 

Other ways to manage the risk

• Join a landlord association (Vermieterverein) such as Haus & Grund. These organizations typically offer legal consultation, rental contract templates, regulation updates, and legal services when problems arise. Membership fees of such organizations are between 100€ and 200€ per annum.
• Get legal protection insurance (Rechtsschutzversicherung): It covers the lawyer’s fee and court costs if you have a dispute related to your rental property. The dispute could be with the tenant, the tax office, the house management, the plumber, etc.
• Gebäudeversicherung (Building Insurance): If you bought an apartment, your Hausverwaltung (House Care) takes a building insurance for the entire building. You can ask your Hasuverwaltung what damages the insurance covers. If there is no insurance, you must get one yourself. This covers the damages to the building caused by fire, water, etc.

NOTE: You can deduct all the expenses (insurance, membership, etc.) from your rental income.

Conclusion

As you can see, there are risks associated with investing in real estate. However, you can manage them by taking the measures explained above.

Moreover, in the worst-case scenarios, you are protected by law. You can consult a lawyer or a landlord’s association for legal advice.

Yes, legal proceedings may take time and cost you upfront (assuming you don’t have legal insurance). However, you can claim all the legal costs back from the tenant.

Buying a home in Germany is time-consuming and involves a lot of money. There are a lot of things you must know before buying a property.

Thus, we wrote a book on buying a house in Germany to make it simple for you. Read it to learn everything there is about buying a property in Germany.

References

• https://www.drklein.de/dachsanierung.html
• https://erste-hausverwaltung.de/mieter-zahlt-miete-nicht
• https://www.finanztip.de/wohngebaeudeversicherungen/
• https://tp-rechtsanwaelte.de/maengel-nach-wohnungsuebergabe/
• https://blog.fairwalter.com/de-ch/schaeden-am-mietobjekt-wer-haftet