Dear prospective buyer,
Every investment has advantages and disadvantages. Experience to date has shown that investing in real estate has the advantage of relative value stability and the opportunity of attractive long-term increases in tangible assets.
On the other hand, the decision to purchase real estate is also associated with fundamental risks, which we would like to communicate transparently. As part of a voluntary disclosure, we have briefly outlined the conceivable material economic risks for your summarized information. In our opinion, the arguments in favor of purchasing the properties we recommend are convincing and remain valid. At the same time, it is important for us to emphasize that no investment is completely risk-free and that there may be further risks in addition to those listed.
1. general information
1.1.
In general, the value and performance of a property is largely dependent on its location and its development. This in turn is determined by many factors such as the economy, the structure of employers, demand, noise and environmental aspects or similar particularities. Even with the most careful selection and assessment of the location, the opportunity of an improvement in the location is always offset by the risk of a deterioration in the location. This can affect the value and lettability of the property. Rented properties generate a significant proportion of their return from rental/lease income. It is conceivable that a property may one day only be re-let on less favorable terms. There is also the possibility of a total loss of rent (e.g. due to the tenant's insolvency). In the event of vacancy, the ancillary costs that could otherwise be passed on to the tenant must be borne by the owner.
1.2.
It should also be mentioned that tenancy law is not straightforward in the case of apartments and that enforcing your rights in court sometimes takes a considerable amount of time. Legislative changes in tenancy law (e.g. further reduction of the rent cap for rent increases) cannot be ruled out either. We generally recommend taking out legal expenses insurance for rented residential property.
1.3.
The rent calculated in the calculation is the current actual rent. If a rent subsidy is granted, this can be used as a buffer for a certain period of time. If the actual rent cannot be increased as planned, this can have a negative impact on the liquidity calculation. The rent subsidy should therefore be set aside in any case.
1.4.
Real estate purchased as a capital investment is intended to generate a return. It should be noted that real estate usually only offers the opportunity to realize a profit in the long term. As one-off costs such as land transfer tax, notary fees, brokerage commissions etc. have to be paid at the time of purchase, there is a possibility that the buyer will suffer a financial loss when reselling a property in the short term. Legislation must also be taken into account here, which classifies a resale of the property within the first 10 years as tax-damaging and therefore a short-term sale of the property is to the disadvantage of the buyer (see "Tax risks"). In addition to the tax advantages, the main profit opportunities lie in the performance of the market. As real estate, like other assets, is subject to fluctuations in value and is dependent on general economic and business cycles, it cannot be assumed with certainty that the owner will be able to achieve a certain price at a certain point in time if the property is sold. The value of real estate is also dependent on general economic trends and may fall. In such a case, it is also conceivable that a loss could be realized despite long-term ownership of the property.
1.5.
Especially in the long-term sector, additional expenses such as maintenance and modernization etc. must be expected for all properties (new buildings and used properties). Although warranty claims generally exist for five years for new-build properties, it is conceivable that such claims cannot be realized due to a lack of performance on the part of the tradesman carrying out the work. There are generally no warranty claims for used properties.
1.6.
It is therefore also possible at the beginning of the investment that further costs will be incurred by the community of owners and/or the individual buyer. The amount of the maintenance reserve and any pending or already resolved maintenance measures are also decisive for the amount of the individual charge. Properties must be regularly maintained: Due to insufficient maintenance provisions, negative deviations in the planned returns may result. Maintenance reserves for parts subject to wear and tear (roof, windows, facades, heating, etc.) must be set aside in sufficient amounts so that this cannot have a negative economic impact.
1.7.
It should also be noted that, unless expressly agreed otherwise in writing, the manager only manages the common property, i.e. the owner is responsible for managing the separate property (enforcing rent increases, awarding contracts for repairs within the apartment, etc.). In order to gain an overview of the property, its condition, the existing WEG resolutions and the resulting rights and obligations, we recommend inspecting the WEG minutes from previous years and the declaration of division before purchasing. It is also advisable to commission a condominium management company to manage the condominium if comprehensive management is desired.
2. notes on new construction and conversion
2.1.
If no building permit has been granted for the property at the time of the purchase decision, there is a fundamental possibility that the property cannot be realized, can only be realized in a modified form or that delays will occur in its realization.
2.2.
In the absence of planning permission, there is inevitably no final plan. It is therefore generally possible that the floor plans may still change and that the way in which the construction is carried out may have to be adapted. This could result in disadvantages for the buyer, particularly with regard to the building itself or the agreed purchase price. However, the notary can make provisions for this in the purchase contract.
2.3.
In the case of properties that have not yet been completed, there are risks for the buyer until final completion. If the property is constructed by a general contractor (general contractor: a general contractor who is entrusted by a client with the execution of a construction contract and who can and does use other contractors to fulfill this task), the general contractor's performance and creditworthiness are decisive for the success of the project. When purchasing a condominium from a developer, the buyer is largely protected by the statutory payment by installments in accordance with the Real Estate Agent and Developer Ordinance, as the purchase price is only paid in installments according to the actual progress of the construction work. However, delays in completion, which can also have an impact on financing (see above), cannot be ruled out. In principle, there is also a risk that the community of owners will have to raise funds in excess of the agreed purchase price in order to realize the property if it is not fully completed.
2.4.
Tenancies often do not yet exist for properties to be built. The rents on which the profitability calculation is based are therefore assumptions that may not be realized later. The future tenant is also not yet known.
2.5.
The construction period estimates are estimates; they may be higher or lower depending on the duration of the construction period.
Despite careful selection and inspection, it is conceivable that a property may contain hidden defects. Although the seller may not conceal such hidden defects of which he is aware, the buyer bears the risk if the seller was not aware of these defects. Components may wear out more quickly than expected, leading to earlier or higher maintenance costs.
3. information on rent and tenants
3.1.
Sometimes tenants in second-hand buildings have old tenancy agreements with long notice periods and increased protection against termination or with different ancillary cost regulations, no rental deposit or contractual clauses that have since become ineffective, etc. In addition, it may be the case that not all of the ancillary costs normally borne by the tenant are apportionable and the owner has to bear these from his own funds. In addition, it may be the case that not all ancillary costs that are usually borne by the tenant are apportionable and the owner must bear these from their own funds.
4. notes on tax risks
4.1.
A not inconsiderable proportion of the financing of the property and the ongoing monthly charges are influenced by the utilization of tax advantages. These tax advantages are entirely dependent on the personal situation of the buyer. A deterioration in income leads to a reduction in tax benefits and thus to an increase in the cost of financing. In extreme cases, unemployment or disability can force the property to be sold at a loss. It may make sense to consider taking out additional unemployment insurance. When selling a privately owned property, the capital gain is subject to income tax if the property is sold at a profit within 10 years. If more than three properties are sold within a five-year period, commercial property trading may be considered. In this case, any profit resulting from the sale would be subject to income tax and possibly trade tax. Investors should therefore never acquire a property solely for tax reasons, but also with careful consideration of the location, substance and other criteria. In particular, the deductibility of renovation costs within the first three years should always be carefully examined.
4.2.
There is no guarantee that the currently valid tax laws will remain unchanged. The tax information presented therefore reflects the current legal situation, current case law and its interpretation by the tax literature.
Future changes to the law and deviating interpretations of the law by tax authorities and courts cannot be ruled out.
4.3.
In addition, some tax constructions are dependent on recognition by the tax authorities. For example, maintenance expenses, the question of whether a property is a new building or a renovated old building for tax purposes, expenses for properties that are listed buildings, etc. must be recognized by the tax authorities on a case-by-case basis. The same applies to the use of residual useful life reports. In addition to the risk of legal disputes with the tax authorities, there is also the danger that things that previously seemed unambiguous will ultimately not be recognized at all.
5. notes on financing risks
5.1.
Due to the ratio of purchase price to rental income, real estate in Germany is in the vast majority of cases acquired with equity. If this is not done, the owner/buyer may incur real monthly or annual costs. In your financing calculations, check whether there is a shortfall and whether this can be regularly offset from your own income.
5.2.
A financing calculation is always a kind of forecast. Any fees and costs incurred (notary, land transfer tax, bank charges, discount, etc.) are assumed on the basis of experience. The actual fees etc. may be higher or lower. This would change the total expense and thus the financing burden. The final values can only be taken from the notices, contracts and invoices.
5.3.
The amount of actually deductible income-related expenses and deductible depreciation is determined during the final audit by the tax office. The amounts recognized for tax purposes may be higher or lower, which may change the result of the after-tax financial burden.
5.4.
The income tax savings resulting from the tax losses from letting are generally calculated as part of the income tax return (one to two years later). The liquid inflow of income tax savings is therefore not made until the following year at the earliest, depending on the submission of the tax return and the processing time by the tax authorities. Liquidity during the year can be optimized by using the so-called income tax reduction application. We recommend consulting a tax advisor to ensure that the application is submitted on time and in the correct form.
5.5.
The non-recoverable ancillary costs or management costs include the maintenance reserve and property management fees. These costs are calculated according to the current status, but can change at short notice and over the years, so that the calculation result also improves or deteriorates. Each condominium owner is also liable pro rata for housing costs that another owner of the condominium community in question may not pay.
5.6.
All personal data, in particular the indication of the correct marginal tax rate, in the example calculation are taken from your details. The calculation can of course only be correct to the extent that your details are also correct. The difference between "gross" and "taxable income" is particularly important for the correct marginal tax rate. Taxable income is usually lower than gross income, as any allowances (child allowances, income-related expenses, etc.) have already been deducted. Make absolutely sure that the correct value has been calculated here. The Freundeskreis Group assumes no liability or guarantee for the use of the marginal tax rate in exemplary calculations.
Tax calculations are always estimates. All figures in the calculation are approximate values and may fluctuate. This applies in particular to interest rates, as these are set by the bank depending on the capital market, creditworthiness and equity. Interest rates are always non-binding.
If the repayment has been set to zero in the calculation, this is usually for reasons of transparency in order to make the profitability of the property clear. It makes a difference in the calculation whether the property is repaid in 30 years or in 10 years. However, to illustrate the profitability of the property, it can make sense to omit the amortization. Of course, the actual financing will always include a repayment.
The entire liquidity calculation should be seen as a balance sheet: There can always be postponements or that, for example, the buyer has to make advance payments for house payments and can only settle this later (liquidity burden). Tax benefits also usually only accrue 1 - 1.5 years later, which can initially put a strain on liquidity. In this calculation, current house payments are only included with the ancillary costs that cannot be passed on to the tenant.
A property is not a "savings book"; unexpected additional costs can arise at any time (loss of rent, renovation, expenses, etc.). For this reason, a lower ongoing charge should not be the purchase criterion, as this calculation is based on the assumption that there will be no disruption. The buyer must be aware that reserves must be set aside for such eventualities. Possible unemployment increases the burden, as the calculated tax advantage is no longer available.
5.7.
There is a further risk at the end of the fixed interest period. No one can predict how interest rates will develop over the next three, five or ten years. At the end of the fixed-rate period, higher interest rates are possible, which then increase the ongoing burden.
6. summary and disclaimer
6.1.
This list of possible deviations and risks of a real estate purchase does not claim to be exhaustive. It answers the most frequent questions that we are asked and that you as a real estate buyer should be aware of.
If you have any further questions on these points, please do not hesitate to contact us at any time.
