Rental Guarantees in Germany

Rental Guarantees in Germany

I am frequently asked about rental guarantee promises made by real estate developers and other third parties in Germany and what I think of it.

So with this post I will share my thoughts and what you should do when someone comes around the corner with a rental guarantee promise.

Obviously the real estate developer in Germany has plenty of legitimate reasons to offer a form of rental guarantee through third parties e.g. acceleration of the sales cycle and higher sale prices.

And again there is nothing wrong about it. But what you should question is simple. Is the rental guarantee inline with the overall market rent levels in the neighbourhood and are those rents sustainable in the long term. Because you don't want to end up in a position where you have 1 or 2 years of guaranteed rental income and then it will be hard to find a tenant afterwards. This might turn an initial good investment into a bad one. So be careful and get a second opinion.

Second you should always understand why and how the service provider is able to make a commitment. I am not saying that this is common practice in Germany, but I have seen business models in other countries where prices were significantly marked up just to be in a financial sound position to pay the rent for 1 or 2 years regardless of the demand by tenants. Because then you basically own an overpriced building and end up receiving rent out of your own pocket.

Third, and this is quite common practice in big cities like Frankfurt and Berlin. Rental guarantees by property management companies. These property management companies are well positioned to offer 1 year rental guarantees to you, but convert your apartment into a short term rental stay for business people, commuters and visitors. This proposal is very lucrative for both the landlord and service provider. However this business model only makes money on scale. So make sure that you are working with a big player with a track record. Tier 2 or Tier 3 players in the market are not worth considering.

With every financial transaction you should always read and understand the terms and conditions. If not do yourself a favour and consult a lawyer or just decline the offer and pursue another investment opportunity in the German real estate market.

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