Why should you avoid investing in flats
My personal experience is that investing in units/flats is at least tricky. Below I cover some scenarios that might happen one by one or even together. As always there is a way to avoid the problems. But first I want to raise your awareness what could happen.
Executive summary
Buying into a normal condo, with standard German rental contracts comes with several risks on the economical, legal and technical site. On way to avoid this hassle of a “used” flat is to buy a new flat from a developer. On top there are products on the market that help you to avoid the typical German rental contract and therefore optimize your rental income as well as capital appreciation potential.
1. Your profits don’t cover Legal Costs
The profits of your flat investment does not cover legal costs. If trouble occurs you have to call a lawyer, because you don’t know the legal system nor the language. Trouble occurs more often with foreign investors because they have higher expectations in the market or the service ability of the service providers. The service provider (mainly the property manager) does not want to deal with small things in a language he does not fully understand, etc. etc. In the end you want to call the lawyer and the lawyer politely asks you for a pre-payment, as you are a foreigner. An investment as a buy-to-let in a unit lower than 100.000 Euro, does not make sense because of the side costs and the eventual but costly problems that could occur in between.
2. Legal Due Diligence
The legal due diligence eats the first years profit and therefore is handed to the agents “free” service, but the agent often doesn’t have clue or the knowledge, in worst case both.
3. Financing is not available
Financing is hard to find or even not available, due to the fact that banks don’t like small loans.
And the beauty (read: yield) of real estate investments comes with a loan, called leverage.
The only way is to buy 100.000 Euro property with 100% cash.
4. The Property Manager is not listening to you
Your weight in a condominium is small, and the property manager does not really want to deal with you outside his mother language.
You sign a German property management contract which you didn’t understand, and you don’t realize that you gave power of attorney to act with out your Ok for everything below a certain amount. Often this includes the rentals on a certain price. I don’t say the property manager cheats on you, but he really things 6.50 per sqm/month is good but you and the agent thought you might get 8.00
5. Low quality of the Building
Flats with a price tag lower than 100.000 Euro are often not renovated or renovated just to look good. The real cost of ownership occurs later, or sometimes even to late.
6. You don’t just buy the flat, you buy into the whole house
You buy a share of the condominium not just the flat: flat buyers are often not aware that they buy a share into the whole house, they just focus on the flat, and forget to check the roof and the cellar. But the roof and the cellar can cause major problems and damage total investment. If a prewar house has dry rot which is typically the case (I you use to say: If you are not aware of it, or did not have a dry rot decontamination yet, you still have it.) the financial damage to the condominium association typically exceeds 300.000 Euro. Which you pay your share.
Avoid this disaster by using an experienced engineer to check the building for you on your costs. (see no. 7)
7. Technical Due Diligence
No technical due diligence: 100.000 Euro buyers have not budget to call a technician to check the building inside out as well as the cellar and the roof (Note: always check and ask for dry rot). The engineer should be an authorized inspector by the chamber of commerce, we call this “Öffentlich bestellter und vereidigter Sachverständiger” or a “Dipl. Bau.-Ing.” he might not be appointed by the chamber, but has the knowledge because of his studies.
8. Time Pressure
Flat buyers are often act or are put under time pressure by the seller or agent to close the deal. Mistakes as shown in 1.-7. happen, but you buy as seen with out any guarantee. You have to proof that the seller/agent knew the problems, this is often time and money consume if not impossible.
9. A rented flat is another type of investment
A vacant flat is more expensive in Germany than a rented one. The rental contract is binding even for the new owner. Sale doesn’t break the rental agreement, we say in Germany. And the rental agreement in place gives limitations to the rent adjustment potential. This affects the value of the flat, and the price typically is much lower if its rented.
Conclusion
If you don’t talk German and if you have (yet) no understanding of the market and of the typical problems of buildings in Berlin a unit investment is nothing for you. If you can put a budget higher than 500.000 Euro I highly recommend buying a multi-family-home in the city of Berlin or a portfolio of new build flats.
The way out of a highly regulated market: new build housing bought off-plan and furnished to be rented turnkey ready.
Here are the benefits of this type of investment, into new build, down-town, high-end flats, fully furnished and serviced rented to corporations for their consultants and part-time employees:
If you buy into a new unit, completely newly built building, the the seller has to give you 5 years warranty.
If you buy into a new development, even off-plan, you can be pretty sure the location must be good, because of the prices developers have to sell for more than 2.500 Euro (in more central locations even higher). But if the sqm costs 2.500+ people would only buy if the rental income gives the right returns, therefore the demand in this location must be high. High demand reflects a good location quality.
New build building come with an elevator and often with barrier-free features that are highly requested by an aging society. Lift and underground parking are as well features that are appreciated by potential renters.
As Berlin does not only lack new living space, but especially modern and barrier free homes this will give additional capital appreciation potential in the future.
Additionally it is often the case that new condos are bought by foreigners, so the language problem (see no.4) might be solved. Ask the seller or sellers agent about the property management company, who is typically installed by the developer/seller for the first 1-2 years.
New flats are handed over vacant typically and therefore don’t face any regulations regarding the rental hight by law.
Serviced and furnished flats rented out with a self-terminating contract help to adjust the rent according to the market.
Buying into such a scheme is a one of the best investments in the current highly regulated rental market.
But it is crucial to use a good interior and operations agency to ensure high quality tenants and therefore high returns.
About the author: Alexander Korte is a Berlin based residential property developer and active real estate investor and co-owner of a brokerage & advisory firm.
Search on this Site
This site rocks the Classic Responsive Skin for Thesis.
No comments:
Post a Comment