Finance big, wait, or think smaller?

Dear house-building forum,

Happy New Year to all, I have been reading here for a while and am very grateful for the advice and exchange of experiences.
Our topic has come up similarly quite often, yet we would also be grateful for your assessments regarding the financial feasibility of our intended real estate project and the solidity of our planning.

General information about you:

[*]Who are you? Married couple, one child
[*]How old are you? 32, 30
[*]Are there children? Yes, a son, six months old
[*]Are more children planned? Yes, one more
[*]What do you do professionally? He: software, she: public service
[*]Are you employed? Yes
[*]How many hours do you work? He: full-time, she: currently parental leave with parental allowance, afterward we cautiously calculate 100% parental leave without parental allowance
[*]Previous craftsmanship experience or talent: none

Income and asset situation:

[*]What income do you have (gross/net)? He: €7,000 net monthly (thanks to spouse splitting), she: currently €1,800 net monthly parental allowance (which we omit for planning as it is temporary) - in addition, a bonus of at least €1,000 net monthly that we also omit for planning
[*]Transfer payments: child benefit €250
[*]So, current income: €7,250
[*]How much equity do you have? €300,000 (self-saved, no grants included – have been working since age 18 and have always studied part-time)
[*]How much equity do you want to invest in the house project? Basically everything except a safety buffer of about €10,000

Housing costs:

[*]Current cold rent €1,250
[*]Current warm rent €1,500

Living expenses:

[*]Mobility costs (1 car): €400
[*]Electricity & internet: €120
[*]Other insurance: €150
[*]Food & drugstore: €500
[*]Clothing: €120
[*]Other costs for child: €300 (currently set too high but will rise)
[*]Eating out: €70
[*]Vacation: €250
[*]Unexpected expenses: €200 (set too high but for safety)

According to our household overview, we have total monthly expenses of about €3,600, including rent.

Income and expense totals:

[*]Total income €7,250
[*]Total expenses: €3,600
[*]Balance = €3,650
[*]Plus cold rent €1,250 = €4,900

Question:
We are looking for a detached two-family house with a garden. We want to live in the ground floor and basement ourselves and rent out the 1st floor.
A concrete candidate property looks like this:
Ground floor: 123 sqm
1st floor: 95 sqm
Plot: 470 sqm
Standard land value: €850
Year built: 1985
No renovation backlog, energy renovation already very good for an existing property (efficiency class C), but electricity and water not yet renewed.
Purchase price including ancillary costs: €740,000

The bathrooms (2 bathrooms, 1 guest WC) would have to be renovated, for which I have budgeted €50,000.
The floors on the 1st floor would have to be renewed, for which I have budgeted €20,000.
€30,000 I have budgeted for unforeseeable/padding.

In total, therefore, costs of €840,000

According to the rental price index, a cold rent of €930 will be possible from the intended rental of the 1st floor.
Due to the tax effect of the proportional depreciation as well as the proportional interest, a monthly cash flow advantage after taxes of €870 would remain with us.
Furthermore, we only have to bear ancillary costs for a living space of 123 sqm ourselves.

However, it remains that we would have to take out at least €550,000 in loans.
According to various online calculators, I think there will be banks that will approve this in our case, but I find the idea of having over half a million in debt frightening and would want to repay it as soon as possible.
I think we could manage a monthly burden of €4,000 as an annuity, which would be an initial repayment of 5.5% at 3.22% interest.
However, I think that banks will probably only offer us about 35% of our household net income and we could possibly make the rest as annual special repayments.
That would then be a rate of €2,500

Plan B is: to stay renting and diligently save for one or two more years and build up equity further.
Another suitable property will also come.
Possibly in mid-2024 a further decrease of ECB key interest rates or the downward trend in the real estate market might reduce the purchase price by a few more percent.
How would you see that?

Plan C: Scale down a bit and buy a terraced middle or end house and nicely modernize it. That would be possible with a loan of "only" €300,000.
But living is more than just rational, and the goal is actually something detached.

If any crucial information is missing, I will gladly provide it.
Thank you very much in advance for all answers!
Best regards and have a nice Sunday

I would definitely vote for Plan C. There is nothing wrong with townhouses. In any case, in that scenario you would have your own house, whereas in A people still live in the house with you. If that works well, it’s fun. But if not, it quickly becomes unpleasant. With the townhouse, you just close the door and that’s it. I don’t understand what’s so great about "freihstehend". The edges are just for the trash cans and stuff. In Scenario C, I imagine life to be the most relaxed. No huge payments, no tenant and landlord stress (which you can then arrange elsewhere, in an external property if you want). Plan B is also relaxed if you are satisfied with the apartment. Personally, I would definitely not consider Option A, but either go for C or stay with B.

May I ask how one comes up with the idea to look for a property that tenants are supposed to have in the [og]? There is actually nothing more annoying than tenants above you?!

Thank you for the quick responses.

The question is valid. The idea is to make part of the house costs tax-deductible for 5 years (interest, depreciation, modernization costs) while family planning progresses. Then you could convert the property to sole use.
The tax planning flexibility is more attractive than owner-occupation, and temporarily the rental income helps with financing. But that is only theory, I agree with you.

I would not mix investment properties and owner-occupied use. With your equity and your net income, a proper house is doable. It doesn’t have to be a townhouse. You can then get the property as an investment once your own home is sufficiently financed (e.g., when your partner works again).

You have a solid income; your wife should also be able to earn at least 3k net anytime if something happens to you.

With a 2500 payment, you can get something new at any time with your equity; don’t put yourself through the stress of renovation. From my own experience: 2x bathroom and toilet cost 50k only with massive sweat equity and connections. That means complete demolition yourself, only the essentials to the installer. 2% repayment, 3% interest means with a 2500 payment a loan of 600k, plus equity we are at 900k. That should be enough in all commuter belts except Munich for a semi-detached house. And your payment could even be somewhat higher.

Better new than used if you have no craftsmanship skills. Everyone underestimates the renovation of an older existing property and all online cost calculators are wrong. Not to mention the time required. Despite falling prices for existing properties, they still don’t pay off. Unless you are a craftsman yourself and have the right network (then an appointment can be quick and uncomplicated on the weekend and still cheap).

With your salary and the saved equity, I would either continue renting and watch the real estate market/interest rate developments or buy a property without tenants.

Whether detached, terraced house, or semi-detached house - it needs to suit you and you have to feel comfortable.