Buy a Reihenmittelhaus KfW 55 standard and rent it out later

Hello,

I have a question. My girlfriend and I want to buy a terraced house in [KFW 55 Standard], but it should only be a temporary solution since we currently can't find a plot of land to build on. Our plan is to live there for about 7 years and then rent out the house, or should we continue renting as long as we can't find a plot? (Rent amounts to 560 euros cold including additional costs.) Or maybe sell the house again after that time?

Key data about the house: 255,000 euros (130m² living space / 354m² plot size), built in 2017 and ready to move in January 2018. The house is sold without commission; we only need to buy the kitchen. The house is sold in beautiful Schleswig-Holstein.

Household income is just under 5,000 euros net per month. (I am 25 and my girlfriend is 23.) My idea is 5% repayment on this property, which would cost us just under 1,500 euros per month. After moving out, we would reduce the repayment to 1% to finance our new property. We are really a bit afraid to take this step because there will obviously be very high debts, but the terraced house should ideally cover itself through the tenant? Should we invest all of our equity or just the additional costs like property transfer tax? Our equity is 70,000 euros.

I would like to hear some opinions on this.

First question. Is the terraced house located in a way that it is interesting for tenants? What are the usual square meter rents at this location today? Would you tolerate two or three months of vacancy? Would a gross return of 6% before taxes be achievable? Do you trust yourself to assess tenants and not end up with rent nomads or similar? I rented out 85 sqm myself in Neustadt in Holstein for 600 cold for years. The experiences were good. But we sold the property in 2016 to co-finance our house. Continuing to rent out and taking on more credit would have been possible. But I’m too old, and if I have to go, I don’t want to leave debts to my wife. But you are young, you could do it. Karsten

Townhouses can economically be the suitable alternative for people who value owning their own home. For tenants, however, the model of an apartment is the classic comparison object. Compared to the apartment, the townhouse offers the advantage of a green area adjoining the terrace instead of usually a significantly smaller balcony without garden access, but especially as a mid-terrace house still the disadvantage of having two windowless exterior walls (in addition to a lot of stairs). I would personally regard a "loft studio" as a storage room and accordingly would not be too optimistic about its overall attractiveness for tenants. In other words: I would "deduct" such a structurally resulting surplus space from the total area when estimating future tenant expectations. That’s the aspect of "whether the house will be in demand by tenants."

The other aspect is retaining and renting versus selling: a sale brings equity for the subsequent property, renting mainly helps with repayment. In general, I am rather skeptical whether a two-property portfolio with one self-used and one rented unit is worthwhile. Specifically here, under the premise that this is a precursor property of the actually desired own home, I tend to recommend selling when the actual property is to be tackled. It will not be worthwhile for you to be landlords out of sheer embarrassment of having an extra house. Being double-income twenty years older, one spouse salaried A16 and the other self-employed, I might see this differently :)

The question remains: buy an "interim house" now or continue being tenants during the waiting period. I would say, if it is not a big financial burden, then indulge yourselves in the experience of a single-family house, which can pay off when planning the "actual" house.

Is this now _only_ an alternative interim solution or would it be a house you could warm up to? I ask because it will initially become your property for several years, regardless of what you plan later. Financing 260,000 is nothing compared to what you have to spend on a single-family house, so you are making the wrong considerations regarding a terraced mid-terrace house for 7-10 years. A terraced mid-terrace house of 130 sqm is great! If everything else is right, why hesitate? You can live in such a house for 40 years starting at 25, if things turn out differently than you think :)

Hey, with the income, purchase price, and equity, I wouldn't hesitate at all but buy if it fits. It's on par with the cold rent, but you are building equity. Also, you might even get attached to the house.

I wouldn’t worry too much now about which of the two options will probably be better in 7-10 years. Do you like the house enough that you want to live there for several years? Then go ahead, a townhouse is a good (at least) interim solution. Regarding the equity question: you pay interest on all the money you keep. I would keep an emergency fund of about 3 months’ expenses, plus reserves for replacing cars and major appliances depending on their age, and put the rest into the house. You probably don’t need repair reserves for the house if it is a new build that you plan to sell again in the foreseeable future.