Buying a property abroad: the guide for German buyers

Financing from Germany: three viable paths

The probably most demanding part when purchasing a foreign property is the financing. German banks rarely issue loans for properties abroad directly because they cannot register enforceable collateral in the target country. In practice three paths have become established. First the financing via a bank in the target country: It knows the market but often requires 30 to 50 percent equity from foreigners and higher interest rates. Secondly an internationally operating bank, that works across borders. And thirdly – the most common route in Germany – a loan via German equity capital, secured by an existing property in Germany. This way you secure German conditions and a pure euro loan without exchange rate risk.

Always keep the currency risk in mind outside the eurozone - for example in Switzerland, the UK or Scandinavia: An unfavorable exchange rate can noticeably alter your calculation over the term. In addition, clarify if there are special taxes or restrictions for foreign buyers in the target country.

Realistically plan ancillary and follow-on costs

The ancillary costs of purchase are often higher abroad than in Germany. In Spain the real estate transfer tax, notary, land registry and lawyer add up to about 10 to 13 percent, in Italy depending on buyer status to 9 to 16 percent, in Portugal to around 7 to 10 percent of the purchase price. Therefore calculate a flat buffer of 10 to 15 percent above the pure purchase price. In addition there are ongoing costs: local property tax, building and liability insurance, administration, maintenance and – for holiday letting – cleaning and property management.

Tax issues: double taxation agreements and progression proviso

Rental and sales income from a property abroad is generally subject to taxation in the country where the property is located. Germany incorporates this income via the double taxation agreements – in many countries via the so-called progression proviso. This means the foreign earnings often remain tax-free in Germany but raise your personal tax rate on the remaining income. How exactly your situation is treated depends on the respective agreement. An overview of applicable agreements is published by the Federal Ministry of Finance. In any case commission a consultation specialized in international tax law.

Identify and mitigate risks early

Foreign legal systems, language barriers and opaque ownership structures are among the greatest hazards when buying property abroad. Time and again illegal buildings without valid planning permission or plots with unresolved encumbrances emerge. Therefore always engage an independent locally knowledgeable lawyer – never the seller's – have the land register and all permits examined and do not sign any preliminary contract without legal approval. In addition the Foreign Office provides country informationfor many countries which give an initial overview of the legal framework.

Alternative: legally secure building in the DACH region

Those looking for sun in the south often dream of a property abroad – and underestimate the legal, tax and language barriers. For many investors a new build in Germany, Austria or Switzerland represents the lower risk choice: legally secure, easily financeable, precisely plannable and without exchange rate risk. A winter-proof holiday home as investment in a German coastal or alpine region promises stable demand with calculable expense. Those who value full control over floor plan and energy standard will find with a timber house or a classic prefabricated house an attractive alternative to a property abroad.