Hoping to live off rental income

[howard24 12]

Hey there Toytowners,

 

I'm hoping that when I emigrate to Berlin later this year I can buy some property and almost totally live off the rental Income I'll earn.

 

What I'm wondering is, should I call myself Self employed? Will that mean my Health insurance fees are relatively high, I've heard that minimum monthly payments are about 335euros/month. I estimate that I'll only be earning about 12000 - 14000euros annually therefore this would be a massive part of my earnings. Is there a lower cost option to this, maybe set up a property company and pay myself an income?

 

I'm a pretty frugal guy I don't need a ton of money to live, but losing almost a third of my income to Health insurance would be tough.

 

Any advice?

[PandaMunich 16,574]

 

What I'm wondering is, should I call myself Self employed? Will that mean my Health insurance fees are relatively high, I've heard that minimum monthly payments are about 335euros/month.

 

No, under no circumstance, you would end up with the high minimum contribution for the self-employed you already found out about.

 

If your main source of income is from being self-employed, they assume a minimal income of 75% of the Bezugsgröße.

The Bezugsgröße is a figure that changes every year, please see here for the current value.

 

In 2013 they would assume for a self-employed a minimal income of: 0.75 * 2,695€ = 2,021.25€:

 

• public health insurance 14.9%: 0.149 * 2,021.25€ = 301.17€
  public nursing insurance 2.2%: 0.022 * 2,021.25€ = 44.47€
  _________________________________________________________
  = 345.64€ per month
  

 

 

 

I estimate that I'll only be earning about 12000 - 14000euros annually therefore this would be a massive part of my earnings.

 

Don't worry, you will just be a private person with rental income, see here.

 

You will have to pay according to your rental profit, but they will assume a minimum income of 898€ a month (= 1/3 * Bezugsgröße = 1/3 * 2,695€), i.e. at the very least:

 

• 14.9% of 898€ = 133.80€ for public health insurance
  2.2% of 898€ = 19.76€ for public nursing insurance
  _______________________________________________
  = 153.56€ per month

 

Of course, if your rental profit is higher than 898€ a month, you will pay more.

 

 

Is there a lower cost option to this, maybe set up a property company and pay myself an income?

 

No, you are not allowed to be an employee of a company in which you own at least 50% of the shares, or even if you earn less than 50% of the shares, if you still have the say in that company, see here.

[howard24 12]

That seems pretty good news. Thanks PandaMunich. The link looks helpfull too. :)

[Starshollow 6,069]

O don't want to burst your bubble - but I would be very, very carefull about your general assumption about living from rental income while in Berlin.

First of all, tennants have huge rights in comparison to the UK - every little thing they do not like or think you should repair can cost you part of your rental income.

Plus, if you are unlucky enough to get a so-called "Miet-Nomade" (google that for more information) it can take years to get the out of your property while you still have to cover for heat and energy and are facing serious repairs/rennovation after you finally got them evicted.

 

There is a saying in Germany that you should not own property to rent out if you need the capital to pay the mortgage (without a serious security buffer, that is) or need the money to live from. Germany is not a very landlord-friendly market. Just so you know in advance...

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.

[Small Town Boy 6,672]

Agree with Starshollow. You'd probably be better off investing in the UK and using that rental income to live in Berlin. If you do the maths you'll probably also find that the rental yield is higher in most UK cities compared to Berlin. I have a rental property in the UK and would never in a million years become a landlord in Germany.

[howard24 12]

Thanks for the advice you two. I wasn't actually thinking of buying property in Berlin, just living there myself. I was actually thinking of commercial property in the western side of the country, (Rhine areas). Things like cafes, hair salons, doctors surgerys etc. They seem to me to be a lower risk from Miet-nomed than residential apartments.

 

I've seen yields of around 10% quoted, to me that seems good, hopefully not too good to be true.

 

If anyone does know of any down sides to this type of venture, I'd be only too happy to learn from them.

 

Howard24

[PandaMunich 16,574]

 

If anyone does know of any down sides to this type of venture, I'd be only too happy to learn from them.

 

I have seen a lot of empty commercial properties in that region, so there is no guarantee that you will have a steady tenant.

Somewhere in the south of Germany like, for example, Stuttgart or Munich would be safer, but also much more expensive to buy, and rents not high enough to still get you a 10% yield...

 

If you haven't yet stumbled across it, Immobilienscout24.de has a special investment property section.

[howard24 12]

Yes PandaMunich, same as in the UK, there are lots of empty shops about, However property, were the business is offering a service, as opposed to selling physical items, they seem to me to be riding the storm better. Not too east to buy a hair cut or fresh coffee and cake over the internet. Bavaria and Hessen too are options. I have actually noticed that Deutsch Post has many of it's premises for sale, all over Germany. I was wondering if their landlords had got wiff of Deutsch Post possibly implementing a property streamlining (cost cutting) policy? Royal Mail has done similar over here over the last few years. I'm don't really imaging people here will have any inside knowledge on Deutsch Post strategy, but you never know, could be worth throwing it out there.

[howard24 12]

Sorry, I only got half your post then.

 

yes I have been looking at the scout24 site, it's very helpfull. I know I will need to inspect everything in the flesh, get surveys etc, but some of the numbers do make you scratch your chin.

[PandaMunich 16,574]

On the Immoscout web site, after you have chosen a city, e.g. Munich, you can filter the search results according to the price/rent ratio (it's located at left of the page).

 

A ratio of 10 would mean that the price is 10 times the yearly rent, i.e. a rough yield of 10%.

A ratio of 20 would mean that the price is 20 times the yearly rent, i.e. a rough yield of 5%.

 

 

But take care, some people input the wrong postal code, so a property from a cheaper region appears in the Munich results (e.g. a Madgeburg property from Eastern Germany), so read the results attentively.

 

However, I think it is a bad policy to live in a different city from your let property - you will have to hire somebody to take care of the property and that will seriously eat into your profit margin.

[howard24 12]

Thanks PandaMunich, as ever you are very helpful.

[dessa_dangerous 13,315]

 

Not too east to buy a hair cut or fresh coffee and cake over the internet.

 

You're right that people enjoy going out to cafes for the experience, but since I've lived in Berlin I've had both haircuts and tattoos done in my home. (If your eyebrow raised about the tattoo part, believe me, I was wary at first too, but the artist managed to transform a corner of my house into a bastion of hygiene.) Why? Because they don't feel like paying over half what they earn to do it in a shop.

 

Not trying to be discouraging, like, and obviously a minority of people overall are being tattooed at all--much less at home--but the haircut thing seems pretty common around here anyway. Even my highly paid MIL has her favorite hairdresser that comes to her place.

[Small Town Boy 6,672]

 

A ratio of 10 would mean that the price is 10 times the yearly rent, i.e. a rough yield of 10%.

 

This calculation is too simplistic; the purchase price will be around 10% higher than the sale price, it could cost you thousands to make the property rentable and the operating costs (always higher than you think) need to be subtracted. My calculations for residential lets in the Munich area come to around 1.5 or 2%, so I think 10% is out of the question regardless of the type of property or location.

[Johnny English 3,071]

 

12000 - 14000euros annually

 

I've seen yields of around 10% quoted

So reverse maths is that you have a lump sum of £125,000 (€150.000)

 

I think very brave and optimistic to try and live off this. Yes it is possible to get 10% on commercial property, but it's not easy (pretty unusual return actually) and you always run the risk of a bad debt or a bad tenant etc. Once you get into a non-paying tenant situation over here it can drag on for years.

 

So by all means invest the lump sum in property, and take the income....but make sure you plan to have a real job!!! No way would I personally rely on a rental property as my primary income.

[bludger 104]

 

... and the operating costs (always higher than you think) need to be subtracted.

 

What sort of operating costs are you talking about here? I assume this would be repairs etc, that are not covered by the regular Nebenkosten. How could I estimate these costs?

[El Jeffo 42,120]

Repairs to the premises, contributions to the Instandhaltungsrücklage (house maintenance fund) - not to mention any Sonderumlagen (special assessments) for major repairs if the maintenance fund is running low, payment for the Hausverwaltung, and the costs of banking are all costs that cannot be passed on to the tenant.

[fraufruit 41,947]

Another possible operating cost is if you get a non-paying tenant in and it takes a year or so to get them out. Also, months where you may have no tenants.

 

edited - Just saw that you are considering commercial property so my first point may not apply.

[murphaph 9,652]

 

Repairs to the premises, contributions to the Instandhaltungsrücklage (house maintenance fund) - not to mention any Sonderumlagen (special assessments) for major repairs if the maintenance fund is running low, payment for the Hausverwaltung, and the costs of banking are all costs that cannot be passed on to the tenant.

 

Great post Jeff. Sonderumlagen have been the bane of my life since buying in Berlin (apartment, but the principle is the same for many commercial premises). I couldn't have known, but the building had dry rot in the structural members on 2 floors, which obviously had to be fixed...at the cost of all owners. It has cost just under 5k (my share, total repair costs were over 60k) to replace the wooden beams with steel and renovate the affected apartments.

 

The decision to fix such things (which really must be fixed or the building may collapse) will generally be taken by all the owners together at an AGM or EAGM. You have no choice but to abide by the decision made by vote as failure to pay Sonderumlagen (or your Hausgeld generally) will result ultimately in you being sued by the other co-owners in the building.

 

Also not to forget is that the amount paid into the Instandhaltungsrücklage will also be decided by vote and you also have no choice but to abide by that decision. Be careful about buying units in a building where one or two parties dominate the ownership as it's usually one vote per unit so an owner with more than 50% of the units in a building can effectively make all these binding decisions himself and you will be forced to go along with them! (imagine an owner has all of his units on the top floors and decides his properties will be more attractive if the building had a lift-you as a ground floor tenant get to pay your share of a lift you nor your tenants will EVER use!!)

 

It's a risk you take on when you buy property of course, but it MUST be factored in to your rental yield calculations, as should void periods.

 

As for 10% yield in Munich...absolutely no chance!

 

As some others have said...unless you have a LOT of money to invest in diverse properties then planning to live off rental income from just one or two properties could be extremely risky IMO. How would you finance eviction proceedings against a non-paying tenant etc?

 

I am not a landlord in Germany (owner occupier here) but I do let some property in Ireland. I will likely rent out the property I now live in but will be treading extremely carefully, possibly avoiding long term tenants completely. Will have to seriously think about my strategy anyway.

[howard24 12]

Hey Murphaph, Did you not have a buildings insurance that covered this? I'd expect to get insured for stuff like that.

[El Jeffo 42,120]

Insurance doesn't pay for regular maintenance and upkeep, howard24 - the owners do.

 

Insurance pays for unforeseen incidents - like burst pipes and natural disasters. If a roof needs repair because the wind blows a tree over onto it, then insurance pays for it. If a roof needs repair because it's 40 years old, the owners pay.