Assessment of Income/Assets for Real Estate Acquisition

Hello,

after quietly reading along for a few weeks, I would like to ask for your assessment regarding the question currently occupying us about the possible financing of a home.

General information about us:
We (EF: 36 years / EM: 40 years) are married and have 2 children aged 5 and 7. We are both employed in Frankfurt (EF: part-time 64% / EM: full-time 100% 40h) and have been renting for almost 4 years in a "suburb" of Frankfurt (semi-detached house, each approx. 20 minutes to the office in Frankfurt). No further children are planned.

In addition to the employee job, I (EM) am also partly self-employed on the side.

We moved to the Rhine-Main area for professional reasons. Unfortunately, we do not have any other family here locally.

We have not really dealt seriously with the purchase of a home in the past. When we last moved in 2016, we looked very superficially at portals for existing houses, but at that time gave up due to the already unrealistic prices for even heavily in-need-of-renovation properties. We did not consider new builds at all.

Moreover, we wanted to maintain a certain flexibility in the past. This has now changed and is no longer a priority for us in view of the children.

No gifts or inheritances are expected from the family, as we both come from relatively down-to-earth backgrounds.

General information about us:

[*
How old are you? EM: 40 years / EF: 36 years
[*]Do you have children? Yes, 2 (7 years and 5 years)
[*]Are more children planned? No further children planned.
[*]What do you do professionally? Employed. EM also freelance on the side.
[*]Are you employed, self-employed, retired, housewife, househusband, etc.? Employed.
[*]How many hours do you work? EM: 40 hrs / EF: 25 hrs.



Income and asset situation:

Income


[*]What income do you have per month (net after tax)?
[LIST]
[*]Employment: EM: EUR 6,100 (plus approx. EUR 3,000 Christmas bonus, from 2020: 2-3% p.a. inflation adjustment)
[*]Employment: EF: EUR 2,450
[*]Income tax deduction based on tax class 4 factor
[*]Income from self-employment irregular, approx. EUR 4,200 p.a. / approx. EUR 350 p.m.
[*]Income from rental (currently cash after housing costs and annuity, before special property reserves and rental loss risk): EUR -250 after tax (from 10/2019: EUR +450 after tax)


[*]How much child benefit do you receive per month? EUR 400
[*]Total income without one-time payments: EUR 9,050


[*]plus annual one-time payment of EUR 3,000
[*]from 10/2019: EUR +700 from rental
[*]from 01/2020 annually: EUR +100-200 p.m. from EM employment

Asset situation

[*
How much equity do you have?
[LIST]
[*]Stocks/funds: approx. EUR 60,000
[*]Cash: approx. EUR 30,000
[*]Real estate (net): approx. EUR 144,000
[LIST]
[*]Condominium 01: Value EUR 210,000 / Loan EUR 122,000 (current loan-to-value: 58%)
[*]Condominium 02: Value EUR 90,000 / Loan EUR 69,000 (current loan-to-value: 77%)
[*]Condominium 03: Value EUR 35,000 / Loan EUR 0 (current loan-to-value: 0%)
[*]Real estate repayment p.m.: EUR 950 (repayment portion of annuity loan installments for 07/2019)


[*]Total assets: approx. EUR 234,000

[*

Equity substitute:


[*]After consultation with the bank financing the loans for Condominium 01, a subsequent loan on Condominium 01 of approx. EUR 35,000 would be possible (conditions would be for a mortgage loan).
[*]Condominium 03 is unencumbered, meaning in the best case an equity substitute of EUR 35,000 x 80% = EUR 28,000 would be feasible here.

Expense situation

[*
Current gross rent: EUR 1,850 (EUR 1,450 cold rent)
[*]Private health insurance for children: EUR 310
[*]Daycare/school fees: EUR 900
[*]Food/drugstore: EUR 900
[*]Clubs: EUR 50
[*]Telephone, internet, mobile: EUR 90
[*]2 cars, paid off: EUR 430
[LIST]
[*]of which petrol: EUR 230
[*]of which insurance/tax/repairs: EUR 200


[*]Other insurance (liability/home contents/long-term care/additional accident/disability/life insurance): EUR 140
[*]Vacations: EUR 600
[*]Cleaning service: EUR 200
[*]Canteen: EUR 360
[*]Miscellaneous (clothing, etc.): EUR 370
[*]Total expenses: EUR 6,400

Savings:

[*
Stocks/funds: EUR 1,000
[*]Cash: EUR 1,650 (from 10/2019: EUR 2,500)
[*]Total savings: EUR 2,650 (from 10/2019: EUR 3,350)



Income and expense totals:


[*]Total income: EUR 9,050
[*]Total expenses: EUR 6,400
[*]Balance: EUR 2,650 (plus rent savings of EUR 1,450 if buying)



Thus, the following questions arise for us:


[*]In the above situation, what would be a maximum "healthy" annuity for the purchase of a home?
[*]Since currently a relatively large amount of equity is tied up in real estate and we do not intend to sell the condominiums, the following questions arise for us:
[LIST]
[*]Up to what amount would you recommend a real estate loan, considering our ages (40 / 36)? The property should be debt-free at the latest upon retirement (preferably already by age 58).
[*]Would it be more advantageous
[LIST]
[*]to buy now with possibly low equity injection, or
[*]to save cash for an additional 2-3 years in order to achieve approx. 80% financing and then buy?

[/LIST]

Thank you in advance for evaluations, suggestions, and assessments!

Best regards

You are well organized with your finances. The question is rather in which price range you are looking and what you want to finance.

So far, we are not searching concretely yet. My approach was to first outline what is possible in order to then compare it with the real estate offers. Ideally, it would be a single-family house, 150 sqm of living space with a small garden. A semi-detached house would not be an option for purchase, as we already live in one as tenants. The price is the intriguing question. According to current listings, we would quickly be looking at EUR 750k and upwards here in the area. Keep in mind, this is for existing properties. What new builds would cost, I can hardly estimate, since about 95% of the building plots nearby are only developed with semi-detached or terraced houses. The question is whether it might be better to enter a purchase with more "liquid" equity and wait another 2-3 years. Then we would be 43 years old and 39 years old respectively. An alternative would be to buy soon with a comparatively low equity contribution of approx. EUR 80-100k (EUR 30k cash and equity replacement of approx. EUR 65k via the existing properties). The equity replacement service could roughly be covered by the rental cash flow starting 10/2019 (there would still be sufficient buffer in case of rental default). These are at least our current considerations. :Would that be a possible approach? Criticism welcome anytime.

So far we are not searching specifically. My approach was to first outline what is possible, in order to then compare that with the property listings. Ideally, it would be a single-family house, 150 sqm of living space with a bit of garden. A semi-detached house would not be an option for purchase, as we already live in one as tenants. The price is the exciting question. According to current listings, we would quickly move into the region of EUR 750k and up here locally. Mind you, for existing properties. What new builds would cost, I can hardly estimate, since around here in the development areas 95% are only built as semi-detached or terraced houses. The question is whether one should go into a purchase with more "liquid" equity and wait another 2-3 years for that. Then we would be 43 years and 39 years old respectively. An alternative would be to buy soon with comparatively little equity of about EUR 80-100k (EUR 30k cash and equity substitution of about EUR 65k via the existing properties). The equity substitution services could roughly be covered by the rental cash flow from 10/2019 onwards (in case of rental default, there would still be enough buffer). Those are at least our current considerations. :Would that be a possible way? Criticism always welcome.

Well, I would base myself on your cold rent. For €1,450 you can already get something. €750k and €1,650 for 20 years still results in a residual debt of €565k, but that would be full financing. Just as a feeling.

Do you plan to sell the [ETW] at some point? We have just completed a financing deal and can only sell our [ETW] tax-free after 5 years. We were able to agree on a fixed special payment of 100k in a few years, which clearly lowered our interest rate. Just an idea.

Your listing of expenses is commendable but will probably not be complete, as there are still quite a few items missing that add up significantly, such as non-regular consumption (e.g., electronics) or smaller items like cleaning, GEZ, Amazon, Netflix, Spotify, gifts (for her, children’s birthdays of kids and friends, etc.) and so on.

What have you managed to save monthly in the last 3 months?

I’m only asking because the expenses, despite above-average income, are pushed up by items like cleaning lady, school fees. Whether this is necessary or not doesn’t matter initially.

I’m deliberately focusing on the savings rate now because you asked whether it makes sense to save equity for 2-3 years and then only acquire property. To be honest, I don’t think it’s advisable to wait longer in the FFM region, because;

- Your savings rate relative to your salary is abysmal (we managed to save more with less income and didn’t live badly)
- Property prices in metropolitan areas are currently rising so strongly that it might end up being a zero-sum game.

In the other forum you said you want to be done after 18 years (or someone put that into your mouth). You yourself read that you don’t have the possibility to service such a rate.

For my part, I believe you won’t avoid having to sell at least one property beforehand in order to be debt-free before retirement (assuming that’s the goal) with an estimated loan of €750k.

You write that you like existing properties in the range of around €750k, so in Hesse you will have at least another €60k in real estate transfer tax, notary/land registry on top. Also, existing properties are mostly brokered through an agent. The commission in Hesse is also another 6% of the purchase price! Worst case, that makes €105k in ancillary purchase costs.

And with that, a loan of €850k upwards or a property under €600k.

From my point of view, quite a few things don’t add up for acquiring a +€750k property, because what I read here is rather, “I don’t want to sell my stocks, real estate but rather keep saving or go in with less equity,” and that simply doesn’t fit the amount and the savings rate with the wish to be done by age 58.

But that doesn’t mean you won’t get a loan of that amount, since your actual expenses will presumably not be evident to that extent from the bank statements (which will be required).