Is your property vacant or not generating enough income? You're wondering if an expensive renovation will really increase rental income. This article provides you with a clear cost-benefit analysis and shows which measures have the greatest leverage for your return.
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The topic briefly and concisely
Renovating before renting is only worthwhile with a clear cost-benefit analysis, taking into account legal obligations (GEG) and the limited modernization surcharge (8% of the costs, capped at €2-3/m²).
Focus on value-adding measures such as energy-efficient renovations and the modernization of the bathroom and kitchen, as these create the highest acceptance for rent adjustments.
Take advantage of the tax deductibility of renovation costs as business expenses to significantly reduce the overall financial burden of your investment.
The decision to renovate a property before re-letting is one of the most consequential for owners. An investment of €20,000 can either increase the return by 2% or prove to be an expensive mistake. Given rising construction costs and legal requirements such as the Building Energy Act (GEG), a blanket answer is impossible. Instead of relying on gut feeling, you need a data-driven strategy. We show you how to objectively assess the profitability of a renovation, which measures pay off the fastest, and how to legally allocate costs to the rent to avoid vacancies and sustainably improve your cash flow.
The essentials at a glance: Your strategic checklist
Before you approve budgets, you should be aware of the key factors. A renovation is more than just a cosmetic enhancement; it is a financial decision with direct implications for your rental income over the next 10 to 20 years.
Cost-benefit analysis is essential: Not every renovation proportionally increases rental income relative to the costs. A precise calculation is the first step.
Observe legal requirements: The Building Energy Act (GEG) often mandates energy-efficient renovations in the event of a change of ownership or major structural changes.
Utilise the modernisation levy: You can allocate 8% of the modernisation costs annually to the rent, but only under certain conditions.
Focus on high-impact measures: Energy-efficient renovations and the modernisation of bathrooms and kitchens often offer the greatest potential for rent increases.
Maximise tax benefits: Renovation costs can be deducted as business expenses, reducing your overall burden by up to 42%.
These points form the basis for an economically sound decision. The next step is a thorough analysis of the current state of your property.
Cost-Benefit Analysis: When is Renovation Worth It?
The central question is: Does the potential increase in rent outweigh the expenses incurred over a reasonable period? A general renovation without clear objectives rarely leads to success. Take, for example, a 70-square-metre apartment: Renovating a bathroom for €15,000 might justify a rent increase of €100 per month, which corresponds to a payback period of over 12 years.
The condition of the property plays a decisive role. Are we dealing with mere cosmetic repairs or addressing significant defects that hinder lettings? When there is a considerable backlog of renovations, such as outdated electrics or leaky windows, the measures are often essential just to enable renting at all. A detailed cost-benefit analysis helps set priorities. An investment in a new heating system that reduces tenants' ancillary costs by 20% might achieve greater acceptance for an increase in the base rent than a new coat of paint. Therefore, analysing the current market value and potential is the first step.
But not only the voluntary measures, but also the legally mandated ones must be included in your calculations.
Statutory renovation obligations under GEG: What you need to know now
Since 1 January 2025, stricter rules set by the Building Energy Act (GEG) have been in place, directly affecting you as a landlord. In particular, when there is a change of ownership (purchase, inheritance), older buildings often need to be brought up to a minimum standard within two years. This is not optional but a legal obligation, non-compliance with which might result in fines.
The most common mandatory measures include:
Replacement of old boilers: Heaters installed before 1991 generally need to be replaced. The 30-year limit applies to many constant temperature boilers.
Insulation of the uppermost storey ceiling: Uninsulated ceilings facing unheated attics must achieve a U-value of a maximum of 0.24 W/m²K.
Insulation of pipework: Heating and hot water pipes in unheated rooms must be insulated.
You must factor these unavoidable costs into your return calculations. A renovation potential report can clearly show you which measures are mandatory for your property. These compulsory investments form the basis upon which you can plan further profit-enhancing modernisations.
Modernisation levy: How to legally involve tenants in the costs
One of the most important factors to ensure that a renovation before renting is worthwhile is the modernisation levy according to § 559 of the German Civil Code (BGB). You are allowed to add 8% per annum of the incurred modernisation costs to the net cold rent. It is crucial to distinguish between them: Pure maintenance costs, which are the restoration of the original condition, are not chargeable. For example, if you replace old wooden windows with new, more energy-efficient plastic windows, you can only allocate the modernisation share.
Additionally, the legislator has introduced a cap to protect tenants from excessive increases. Within six years, the rent can increase by no more than €3 per square meter due to the levy. If the starting rent is below €7 per square meter, the cap is even only €2. A careful calculation of the modernisation levy is therefore essential. Also, inform your tenants in writing at least three months before the start of the work about the nature, scope, duration, and the expected rent increase.
The right strategy for the levy decisively determines the profitability of your investment.
Yield drivers: Which renovations increase the rent the most
Not all measures have the same effect on the achievable rental price. Focus on renovations that noticeably enhance the living value or reduce ancillary costs. A study shows that energy-efficient renovations not only increase the property value but also significantly enhance tenant appeal.
The following measures are often particularly profitable:
Energy-efficient renovation: New heating, modern windows, or facade insulation reduce energy costs for tenants. This justifies a higher base rent, as the total rent for the tenant often only increases moderately.
Bathroom modernisation: A modern, functional bathroom with contemporary tiles and fittings can increase the appeal of a flat by up to 15%.
Kitchen upgrade: A high-quality fitted kitchen is a strong rental argument and can allow for a higher monthly rent of 50-80 €, depending on the equipment.
Layout optimisation: Removing a non-load-bearing wall to create an open-plan kitchen can significantly enhance the perceived living value.
The question of what rent you can charge directly depends on the quality of these features. Investment in these areas usually pays off faster than purely cosmetic corrections.
Tax Deductibility: How the Tax Office Can Assist You with Financing
You do not have to bear the costs of a renovation alone. The tax office contributes by allowing you to deduct the expenses as advertising costs from your rental income. This significantly reduces your tax burden. Essentially, there are two types of costs.
Maintenance expenses, such as repairs and the upkeep of the existing condition, can be fully deducted from tax in the year of payment. This includes, for example, painting the walls or replacing a defective boiler with an equivalent model. However, if the costs exceed 15% of the building's purchase price (excluding land) within the first three years after purchase, the tax office treats them as acquisition-related production costs.
Production costs that significantly improve the value of the property (e.g., an extension or a complete modernisation to a higher standard) must be depreciated over the useful life of the building. This is usually done at 2% per year over 50 years. Keeping accurate documentation of all invoices is crucial to fully benefit. This way, the financial burden of renovation is noticeably alleviated.
lohnt-sich-eine-sanierung-vor-der-vermietung
The question of whether renovation before renting is worthwhile cannot be answered with a simple yes or no. It requires a cool, data-driven calculation. Legal obligations from the GEG, the possibility of a modernisation surcharge, and tax benefits are pieces of a complex decision puzzle. The key to success lies in prioritisation: First the mandatory requirements (GEG), then the most profitable additional measures (bathroom, kitchen, energy efficiency). A blanket luxury renovation often exceeds what the local rental market can support and what can be refinanced through the modernisation surcharge.
So before you commission tradespeople, you should establish a neutral, data-based foundation. A professional property valuation and a potential analysis, such as those offered by Auctoa, provide you with the necessary data to precisely weigh costs against expected rent increases. This way, you turn a risky expense into a secure investment. Make your decision based on facts, not assumptions.
Additional useful links
Statista offers statistics on the costs of energy-efficient renovations of rental apartments in Germany.
Institute of the German Economy Cologne (IW Köln) provides an expert report on renovation potential in residential real estate.
Statista offers statistics on government subsidies for energy-efficient property renovations.
German Energy Agency (dena) publishes the dena Building Report 2024.
KfW provides information on funding programmes for the energy-efficient renovation of existing properties for private individuals.
United Tax Aid (VLH) offers information for landlords on the tax deductibility of renovation, conversion, or construction costs.
Federal Ministry of Finance provides information on the tax incentives for energy-efficient building renovations.
Federal Statistical Office (Destatis) provides a table on rents and net household income.
FAQ
Is renovation worthwhile even with rent control?
Yes, refurbishment can be worthwhile even with the current rent price cap. The modernisation surcharge is an independent option for increasing rent, which exists alongside the adjustment to the local comparative rent. Furthermore, modernisation can increase the property's value for a future sale and reduce vacancies.
What is the difference between restoration, renovation, and modernisation?
A renovation removes signs of use (e.g. painting). A refurbishment rectifies defects and restores the original condition (e.g. mould removal). A modernization improves the living standard or energy efficiency (e.g. installation of new windows, bathroom refurbishment) and only its costs can be passed on to tenants.
How far in advance do I need to announce a modernization?
You must inform your tenants in writing at least three months before the start of the measures. The announcement must include details on the type, scope, start, duration, and the expected rent increase.
What happens if I ignore the renovation obligation under GEG?
Non-compliance with the renovation obligations under the Building Energy Act (GEG) constitutes an administrative offence and can be penalized with fines of up to €50,000. Additionally, the relevant authority may order the implementation of the measures.
Can a tenant object to the modernisation?
A tenant generally has to tolerate the modernization. However, they can raise an objection based on hardship if the measure or the associated rent increase would cause them an unreasonable financial burden. This is assessed on a case-by-case basis.
What role does vacancy play in the renovation decision?
A high vacancy rate in the region or for your property is a strong argument for renovation. A modernised apartment is significantly more attractive and can be rented out faster and at a better price, reducing the costs associated with the vacancy.
