Getting Clear on Running Costs – The “Warm Rent” of a Property
Perhaps the most complex aspect of German property ownership is the understanding of the ancillary or running costs of the property, the so-called “warm rent” associated to each tenancy. Whilst the issue is more complex than in other markets, the action on landlords is minimal as the activity is conducted on your behalf by your manager. But it is good to know what is going on behind the scenes, and any input you could have to make your investment run more efficiently.
In many markets around the world, you will receive a gross rent from your tenant and then deduct the fees for running of the property. This is the most simple method of running the investment of course, but calculating your real return or yield can be more difficult, with perhaps unknown costs at the outset. Being an investor-driven market, in Germany all of the unavoidable costs are bundled together in what is known as a “warm rent” and is dealt with separately by your manager. Therefore, your tenant if it is say a 60 sqm apartment may pay you net rent of say 300 Euro per month and make an additional payment of 150 Eur for the “warm rent” costs.
With the yield in Germany based on just the net income, it is therefore far easier to evaluate a property yield quickly.
The items comprising the warm rent would include:
• Heating costs, where a shared heating system is in place [that's why we call it the “warm rent”]
• Building and liability insurance
• Ground Tax
• Caretaking duties such as bins, sweeping stairs, small repairs such as painting and locks.
• Street cleaning
• Water and sewerage services
• Boiler maintenance
• Lift maintenance [where applicable]
• Chimney sweeping
• Communal lighting
• Snow clearance to the front of the property
• Provision of cable television [but not service package]
These ancillary costs are transferable to the tenant, the “warm rent”. Cold rents or net rents are net of these costs and are what the property yield is based upon. Nice and transparent.
Levels of Warm Rent
Warm rent, like net rent, is calculated on the apartment size in sqm. Depending on the type of property, warm rents are usually in the 2-2.5 Eur per sqm range. The variability within this being based on heating type [gas or oil], if a lift is in place and the standard of caretaking service used. Where apartments have their own heating system, around 1 Eur per sqm can be deducted from this level as tenants will pay this directly.
When is it Collected and Paid Out?
Warm and cold rents are collected together from the tenant, usually monthly. You manager will pay out the bills as they arrive, some are monthly such as caretaking and some are quarterly like ground tax or heating.
Insurance is usually paid out on an annual basis. Due to this differing periodicity of bills, some variability is seen in the net rent sent to the landlord. For example, if an annual insurance policy is paid in one month, then this will reduce the rent sent to the landlord, other months being higher.
When is it Reconciled?
Because there is a variable element to the warm rent, the heating costs which depend on tenant usage, an estimation is made at the start of the year based on city norms or last year’s bills if the tenant was in the property previously. Clearly this estimation will always be a little out, sometimes in the tenant’s favour and sometimes to the landlord. Your manager will calculate the usage of each apartment and come up with a final bill around April – Jul after the year of bills incurring and inform the tenant and landlord of the reconciliation amount.
Actions for Landlords?
Not many really, your manager will take care of this on your behalf. That said, at the outset of an investment, it is wise to ensure that the warm rents paid are realistic to the property, or you will suffer a shortfall in year 1 of your investment until the reconciliation period. During your ownership, the discussion if the warm rent elements may be part of your regular review of property performance with your manager. In effect, if savings can be made to the warm rent amount without detriment to the service level enjoyed by the tenant then the overall rent paid by the tenant will reduce. This could allow for more successful negotiations when looking to review the cold rent paid as rental prices develop. Costs that should be reviewed are insurance policy and caretaking in the main, other costs being largely fixed.
This can be a complex issue, so if you need advice at the start of an investment or your hold property in Germany already and would like a help to review the warm rent situation, please do get in contact with us.