3 Tips to Increase the Return on Your Real Estate Investments in Germany

Debt financing is an important and even necessary component of most real estate transactions. However, as the global real estate downturn of 2008-2009 showed, there are times when excessive debt on a property can guarantee significant losses. Therefore, it is crucial for investors to understand the leverage of financing, as well as the advantages and disadvantages of its use, and to determine what amount of debt makes sense in a particular situation and how it can affect the risk and return of real estate investments. Most investors in Germany take advantage of debt financing, especially since interest rates are currently very low. The attractiveness of German financing is very high when investors can “lock in” these low interest rates for the next 10 years and, in some cases, even longer. With a fixed-rate loan, you can precisely predict the amount you need to pay each month for your investment, allowing you to set a precise budget. A fixed monthly payment also protects you from interest rate hikes, unlike variable financing, which fluctuates with interest rates.

Below is a table comparing two investments with the same investment amount of €500,000, with one being purchased with cash for the property and the other financed. The chart illustrates the three main benefits of using debt capital.

Leverage 1: More Operating Income – With financing, you can acquire higher-quality properties and generate more rental income for the same investment amount. A cautious lender will focus not on the loan value (Loan to Value), but on the ratio between rental income and repayment rates (Mortgage to Rent Ratio). In this case, with 56% debt financing, you will still achieve a higher net rental yield on an annual basis compared to purchasing the property with cash.

Leverage 2: Increase in Initial Investment Capital – By repaying the financing, you accumulate new equity, which helps increase your initial investment capital. This gain can be realized upon a later sale or refinancing of the property.

Leverage 3: Higher Returns from Capital Appreciation – Assuming both properties appreciate by 2.5% in value in the first year, although both properties start with the same equity share and the same percentage of property value increase, Property 2 generates a higher gross profit upon sale. This difference in profit development highlights the potential of using debt capital to generate returns, provided the project is managed successfully.

It is understandable why the majority of investors choose to use financing to optimize their real estate investments: with the same investment volume, you can more than double your annual return.