Financing an owner-occupied apartment for rental

Hello everyone,

we have lived in the apartment under discussion for 7 years, and upon moving out it turned out that the landlord wants to sell for age-related reasons (80+). I made him an offer which he surprisingly accepted.

The plan is to rent out the property and in 30 years when we retire this might possibly be our retirement home.

I turn to you with the following questions:
1. I have currently inquired at Dr. Klein, Interhyp and VR Bank München Land eG, appointments each in about a week
2. Which other banks/real estate financiers suitable to my profile are there in the Munich area?
3. I tend towards a 30-year fixed interest rate period, in this time frame the apartment would be paid off and I wouldn’t have to worry about follow-up financing – do you see disadvantages besides the fact that not every bank offers this and of course the interest rate rises a bit? (what is the typical range there?)
4. An 80% financing would be possible, to bind less equity I find 90% more comfortable – what is the general sentiment there?

Here is the framework:

I am 37, my lady 36, our little one 1 year, a second little one will definitely come in the next 2 or 3 years...
I have been working for 14 years at a solid hidden champion and am now a department head
Financing/purchase only by me.

Income

Me 4800€ net
Her 1800€ net (parental allowance+) (after that 3000 + part-time)

Household expenses

2800€ rent (welcome to Munich)
2000€+- living (clothing, food, insurance, ...)

Derivation of financing

385000 purchase price
+25000 renovation costs (complete bathroom, parquet in all rooms, underground parking space) (value-increasing to be financed)
=410000 property value
+25000 incidental purchase costs
=435000 total requirement

with 80% financing
435000 total requirement
-328000 (80%)
=107000 equity (possible, but I would feel more comfortable if I had a little more in reserve)

with 90% financing
435000 total requirement
-369000 (80%)
=66000 equity

Financing

Annuity loan
Well, questions and more questions
80% or 90% financing?
20 or even 30 years fixed interest rate period?
Due to bonus payments special repayment (~2-5% p.a.) would be useful
The goal is a monthly rate of +-1200€
I calculate with an interest rate of 1.3 - 1.5% and am still looking for the sweet spot in the above parameters...

Apartment

385000 purchase price
81667 Munich Haidhausen – really good location
70s construction
2 rooms, 61sqm
5th floor including elevator
South balcony
Duplex parking upstairs
Rental income about 22 to 25€/sqm after renovation

Thanks

Twistedhead

For a rental property, I would plan for maximum financing and a long term.

Offer 30 years and 20 years.

I would also ask Allianz.

I expect an interest rate of 1.3 - 1.5%

ROFL - With a financing of 100-10% of the loan-to-value ratio you are way off if you actually want 20-30 years. For 20 years I estimate about 1.50, for 25 years 1.70 and for 30 years around 2% (these are current interest rates from the cooperative sector). Assuming your approx. 3% repayment.

What other banks/property financiers suitable for my profile are there in the Munich area?

You don’t need more than that.

I tend towards a 30-year fixed interest period, in this timeframe the apartment would be paid off and I wouldn’t have to worry about follow-up financing – do you see any disadvantages besides the fact that not every bank offers this and of course the interest rate rises a bit?

Nope, there are no further disadvantages.

Financing/purchase only through me.

That could be tight from the bank’s perspective (only one earner, but a 3-person household with high expenses – the woman’s income is disregarded since she is not a borrower)

4. An 80% financing would be possible, to tie up less equity I find 90% more comfortable – what is the general feeling about that?

The 80% or 90% always refer to the purchase price excluding ancillary costs or the loan-to-value ratio, which also does not include ancillary costs. 90% means for you that the bank should finance more than the property is worth...

Hello,

thanks lastdrop and nordanney for your comments

ROFL - You are way off with a financing of 100-10% of the mortgage lending value if you actually want 20-30 years.
For 20 years I estimate about 1.50, for 25 years about 1.70 and for 30 years around 2% (these are current interest rates from the cooperative sector). Assuming your approximately 3% repayment.

The 80% or 90% always refer to the purchase price without additional costs or the mortgage lending value, which also does not consider additional costs. 90% means for you that the bank should finance more than the property is worth...

Maybe I still have a gap here or expressed myself poorly. Your assumption of 100% or 110% financing is still not clear to me.

1. Purchase price is €385,000
2. I want to renovate and allocate €25,000 for that.
3. I assume that the renovation increases the value, resulting in a property value of €410,000.
4. I finance 80% of that -> €328,000
5. or 90% -> €369,000
6. Purchase incidental costs (€25,000) and the missing 20% (10%) come from equity.
7. The equity to be used is thus €107,000 (€66,000).

Do I have a mistake somewhere?

Another question - what happens if the value of the property differs from the purchase price? Meaning purchase price < value?

Thanks

TwistedHead

I would like to renovate and am planning for €25,000.

The €25,000 does not fully increase the value of the apartment - existing bathroom or existing floors, for example, will be torn out. Calculate €385k purchase price + €15k value increase = €400k apartment value. The bank usually deducts a 10% safety margin to arrive at a lending value = €360k apartment value for the bank. However, you want, for example, "90%" financed = €369k. Thus €9k more than the apartment is worth (from the bank’s point of view). Hence my current daily interest rates for 100 to 110% financing.

Another question - what happens if the value of the property differs from the purchase price? Meaning purchase price < value?

What reason should there be for that? In normal business transactions, the purchase price = market value. Exceptions are, for example, purchases within the family. If the apartment were worth more than the purchase price, someone else would buy it, because no one gives away money. Of course, many property buyers convince themselves they are making a bargain, but bargains no longer exist nowadays. You also can’t sell that to any bank.

As already mentioned, purchase price = value = mortgage lending value of the property. We assume 50% of the proven renovation costs as value-increasing. Financing it alone seems critical to me given the income. We would at least recalculate the net income with tax class 4. €4,800 net with or without private health insurance? As an employee at a hidden champion in Munich, rather a low income. I also find it hard to support something like this if someone does not acquire property themselves and throws away €2,800 in rent themselves.