The Yield Lie in the Property Listing (Rent Control, etc.)

At our office, a prospective buyer showed us a property listing from another real estate agent for a 10-unit building. The property was advertised with a very attractive return on investment, based on a target rent of 12 euros per square meter. However, the current tenants were paying an average of about 7 euros per square meter.

On paper, the property looked promising. In reality, however, the gap between the actual rent and the target rent spanned several years, involved legal constraints, and raised significant modernization issues.

We recalculated the figures:

• reviewed current lease agreements
• recorded actual rents per unit
• compared them with market rent benchmarks
• realistically assessed potential rent increases
• Estimated modernization costs
• Vacancy and tenant turnover risks taken into account
• Return calculated based on actual cash flow

The result was clear: Without comprehensive measures, tenant turnover, and a long-term perspective, the stated target rent was virtually unattainable. The purchase price was based on a future assumption, not on the current investment.

Our recommendation was clear: At this price, the property does not support the business case.

Legal Constraints: Rent Cap and Rent Control

Rent increases for existing properties cannot be set arbitrarily. This is precisely where many Excel calculations fall short. A spreadsheet can increase rents by any amount each year. Tenant protection laws cannot.

For existing leases, the rent cap is particularly relevant. According to Section 558 of the German Civil Code (BGB), rent may generally increase by no more than 20 percent within a three-year period; in areas with a tight housing market, the federal states may lower this limit to 15 percent. Additionally, rent may only be increased up to the local comparative rent.

For new leases, the rent cap may apply. In areas where it is in effect, the rent at the start of the lease may generally not exceed the local comparative rent by more than 10 percent. Exceptions apply, among other things, to certain new buildings or extensively modernized apartments.

For investors, this means:

• The current rent cannot be raised to market level as quickly as desired
• The cap limits rent increases for existing leases
• The rent index serves as the basis for comparison
• The rent cap may limit new leases
• Rent increases due to renovations must be thoroughly reviewed from a legal perspective
• Target rents require a realistic timeline
• Vacancies do not automatically present an opportunity for returns
• Existing tenants are a key factor in the business case

In one case, a property owner wanted to sell his apartment building and had calculated the asking price using his own Excel spreadsheet. His assumption was that the buyer could significantly raise all rents immediately after the purchase. It looked very convincing in the spreadsheet. The reality was less favorable.

The current rents were already close to the local market rate. In addition, the municipality had a reduced rent cap in effect. A short-term increase, as outlined in the sales calculation, was not legally tenable.

We halted the marketing at that point and rebuilt the calculation from scratch. Had we listed the property based on those assumptions, professional buyers would have double-checked the figures during due diligence at the latest. The buyer’s bank would also have scrutinized the projected returns.

A property brochure may spark interest. However, it must not promise a return on investment that is not legally feasible.

The Building Energy Act may also be relevant for older properties.

Section 72 of the GEG includes, among other things, operating bans on certain old boilers, although exceptions and technical details must be reviewed.

In an audit assignment for an investor, we were presented with a portfolio that appeared to offer an excellent gross return. The rents were being collected, the units were largely leased, and the investment seemed attractive at first glance.

Then the technical review began. The energy performance certificate indicated a need for energy efficiency upgrades. The construction files contained references to older roofs. In several buildings, the heating systems were old enough to require a thorough GEG review. Additionally, there was no clear CapEx plan for the next five years.

We recalculated the figures and factored in the expected investments:

• Roof repairs
• Heating system inspection and potential replacement
• Condition of facades and windows
• Reserve requirements
• Technical risks
• Possible vacancy periods during renovation work
• Realistic rent growth after renovation

As a result, the original gross yield became significantly less meaningful. Only after adjusting the purchase price did the supposed bargain become a realistic value-add project.

The distinction is important: A property in need of renovation can be a good investment—but only if the price, risk, and capital expenditures align.

Honest Marketing: Why Realistic Numbers Attract Better Buyers

Serious investors know that not every property is a core investment. They’ll also buy properties with vacancies, in need of renovation, or with below-average rents—as long as the business case is presented honestly.

The problem arises only when a property is mislabeled. A building in need of renovation with potential for rent increases is not an immediate cash flow champion. It may be a value-add investment. And there are buyers for exactly that—if the price is right.

For a property in significant need of renovation, we deliberately avoided making exaggerated return promises. Instead, the business case was clearly presented as a value-add project. The current rents were low, the building systems were outdated, but the location was stable and long-term demand was strong.

The property listing clearly showed:

• what is currently being earned
• what measures are necessary
• what rental growth seems realistic
• what costs should be budgeted
• what purchase price is appropriate

The result: fewer inquiries, but better conversations. The prospective buyers were more professional, the questions were more specific, and the offer phase was significantly more structured.

In B2B real estate sales, honesty is not a disadvantage. It acts as a filter for the right buyers.