Maximising Exit Prices

Many of the investors who are invested in rental property in Berlin are currently considering their options for profitable exits – especially on the back of such strong recent price growth. There are basically three models to choose between:

  1. A “global” sale, i.e. selling a building as a single object. In today‘s market, it is certainly possible to achieve an attractive price.
  2. Converting the building into individual condominiums which are then sold by a professional realtor. In such a scenario, the condominiums are initially offered to their current tenants, who have the legal right of first refusal. Vacant apartments can be sold to owner-occupiers and tenanted apartments can be sold to buy-to-let investors.
  3. I will go on to describe a third model, which will allow you to maximise your returns and achieve the highest prices. You convert the building into individual condominiums and, over the next ten to fifteen years, sell individual apartments as tenants move out and they become vacant.

The benefits of the third model are obvious: You generate by far and away the highest prices – significantly more than with models 1 or 2. This is because the best prices are paid by owner-occupiers for vacant apartments, because investors expect a certain minimum yield and owner-occupiers do not.

Admittedly, the third model is not appropriate for everyone, it has to fit in with your liquidity and life planning. If you are looking for a quick release of capital, this is definitely not the model for you. But maybe you are already thinking to yourself, “At the moment I don‘t really need a large sum of money. I wouldn‘t know where to invest it anyway.” The third model is especially attractive for rental property owners approaching retirement or looking to step back from business. People in this kind of situation are not looking for a one-off cash injection, rather they are more interested in regular windfalls over an extended period of time. Of course, with model 3 it is not possible to plan exactly when and how high these windfalls will be, as much depends on the rate at which tenants move out of your apartment building or buildings.

This model is also only applicable if you have owned the apartment building for at least ten years. Otherwise, in accordance with Section 23 of the German Income Tax Act (EstG), you will have to pay income tax on the proceeds from any sales. Even if this is not a major issue for you, there is another tax-trap to be avoided: You run the risk of being classed as a “commercial real estate trader.” If you sell more than three apartments within a five-year period (a ten-year period for those in the real estate industry), you become a commercial real estate trader, a designation which is then applied to all of your properties. In tax terms, this is an absolute disaster. The only exception: If you have owned the real estate for more than ten years.

So, as you can see, there are two very good reasons, namely avoiding being classed as a commercial real estate trader and not falling foul of the speculation period, to only use model 3 if you have owned a property for more than ten years. It is also vital that you haven‘t carried out any modernisation work on the property, as this resets the clock on the five- or ten-year period for commercial real estate trading.