jimmyone
2017-04-19 21:11:51
- #1
Good evening everyone,
I am currently unsure whether I should take out construction financing for a multi-family house.
I want to say right away that my text will be long because it is meant to be comprehensive.
Specifically, it concerns a house with three apartments, one of which is already owner-occupied and two more are to be rented out.
The property has been regularly maintained and actually offers exactly what I could imagine as retirement provision. With the help of the seller and a bank tool, I determined that the property yields a net return of 4.4% based on the rental share. The seller was only involved by providing all the numbers. So it is not nicely calculated.
For the part that I occupy myself, I cannot really calculate any return. I cannot pay rent to myself.
In the conversation with the bank, it was revealed that the recommendation is to put all equity into the owner-occupied tranche and finance the rental part at 100%. The disadvantages are a higher interest rate but correspondingly higher deductibility. Also, the idea was to suspend repayment and thus maintain the already low interest rate of 2.2% at this level and to put the repayment into a home savings contract. The advantage here would be in the tax consideration.
Since a lot came up in the conversation and I definitely want to use another opinion, I am trying to get a picture here again. The banker said a 4.4% return would be okay but it should not be below 4%, otherwise it does not make sense.
He explained the financing components to me like this. There are two tranches of a loan of €400,000.
We are talking about a [BLA] of 100%. The banker said in response to my question, because it is always said that such financing is much riskier than others with e.g. 80%, that this is only partially true. The bank prices in the higher [BLA] of course through the interest rate. But he sees it as more critical if I have to dissolve all my equity and have nothing left after the financing. He is of the opinion that you could just finance the full purchase price. Even financings with 80% can go wrong.
I didn’t find the argument so bad, even if I have to transfer more money to the bank because of it.
The tranches would be set up like this:
Term: 15 years each
Rental 2 units:
Loan - €230,000, repayment suspension, home savings contract through Deutscher Ring because the balance is better interest-bearing than others.
Owner-occupied:
€170,000, annuity repayment 3%
That all sounds understandable so far. Now comes a part that I did not quite understand and would just need some support with that. Of course, I would also welcome an opinion on the above-described.
The banker said these financings work like this:
75% of the rent the bank uses in the financing.
25% are used for managing the non-allocable costs.
40% of my net salary may be used in the financing. Theoretically, it could be increased to 45%, but 40% is said to be a value for secure financing.
Additionally, 2 € per m2 for operating costs.
If I add both amounts, I am almost €200 above the rate calculated by the bank. So I can use less. That’s already good. But if I calculate the total income, i.e., salary and rent at 100% each, and calculate the percentage based on the calculated rate, it comes out to 45% total use. That made alarm bells ring for me at first because no operating costs have been paid for this, no living expenses, and no savings yet. So I called the banker and he said that you cannot calculate it like that because you have to separate rental from owner-occupied.
The rent must cover repayment plus operating costs. It does.
The salary must cover repayment plus operating costs plus living expenses and savings potential. It does. The percentage evaluation cannot really be applied here.
I do it only with common sense and have to say that I didn’t understand this statement afterwards. At first it sounded plausible, but then again not. 45% is 45%, that means the total use including operating costs should be beyond 50%. 53, 54% or so...
Strictly speaking, if I add everything up, it fits. I can live well and can even spend more than the bank’s flat rate and still save. But somehow it was strange. A bit of an alarm because then I had the sober consideration that maybe I can’t afford the property with this use after all. No matter how good it sounds.
On the other hand, there is still equity available after the financing, the additional savings potential, and a location where you can assume people will want to live for a long time.
Further ideas because the seller is family related through two degrees would be the following, of which I cannot judge whether it makes sense or not. I found it interesting as an offer.
1. Establishment of a hereditary building right where the seller ranks behind the bank, with crediting of the hereditary building rent toward the later purchase price and the option to take over the land after 15–20 years. This is also to be assured in the contract. The hereditary building right is initially to be established for 50 years.
2. Taking up 75% total loan with the bank and 25% subordinated from the seller. The seller would convert his loan share to a bullet loan for 15 years. The basic idea is to generate even better conditions, to be able to repay even more, and then to use the free parts of the land charge for the payout of the subordinated loan again. A special repayment option is to be included in the contract which is possible at any time and in any amount. Meaning if wanted, I could transfer surpluses or Christmas bonuses to him. The burden would not be higher and would thus not affect the household budget.
So that’s it in all length. I would be happy to receive feedback and wish you a nice evening.
Best regards
Jimmyone
I am currently unsure whether I should take out construction financing for a multi-family house.
I want to say right away that my text will be long because it is meant to be comprehensive.
Specifically, it concerns a house with three apartments, one of which is already owner-occupied and two more are to be rented out.
The property has been regularly maintained and actually offers exactly what I could imagine as retirement provision. With the help of the seller and a bank tool, I determined that the property yields a net return of 4.4% based on the rental share. The seller was only involved by providing all the numbers. So it is not nicely calculated.
For the part that I occupy myself, I cannot really calculate any return. I cannot pay rent to myself.
In the conversation with the bank, it was revealed that the recommendation is to put all equity into the owner-occupied tranche and finance the rental part at 100%. The disadvantages are a higher interest rate but correspondingly higher deductibility. Also, the idea was to suspend repayment and thus maintain the already low interest rate of 2.2% at this level and to put the repayment into a home savings contract. The advantage here would be in the tax consideration.
Since a lot came up in the conversation and I definitely want to use another opinion, I am trying to get a picture here again. The banker said a 4.4% return would be okay but it should not be below 4%, otherwise it does not make sense.
He explained the financing components to me like this. There are two tranches of a loan of €400,000.
We are talking about a [BLA] of 100%. The banker said in response to my question, because it is always said that such financing is much riskier than others with e.g. 80%, that this is only partially true. The bank prices in the higher [BLA] of course through the interest rate. But he sees it as more critical if I have to dissolve all my equity and have nothing left after the financing. He is of the opinion that you could just finance the full purchase price. Even financings with 80% can go wrong.
I didn’t find the argument so bad, even if I have to transfer more money to the bank because of it.
The tranches would be set up like this:
Term: 15 years each
Rental 2 units:
Loan - €230,000, repayment suspension, home savings contract through Deutscher Ring because the balance is better interest-bearing than others.
Owner-occupied:
€170,000, annuity repayment 3%
That all sounds understandable so far. Now comes a part that I did not quite understand and would just need some support with that. Of course, I would also welcome an opinion on the above-described.
The banker said these financings work like this:
75% of the rent the bank uses in the financing.
25% are used for managing the non-allocable costs.
40% of my net salary may be used in the financing. Theoretically, it could be increased to 45%, but 40% is said to be a value for secure financing.
Additionally, 2 € per m2 for operating costs.
If I add both amounts, I am almost €200 above the rate calculated by the bank. So I can use less. That’s already good. But if I calculate the total income, i.e., salary and rent at 100% each, and calculate the percentage based on the calculated rate, it comes out to 45% total use. That made alarm bells ring for me at first because no operating costs have been paid for this, no living expenses, and no savings yet. So I called the banker and he said that you cannot calculate it like that because you have to separate rental from owner-occupied.
The rent must cover repayment plus operating costs. It does.
The salary must cover repayment plus operating costs plus living expenses and savings potential. It does. The percentage evaluation cannot really be applied here.
I do it only with common sense and have to say that I didn’t understand this statement afterwards. At first it sounded plausible, but then again not. 45% is 45%, that means the total use including operating costs should be beyond 50%. 53, 54% or so...
Strictly speaking, if I add everything up, it fits. I can live well and can even spend more than the bank’s flat rate and still save. But somehow it was strange. A bit of an alarm because then I had the sober consideration that maybe I can’t afford the property with this use after all. No matter how good it sounds.
On the other hand, there is still equity available after the financing, the additional savings potential, and a location where you can assume people will want to live for a long time.
Further ideas because the seller is family related through two degrees would be the following, of which I cannot judge whether it makes sense or not. I found it interesting as an offer.
1. Establishment of a hereditary building right where the seller ranks behind the bank, with crediting of the hereditary building rent toward the later purchase price and the option to take over the land after 15–20 years. This is also to be assured in the contract. The hereditary building right is initially to be established for 50 years.
2. Taking up 75% total loan with the bank and 25% subordinated from the seller. The seller would convert his loan share to a bullet loan for 15 years. The basic idea is to generate even better conditions, to be able to repay even more, and then to use the free parts of the land charge for the payout of the subordinated loan again. A special repayment option is to be included in the contract which is possible at any time and in any amount. Meaning if wanted, I could transfer surpluses or Christmas bonuses to him. The burden would not be higher and would thus not affect the household budget.
So that’s it in all length. I would be happy to receive feedback and wish you a nice evening.
Best regards
Jimmyone