Equity for land or house - How to best utilize it?

Dear forum,

a quick question regarding equity and its most sensible use. Briefly about the construction project: My wife and I currently have a net cold rent of nearly 1,400 euros, with a rent increase likely to come soon. We have a monthly savings rate of around 1,800 to 1,900 euros. We have equity of about 220,000 euros. We are calculating a total construction volume of about 650,000 euros.

The following: We will acquire a plot of land in the next few days, which will cost around 175,000 euros including all ancillary costs. Building is not possible at the moment; this will—already arranged with the employers or authorities—only be possible in about two years. How would you proceed best with the acquisition of the plot:

1. One option would be to buy the plot directly from the equity. The advantage would be that we would have no additional monthly burden and could continue saving a lot each month. With the acquisition of the plot from the equity, about 45,000 euros would remain. In two years my wife and I would save about 40,000 euros, so after two years we would have nearly 100,000 euros, which would be just under 25 percent of the targeted loan and only about 20 percent of the remaining total volume to be financed (minus the plot).

2. The second option would be to conclude a loan agreement with a bank now for the total loan to secure the currently low interest rates. However, the payout date of the entire sum and the due date would have to be negotiated. With 400,000 euros in the account, I currently can do nothing. The advantage of this variant is that the equity would currently constitute around 33 percent of the total volume and presumably more favorable interest rates could be expected than in variant 1.

What would you aim for?

Hello,

the property also counts as equity, so the (percentage) calculation is completely irrelevant. More important are the questions: 1. How precisely can you estimate the construction volume for a project in 2 years? 2. What extras do you want that the bank does not finance and for which you need cash?

A loan that is not paid out until 2 years later is also penalized with an interest surcharge.

How about a non-secured private loan for partial financing of the property, so that you have about €100,000 equity left in 2 years? These are available from about 2%, that’s also how I’m doing it right now.

Regards

Daniel

Buy the property with the equity.

Buy the plot of land with the equity.

Definitely!

Later, during the financing, the value of the plot of land will be counted together with the equity.

With regard to the loan, 1) and 2) are the same, as Fuchur already wrote, provided the property has not lost (or gained, which is also possible) value in two years. Option 1 saves you interest and is therefore preferable. Option 2 only makes sense in this respect if you invest the money instead in a similarly safe investment whose return exceeds the interest + taxes. That is unlikely. In addition, no bank will now give you 400k for a building that does not even exist on paper yet. A forward is also not an option here. You also won’t be able to preserve the costs for a building that is now planned and priced for 24 months. Ultimately, you currently have no sensible instrument to secure the current interest rate. You will have to swallow the pill, I think.

Absolutely!

Later on, during the financing, the value of the plot of land will be counted as part of the equity

I see it the same way and that’s also how it is. The prices of plots of land will continue to rise, so your plot purchased for €175k will be worth €200k in 2 years.

@Interest rate increase. All I can say is, "So what." If interest rates go up, construction costs will go down again. You just have to catch the moment when the demand for craftsmen’s services declines, because (my assumption) from my point of view there will be an intermediate phase "interest rates rising" + "still high construction demand."

And I can only strongly advise against a total loan. We are talking about 12 months of commitment-free period, after which you may still be building for 24 months.

Anything you additionally negotiate in your favor means an interest surcharge. Banks are not willing to negotiate on that either. From the 13th month onward, you would then pay a monthly commitment interest of €1000 on the €400k.