Buying in Germany: first property

Good things should be recommended and one of the largest knowledge platforms in Germany, is definitely one of them, more precisely: Immobilien-Erfahrung.de. Tip. Use the Google Translator to translate the know-how into your language!

• Read Immobilien-Erfahrung.de in English

3 typical mistakes of first-time buyers

Thorsten Bader, expert at B&B Optimal GmbH and managing director of Immobilien-Erfahrung.de, recommends potential buyers to consider their first property exclusively as a capital investment instead of using it themselves. In this case, there is namely the risk that the management costs, such as insurance, property tax and operating costs, which in addition increase in their amount every year by an average of 5 percent, affect the financial independence.

Purchasing without accurate knowledge of the market

Mistake number two is to engage in the purchase of a property without accurate knowledge of the market. Here, there is a risk of buying a condominium at an overpriced price or spending more on renovation work than actually planned. Therefore, potential buyers should carefully plan their finances in advance and be aware of the current market value and the costs involved.

Condition of the property

Mistake number three is not getting enough information about the condition of the property. Here, one should not only check the appearance, but also the technical condition and the structural substance in detail. Hidden defects such as moisture damage or problems with the electrical system can lead to unexpected costs later. A well-done appraisal by an expert is also advisable here.

In summary, when buying their first property, interested parties should make sure that they consider it exclusively as a capital investment, have precise knowledge of the market, inform themselves about the condition of the property and plan their finances carefully. With these tips, a financially sound capital investment in a condominium can be realized.

Why is a capital investment “better”?

Living for rent and renting out your property?

Real estate as an investment offers several advantages over using it as your own home:

1. Renting
2. Increase in value
3. Financial security

Renting instead of owner-occupying

Real estate can be rented out, which can generate regular income. Your tenant pays the installments of your financing with the monthly rent. At the same time, as a tenant, you have to take care of virtually nothing yourself. Self-use, on the other hand, means: If your salary fails, the repayment of the financing fails. If the heating is defective, you have to take care of everything and, so to speak, always have double damage.

Increase in value

Increase in value: real estate tends to have a stable increase in value, which allows the owner to enjoy an increase in value.

Financial Protection

Financial security: renting a property can provide financial security in retirement.

However, it is important to note that any investment carries some risk and it is important to consider an investor’s specific needs and goals before making a decision.

Investing in Germany

Learn more about interesting and attractive locations in Germany here:

• Capital Investment Atlas

Want to learn more about the real estate market in Germany? Use Google Translator to translate the know-how into your language!

• Read real estate-experience.com in English

With a few clicks you can translate the content of the knowledge platforms for German real estate into your language

Real Estate Market Comparison – Germany USA

What are the differences between buying a piece of real estate in Germany and the USA? What are the things you should be looking at? Below a full run-down of what you have to know about how real estate differs between the two massive markets!

Country Overviews – What do you Need to Know?

Both countries are known worldwide for their strong economy, and progressive markets. That means these countries are stable and can be relied upon for having a future from an economic as well as societal perspective. Germany especially is becoming more and more wealthy, with an average salary increasing, reaching almost $5.000 a month.

• Increases in average salary

Does Germany have a Strong Economy? Is the U.S. Economy Growing?

Yes, in Germany the GDP is growing by 2.5%, while in the U.S. by 2.3%. Both economies are strong and growing. If you want to find out about the strength of a country’s economy, the first thing to do is probably to look at the GDP per capita, meaning how much money is in the economy per person in the country. In Germany the GDP per capita is $50.800, while the U.S. is very similarly at $59.800. That means both of these economies are strong, even when taking into account the amount of people living in the country.

• Germany GDP/c: $50.800 (+2.5%)
• USA GDP/c: $59.800 (2.3%)

Population: Growing Markets?

Increases in population demonstrate a healthy country, and therefore are a good information to support the decision of whether to invest in a country. The U.S. has demonstrated a clear tendency in increasing population.

• Pop. US: 328,2 mil.
• Pop. Germany: 83,02 mil.

In Germany, population growth has not been as strong or constant. This is of course related to the number of inhabitants, with Germany being a smaller country, deviations are more likely and look larger than they are. Despite this, Germany has, in the past years also shown increases in population, with the year 2015 and 2016 showing stronger growth than the USA had since 2010!

Should I Move to Germany? To the US?

One of the most popular emigration destinations for Germans is to the USA. This is evident in the numbers. Every year, 270.000 people move abroad, with 3.6% (9.780) of these choosing the USA. The favourite non-German emigration destination. This is likely due to the strong German heritage in the USA, and economic opportunities. Similarly, every year over 1 thousand Americans receive their German citizenship. This number is changing rapidly, increasing by over 33% last year. There are also 10.000 Americans studying at German universities thanks to the lower tuition fees, as well as high standard of living.

• 3.6% of German Emigrants move to USA
• Number of Americans moving to Germany increasing rapidly
• High number of American students in Germany

Corporation, Entity, Business – Real Estate Companies Germany and USA Comparison

There are of course many different ways to invest in real estate in different countries. Depending on whether you’re a big timer looking to upgrade, or a small partnership not sure of the direction you’re going to take. We take you through the respective real estate entities, investment forms and things you need to know if you want to build a big business in another country.

Germany Real Estate Investment – Types of Corporations, Business Forms, Structure

Germany has many forms of real estate investment businesses. The main types are the Immobilien GmbH and Familienstiftung. An Immobilien GmbH is a real estate company. Meaning a company that pursues the purpose of leasing, development, financing, realization or marketing. A Familienstiftung, strictly speaking, is a form of charity. It allows to save capital on real estate investments. Our simple english-language articles are excellent explanations of what you need to know about these forms of investment.

• Immobilien GmbH – Explained
• Familienstiftung – Explained

These are just a few of the ways that you can save money on your real estate investment in Germany.

German Real Estate – Explanation, Overview

USA Real Estate Investment – Types of Corporations, Business Forms, Structure

The USA has the much more famous forms of investment. Most everyone will have heard the term LLC or corporation. American company forms allow for much more liability protection, and much more freedom in execution. The typical forms are LLC, Limited Partnership, General Partnership, S Corporation, C Corporation, Multiple Entities, and REIT. Partnerships are generally less liability protection, while corporations will allow much more protection. LLCs are undoubtedly the most popular, and in most cases safest choice. Lastly, REITs are for big time invstors or retirees.

• LLC
• Limited Partnership
• General Partnership
• S Corporation
• C Corporation
• Multiple Entities
• REIT

Prices – Where is it Most Expensive?

Comparing the prices of real estate is of course a bit difficult considering that the USA has a much wider spread gepgraphically as well as societally, where there are many properties valued very low in rural, or destitute areas as well as very low-income city districts. In Germany this spread is much smaller, with fewer very low-income regions. Below are the direct comparisons between the two countries.

• Germany and U.S. prices higher than other countries

Price-to-Rent Ratio – Should you Buy?

The price to rent ratio tells you whether it is comparatively cheaper to buy or to rent in a specific region. These ratios are often used to ascertain whether a housing market is ‘healthy’, i.e. whether the market is in a bubble, or well-valued. A very high price to rent ratio (if it is above 20), means that renting a house is better, as it is very expensive to buy a house, compared to just paying rent. On the other hand, a price to rent ratio below 15 means that rent is pretty high, and if possible you should buy because you’ll have it paid off comparatively quickly.

• Price-to-rent ratio >20 = Rent!
• Price-to-rent ratio < 15 = Buy!

Is Buying Real Estate a Good Investment?

These numbers indicate that Germany is a rife market. It is a good time to buy real estate in Germany according to this ratio. A price-to-rent ratio as high as can be taken with caution though, as in 2008 before the financial crisis, the very high price-to-rent ratios were indicative of a housing bubble. Nonetheless, you will find that Germany has vast opportunities for buying real estate, and buying in Germany is a sound investment. This is also heavily down to German rent prices being very high.

You should buy in Germany!

Is it Worth Buying a House in Germany? In USA?

It is a financially sound decision to buy a house in Germany on average, with a price-to-rent ratio over 28. In the USA, the ratio is below 13, meaning that you are better off renting than buying.The price-to-rent ratio in these countries is quite different. In Germany, the price-to-rent ratio is much higher than in the USA. You will find an extremely high price-to-rent ratio in the US cities of Naples, Florida (60,0), Santa Barbara, California (41,9), and Queens, New York (41,8). In Germany, the highest ratios are in Munich (41,7), Freiburg (35,2), as well as Hamburg (32,5) and Cologne (31,7).

• Highest USA: Naples, Florida (60,0), Santa Barbara, California (41,9), and Queens, New York (41,8)
• Highest Germany: Munich (41,7), Freiburg (35,2), as well as Hamburg (32,5) and Cologne (31,7).

USA vs Germany Comparion – Where to Rent, Where to Buy

It is a financially sound decision to buy a house in Germany on average, with the ratio being over 28. In the USA, the ratio is below 13, meaning that you are better off renting than buying. In city centres, price-to-rent ratios tend to be higher than outside the city as is also evident in these numbers.

• Ratio Germany (City): 30,8
• Ratio USA (City): 12,6

In more rural areas, the price-to-rent ratio is lower than within the city, meaning that it is typically better to buy here.

• Ratio Germany (non-City): 28,3
• Ratio USA (non-City): 9,4

Mortgage – How much is a Real Estate Loan?

Of course in different countries the mortgages are also differently high, and more or less difficult to get. This can also be compared across the two markets using the loan affordability index. This index takes into account many different components such as mortgage interest and gives you an accurate impression of the costs and difficulties of obtaining a mortgage. It is calculated by taking into account the mortgage as percentage of income.

Index = (100 / Mortgage as Percentage of Income)

Here, a higher score is better. You see that a loan is generally less financially debilitating in USA than in Germany.

• Index Germany: 1,83
• Index USA: 3,43

House Price Comparison – Where is it More Expensive to Buy a House?

When looking to buy, no matter what type of real estate, house prices give a fairly accurate representation of what the prices look like in a given location. The house prices in Germany as well as the US are showing increase. Meaning an investment here will pay dividends when selling. Importantly, the increase in housing prices is outpacing inflation along with other investments such as gold and many stocks.

House prices in both countries are higher than elsewhere thanks to being desirable places to live, and having a high standard of living. Although it is evident that in Germany the prices for a single-family home are slightly higher than in the U.S.

• Germany: $305.000 (€238.500)
• USA: $261.600 (€215.200)

Germany House Price Index

Germany’s house price index is steadily increasing, as the chart below demonstrates. The fact that this is a constant as opposed to explosive development speaks to the stability of the market, and strength of the general sector. Germany has shown increases in its housing prices by more than 1% in every quarter since 2015, and has not seen a decrease since 2013.

USA Housing Price Index

This index shows the month-over-month development of the American Housing Price Index. While this looks much more erratic, this is down to the nature of the graph (i.e. that it takes the change in index compared to the previous month). It also shows a strong market development.

Real Estate Market Analysis – Most Important Facts

Now that we know these are two strong markets, we take a look at what makes these unique, and how to handle each one.

US-Market – The Biggest Real Estate Market in the Western World?

Annually, almost six million residences are sold in the U.S., this is also in accordance with nearly a million homes being built each year. In the U.S., as in Germany, newly constructed homes are typically more expensive than their older counterparts.

• Many new residences being built

German Market – Investing in Europe’s Strongest Economy

The German market has been criticized for not supplying enough new homes, i.e. new constructions as residences. The amount of new constructions took a downturn shortly after 2010 thanks to new regulations and tax laws making it less financially viable and more difficult to build new houses. Although the number of new construction permits increased by 3,8% to 361.000 This doesn’t necessarily speak for the market in general. Last year, the volume of transactions again increased by 7%, which takes it to a massive $22,5 bil., the second-highest increase since beginning of records.

• Fewer new constructions
• New constructions are increasing

German Real Estate Explained

International Alliance with Economic Exchange

Germany and the USA are economically intertwined, with heavy import and export between the countries showing a strong relationship. Germany is the world’s third largest exporter, and a significant market for its exports is the USA.

• Strong relationship between the countries

Common Success – Economic Relationship of US and Germany

The U.S.-German Treaty of Friendship, Commerce and Navigation is a treaty between the two countries which allows for easier and better economic exchange. It grants U.S. investors national treatment as well as allowing for movement of capital without issue between the two countries. Additionally, sweetening the deal for American investors, taxation of U.S. companies within Germany is regulated such that double taxation is avoided.

Sectors of Economic Exchange

The most important financial sectors on which the U.S. exports to Germany are in Aircraft, vehicles, machinery, medical instruments, and electrical machinery.

1. Aircraft – $8.9 billion
2. Vehicles – $7.2 billion
3. Machinery – $6.9 billion
4. Optical and Medical Instruments – $6.7 billion
5. Electrical Machinery – $5.5 billion

Meanwhile, Germany’s exports to the U.S. are similarly technology-related. With vehicles and machinery also being in the top 5.

1. Machinery – $27.2 billion
2. Vehicles – $25.4 billion
3. Pharmaceuticals – $15.3 billion
4. Optical and Medical Instruments – $10.6 billion
5. Electrical Machinery – $8.8 billion

Political Relations

The political relationship between Germany and the USA has been strong since Germany’s reunification, thanks to mutually dependent support for economic and political relationships. On the state website of the U.S., Germany is very favourably positioned:

Germany is one of the United States’ closest and strongest allies in Europe. U.S. relations with Germany are based on our close and vital relationship as friends, trading partners, and allies sharing common institutions.

Summary – Positioned for Return on Investment

Looking at these two economies it is evident that both offer a strong position for investment. Exchange of goods, and international investments are frequent and supported. With many German realtors looking across the pond to the American market and vice versa. The two real estate markets should thrive in the coming years, with a strong flow of capital from one to the other. German real estate investors in America will find great success, as will American real estate investors in Germany.

Costs for the realtor: New regulation in the BGB

As just described, the realtor commission in Germany is not clearly regulated. In recent decades, it has become common practice that the buyer bears the commission of the realtor when buying real estate. This meant that 100% of the costs were passed on to the buyer.

The new law, effective December 23, 2020, now decides that the seller must bear at least half of the realtor’s commission.

Private purchase, non-commercial real estate trade

However, the new rule only applies to private purchases. So if you commercially buy a property, you are not subject to this innovation in the BGB. Sections 656c and 656d only apply if the buyer is a consumer. Read more here, including BGB innovations, on the realtor commission: new law (external [German]).

For private real estate buyers, this changes quite a bit; after all, the realtor fee makes up a large part of the buying incidentals. When buying a house but also when buying an apartment and buying land, up to 7.14% will thus be due for the buyer.

Broker’s commission usually at 7.14%

Example calculation: 3,570 euros saved

Already with a property with purchase price of 3,570 euros, you have effectively lowered your incidental costs when buying real estate, with this new law.

• Purchase price: 100,000 euros
• Provision of the realtor: 7.14 %
• Cost of realtor: 7,140 euros

For a condominium at the purchase price of 100,000 euros, you pay so far a whole 7,140 euros realtor commission, out of your pocket.

With the new law, the seller must now pay at least half of these costs, when buying a property privately.

With this, your ancillary purchase costs are reduced directly by a whole 3570 euros.

With the conclusion of a purchase contract, the financing is already under the umbrella. The bills from the broker, notary, land registry and tax office come as soon as the loan is fixed. Because of this, the credit is often underestimated. Back to German Real Estate Overview.

Additionally, in the following there may be slight grammatical errors, as this article was written by a German tax expert. This does not detract from the quality of information.

What Percentage are Incidental Purchase Costs?

20% ancillary building costs should be included in the loan at least, in addition to the purchase price, and are quite realistic.

~ 20% of the purchase price

The 4 Biggest Additional Costs when Buying Real Estate

The overview shows the 4 largest additional costs you expect when buying a house. But what other costs are involved in building a house? Find out more here: House construction & the costs that come up.

Fees: Notarization of the Purchase Contract by Notary

The fees for the notary appointment are probably one of the largest items in the additional costs of the house purchase. The notary fees are fixed and may not deviate from these in any direction, but even these are quite high.

~ 1,5% of the purchase price

As a rule of thumb, about 1.5% of the purchase price has been set – and this only for the signature of the purchase contract. So if you purchase a property with a purchase price of 100,000 Euros, the notary’s fee is 1500 Euros, which, in Germany, is usually paid for by the buyer.

The exact fees for notaries in Germany are laid down in the notarial fee schedule, but can also be calculated online.

• Read more here: Notary and Purchase Agreement

Taxes: Real Estate Transfer Tax

As soon as the contract has been signed at the notary and the purchase agreement has been notarized, the buyer will receive mail from the tax office. Next, the purchase tax is demanded from the buyer.

This is incurred somewhat differently. Normally it amounts in Germany round about 3% – 6% of the purchase price of the real estate. Since the land transfer tax is a state tax, meaning each state determines their individual rates land transfer tax rate.

In some federal states, however, such as Hamburg, Berlin and Saxony-Anhalt, it is 4.5% of the property purchase price. For a purchase price of 100,000 euros, for example, you therefore pay another 3500 / 4500 euros for the land transfer tax.

Reading tip: Get to know tax planning options, from cooperatives to family foundations: Save taxes with real estate

Purchase price 100.000 Euro

This debt should be paid immediately, because only when the amount has been received by the tax office will the latter issue the so-called clearance certificate. This certificate is mandatory for the transfer of the new owner to the land register. This is arranged by the land registry office and costs again fees, which are comparatively low.

3.5 – 6.5% of the purchase price

Commission: Brokers Calculate their Share

Whoever buys a property or a plot of land through a real estate agent must of course include the commission to the agent in the overall calculation. You will usually receive the invoice from the real estate agent directly after the notarization.

How high the commission is varies and depends on various factors, such as the region. In most cases it varies between four and six percent of the purchase price of the property.

With a property purchase price of 100,000 euros, you pay between 4,000 and 6,000 euros only for the real estate agent. However, it is important to know that it is definitely worthwhile to negotiate with the real estate agent’s commission, as it is known that this is associated with a large amount of leeway.

A recommendable, total commission of 3.48 percent including VAT is a recommendable and realistic value.

~ 3.48 % of the purchase price

Supplements: Credit Interest and Installment Surcharges

The banks would like to take part in a house sale, of course, and not only through the loan interest rates. In addition to the negotiated loan interest rates, you are charged costs that are additional and usually not expected by the buyer.

These costs are not clearly visible at first glance and therefore banks are deceiving their customers. Such hidden costs can occur in the form of monthly provision interest on the unpaid portion of the total loan.

There, for example, 0.25% is charged, which the customer does not expect and which adds up to the mass. For a loan amount of 100,000 euros, this is about 250 euros per month, which you do not expect.

Additional, Hidden Costs

But there are other hidden costs that you don’t expect. These include account management, which some banks charge as a fee, but also installment surcharges if you get part of the loan paid out, depending on the progress of the construction.

With your loan, pay special attention to exactly what is written in the small print, ask about all unclear points and only sign if you are certain about all obligations.

To be on the safe side, have your bank calculate the so-called total effective interest rate or the actual effective interest rate. There, all service charges are listed in detail and clearly arranged.

Assessor & Renovation – Potential Additional Costs

Another factor that does not apply to all properties is the cost of appraisers and renovators.

Particularly with older real estate it is meaningful to hire an appraiser before the purchase, who examines the real estate down to the lattices. This includes, for example, checks on moisture and pollutants (especially for properties dating from the 1970s). Such appraisals are carried out by independent experts such as architects or civil engineers but also real estate experts.

The costs here are very different, as it depends on the type of expertise and the time required. Depending on how good the report is, possible renovation work in the future may be necessary, which should be incldued in the purchasing price as a reduction. For this reason, these assessments are critical.

Whether it is a new heating, new windows or the restoration of the roof, the costs for this case also vary greatly. Here you should note that there are usually costs for general renovation before moving in. New floors, different wall colors, a new kitchen or even tearing down a wall.

All these things again cost money, which should not be underestimated. Often there are more costs than planned, because something goes wrong, but was more expensive than calculated or small things are missing. Also note that many renovation works cannot be done by yourself. So you need craftsmen and experts to help you and they will of course calculate their working time. Before you decide on a house, think about which work would still have to be done, what you would like to renew and how much the costs for such renovation work will be.

Conclusion: Calculate additional purchase costs

In Germany, for a property with a purchase price of 100,000 euros and a loan of the same amount, expect additional costs of 9,000 to 12,000 euros.

If you do not include them in your loan amount, they must be deducted from your own capital. Such unexpected service charges should not be underestimated and can vary enormously from property to property. The higher the price of the property, the higher the service charges you expect.

• Back to our full guide on Real estate Taxes in Germany.

Additionally, in the following there may be slight grammatical errors, as this article was written by a German tax expert. This does not detract from the quality of information.

Purchase Contract: Definition and Procedure

A purchase contract regulates the transfer of ownership. Legally speaking, one always buys a property, no matter whether it is developed or undeveloped. It contains basic conditions and terms to which both parties must adhere in the purchase process. The parties must both have legal capacity to make the purchase of a property. Note that this does not include the additional taxes which you will pay for the real estate transfer tax in Germany.

Important contract contents are:

• Information on buyer and seller
• Purchase object
• Description of the property
• Purchase price and terms of payment (date, partial amounts, etc.)
• Real estate transfer tax
• Economic transition and transfer of the real estate (date)
• Warranty regulations such as the buyer’s right of withdrawal in case of hidden defects
• Rental and leasing relationships
• Conveyance
• Preliminary remark
• Power of attorney for encumbrance
• Interest on arrears
• Special agreements, such as interior design or renovations
• Other

Legal basis: BGB

The contract is based on a legal consideration, i.e. what is given for the property. This can be money, but also any other economic good that is exchanged for the property. Of course, it will almost always be a certain amount of money, but the consideration could also be another property or the mere promise to pay later.

§ 433 Typical contractual obligations in the purchase contract

(1) The contract of sale obliges the seller of an item to hand over the item to the buyer and to obtain ownership of the item. The salesman has to provide the buyer the thing freely from material defects and lack of title.

(2) The buyer is obligated to pay the agreed upon purchase price to the salesman and to accept the purchased thing.

Extract: §433 German Civil Code (BGB; link in German)

Unlike the contract of sale of movable property, the purchase of real estate (and land or part of land) is not form-free. The regulation on this arises from § 311b of the German Civil Code (short: BGB).

The law requires that such type of contracts must be in writing in order to be valid. Accordingly, you need a notary to make the contract official. Shaking hands and verbal promises are not enough. This is to prevent fraud, a useful documentation process for both parties.

What are the Tasks of the Notary?

In general, the main focus or tasks of a notary are first of all

• Notarization of legal transactions
• Certification of signatures

This results in the following areas of law in particular for notaries:

• Real estate law, such as the notarization of property transfers
• Erbrecht, like the notarization of wills
• Family law, such as powers of attorney or marriage contracts
• Corporate law, such as the notarization of AGs or registration in the commercial register

Usually the notary is chosen by the buyer. At the first notary appointment you will need all important documents ready. The notary will prepare the purchase contract according to the specifications and templates of the buyer and seller.

Approximately one week after the notarization, buyer and seller will receive the notarized purchase contract.

Costs for the Purchase Contract at the Notary Public

The individual items include many individual items, such as the notarization of the purchase contract, which amounts to about 1,070 euros. In addition, there is the registration of the land charge with 435 Euro for the land registry and another 535 Euro for the change of ownership. In addition, there is a maintenance fee, signature certification, etc. In the end you will get out with about 3.700 Euro.

Costs for notary public / land register: ~ 3.700 Euro net

Transfer of Ownership after Full Payment

I want to emphasize this point once again:
Regarding cost allocation: Who pays what? You should make clear provisions on this in the purchase contract. As a rule, the buyer pays the costs for:

1. Fees for notary and land registry
2. Fees for necessary official permits
3. Commission of the real estate agent

As soon as the Purchaser has paid the land transfer tax to the tax office and the purchase price has been transferred in full, the notary public should also have received permission to cancel the “old” land charge.

Then the property is handed over and the land registry confirms the registration of the buyer as new owner and owner.

Make sure to take into account the many hidden and unknown costs when buying real estate in Germany

• Additional Costs with Real Estate Purchases in Germany

Special Features Apartment: Excursus

In the case of purchase of an apartment, the purchase contract contains additional elements:

• Basics as in the sales contract (above)
• Apartment number
• Community regulations, costs of maintenance of common property, elevators, etc.
• Co-ownership share, maintenance reserves for common property or investments for renovation
• Special property, further rooms like cellar, attic, garage, balcony, etc.
• Rights of use for common property
• Special rights of use, privileged use such as parking spaces
• Down payments, at New construction (not yet completed)

Our full guide to saving money on the German real estate market with tax optimization can be found here:

• Saving Money – Tax Optimization on German Property Investment