Demolition and reconstruction or renovation?

that looks very much like a regulated residential area for single-family houses, possibly also for semi-detached houses. I don't. I would do that too. I simply exclude multi-family houses, bungalows not (why should I). Whether three of that kind or only two...?! I would see it similarly. gone is gone, but you have gained the distance! What you keep, possibly still enjoy as fallow land, i.e. as a garden and later have it built within the family. Give up the old house! Worries gone, distance gained.

No, multi-family houses are possible. House gone is definitely a favored idea... Or renovate after all. Or rebuild? Man :-(

Multi-family house: Yes, next door is a two-family house, on the street a 12- and a 5-family house are currently being built. The only condition is the ridge height, which must not be higher than the neighboring houses, but that is enough for 2 1/2 floors.

No, multi-family houses are possible.

Tearing the house down is definitely a favored idea... Or renovate after all. Or new construction? Man :-(

Ok, a two-family house is of course not a multi-family house, but naturally 5 or 12 units. However, I can’t imagine that a floor area ratio / plot ratio doesn’t play a role there and limits a lot for you. A whole plot naturally offers more units (in terms of floor area ratio), if the area is parceled, you rather have to budget.
I am of the opinion that if you classify your options into “does not bother me” and “don’t want,” you will hardly have any choice left or the solution should be obvious.

Well then Either build new or renovate. Would be my suggestion

No, there is no building obligation. However, for us it is a financial burden for the loan taken, although at an acceptable level. Apartment building: Yes, next door is a 2-family house, on the street a 12- and a 5-family house are currently being built. The only condition is the ridge height, which must not be higher than the neighboring houses, but that is enough for 2 1/2 floors. Bungalow yes, but 2 bungalows are of course not exactly the cheapest option... Rental market: Yes. One apartment could be 60, one 55 m² in size. That is exactly what is being sought here. But as I said, nothing relevant has been invested in the last 70 years, just paint is not enough... Children are still in school/training/university Finances: we don’t want to put in extra money, it should pay for itself. Financing flexibility exists. From 1-5 basically everything is possible How do you know about our conversations over red wine?? :) In the middle of the property we could later imagine a bungalow just for the two of us, so a downsizing when the children have finally left the house. Those were also the first thoughts with the property. Gardening: Yes, pulling weeds no. But a beautiful garden with flowering plants, a pool and a sauna house we both like and enjoy. We have both been landlords before and would want to do it again. Regards Heiko

How do I know that? My husband and I joke about buying the neighbor’s garden. I am sitting in front of the list of tomato varieties from the exchange package or seed catalog and sorting them out. I curse that I don’t have enough space, comes “yes I’ll ask the neighbor.” Where do we water the ice rink if it gets cold enough? Mh we ask the neighbor. We don’t want the buildings at all. We only want the garden. So you do need quite a bit of the area yourselves, which conflicts with 4. And 4 is what you didn’t want. Clarify what is possible, what it costs and what it yields. Always think about whether this is what you wanted over red wine.

Oops, the first sentence is incomplete. I would get quotes on what a renovation costs.

For me personally, I would see 2 sensible options in your case.

For both options:
Expand your garden by at least 1/3 to about 1/2 of the new plot and design it for gardening for yourselves!
Another advantage: if needed, in 15 years this area is optimally usable for new construction, e.g. of a bungalow.

Option A:
Carry out a few cosmetic repairs and rent out the old little house (inexpensively) along with the clearly smaller part of the plot. This way you have time to consider what exactly can be usefully done with it. Through rental use, the still existing building fabric is preserved (for a possible later renovation).
Furthermore, your children thus have the opportunity in 5-10 years to either renovate a house near the parents or to newly build on a plot. And yet the previously existing living space is currently being used.

Option B:
Demolition and new construction of a 4-5 person rental building. When designing, make sure that your garden view to the south is not strongly impaired and that tenants cannot look onto your terrace. As builders, you can actively take this into account.
Advantages:
Use of current low interest rates, creation of living space, income property (for you and your children), possibility for children to possibly use an apartment themselves in a few years.

Option A of course also leaves you the possibility to go for option 2 in a few years.

In the middle of the property, we could later imagine having a bungalow just for the two of us, a downsizing when the children have finally moved out.

Well then everything is clear: 1. (simply factually by relocating the fence, without re-dividing the plots!) move the boundary between the gardens, create sun-permeable privacy screens with bean poles, rose arches or similar climbing structures towards the old house. 2. Keep the footprint of the retirement bungalow free of development, use it as a temporary rented garden. Possibly I would also make a garden gate to the driveway of the old house, so there is a second access. 3. Renovate energetically as needed, make sanitary and kitchen installations fit for a maximum of another two decades, no more. I could imagine just keeping the roof weatherproof, using the attic as storage space and declaring the thermal envelope closed with the floor ceiling between the ground floor and attic, and only renting out the ground floor – rafter insulation etc. and the like for an additionally rentable apartment I do not expect to be worthwhile. For rent-free years and a termination by you at the earliest in ten years, the tenant should adapt the interior to his wishes at his own expense. In ten years you think about extending the rental and its conditions, in twenty years you tear it down, and the little house frees up the floor area ratio and front garden area. This way you have decay protection through habitation in the meantime, the substance is not a burden on the mortgage value of the property by the preservation, and the building ground of the retirement bungalow remains untouched. The tenant pays only ancillary costs and a contribution for financing the necessary energetic and sanitary renovation for several years, makes it "nice" at his own expense in return, and everyone is satisfied to happy. The investment is very manageable, no dice fall to the detriment of future opportunities. And if they haven’t died, then the Brothers Grimm or something like that are happy.