Financing as a self-employed person

Good day,

I intend to purchase a renovation project at a foreclosure auction. Regarding the topic of real estate acquisition financing, I am almost completely clueless.

I have only been self-employed for 4 years; initially, during the start-up phase, this was self-financed. The self-employment is more or less crisis-proof and rather resembles that of an employee. The advantage here is clearly that you know the future revenues at about 95%. The disadvantage is that the revenues are therefore also manageable in the range of an employee. However, I can already say which revenues will be generated in 2020 with 0% default probability (only the payment timing is sometimes "a bit" extended, which means I always need a sum X in the business account). So far, I have valued a life-work balance, focusing on life, meaning I still have potential for expansion which I have not used yet because I do not actually place much value on "money"; what I had was more than necessary. As a freelancer, I currently (and retrospectively in 2018) have about €3,900 per month minus health insurance and income tax, leaving about €2,600 after tax and health insurance. Expenses (including taxes and health insurance) are currently €2,200. Remaining is €1,700. Pension expectations are poor, planned to work until it is no longer possible (quite feasible and if it’s still somewhat fun, better than sitting at home in front of the TV). Unfortunately, I am already too old and have no offspring to leave anything to, so the plan is to spend a nice time in the house and then sell it in 15-20 years.

Savings potential through moving residence would be €360, as well as possibly around €5,000/year for the currently rented office (considering moving the office into the property).

Since I cannot assess the property or the bidding behavior of the competition at all, I am considering what I ultimately want to submit as a maximum bid. I am wavering between reason (bidding just above market value with enough reserves for renovation costs) and unreason (using the renovation budget). The house is truly a "ruin" (70s with significant renovation backlog), the location is dreamlike for me and I actually can’t find a comparable property. I am extremely tempted to plunge into the adventure of "house renovation." I have to manage more or less everything alone or organize help. But I trust myself to do it.

Regarding financing and in general, I then also have some questions.

Currently, it looks like this:
- Equity approx. €60K
- Emergency reserve approx. €20K
- Property maybe €260-270K!?

I visited one of these advisory companies...

Here, calculations were made with a purchase price of €280K, €26,000 modernization costs including personal contribution, €20,000 incidental acquisition costs, balance €50,000.
A (non-binding) offer looks like this:
KfW 0.50% €50,000 with 10 years fixed interest
Bank 1.40% / 1.42% €226,000 with 15 years fixed interest, calculated term 38 years, 5% special repayment

With these offers, I would come to about €900 per month, plus ancillary costs for the house, which would certainly be cheaper than renting a comparable property. Now to all my questions:

1. In the forum, I read that from 01.10.2019 KfW grants up to €100K. Would an increase in the KfW share be worthwhile? After all, here only 10 years are secured.
2. 15 years or 20 years fixed interest?
3. Here in other financing inquiries I read that personal contribution was credited as equity? I don’t quite understand. What is credited there, the pure monetary framework or the actual self-performed work as monetary benefit (e.g. tile setter saved + €3,000)?
4. I want to remain flexible with the bid, does the bank cooperate if I offer €310K instead of €280K and use a significant part of the renovation budget for it? Or could they then deny me the loan?
5. If I get the property cheaper, e.g. for €240K, would the loan amount then be adjusted downwards? Or would I still get the €276,000? The latter would then lead to higher renovation costs (e.g. heating system, etc.).
6. When do I need the definitive approval at the latest to be able to bid without risk?

On the open market, there is absolutely nothing that would interest me, especially as the called prices make me shudder. In my opinion, the region is on the decline (except for this property which is like a small oasis). If I were not so strongly tied up professionally, I might already be gone (but where to). I have fallen in love with the property, everything fits for me and the renovation demand tempts me to put everything together more or less according to my ideas. I also hope that this will deter many other interested parties. Actually, "ownership" with debt was not on my radar. However, the conditions have changed (annoyed by the constant search for parking in front of the apartment, want to get a pet, garage for fun vehicle in the other district, rent increases, troubles with landlord, etc.) so that I rather accidentally got the idea. But even another apartment is no longer feasible at present if you look at the prices for nice living space, so I’d rather buy the "ruin".

Thank you very much for your attention

I’m not very familiar with the self-employed, but what’s important is how the last few years have been, not what you think the future might bring.

It’s good that you’ve already been to an agent, so it seems it might work out after all.

But I’m worried that you are completely misjudging the renovation project. If you renovate on your own, you still have to buy materials. Can you even live in the house while you are renovating or how long do you plan to renovate? What actually needs to be done? You definitely lack a plan here!

What surplus after deducting all costs and taxes have you had in the last 3 years? The 400€ per month is not enough. Especially since you have (understandably) calculated yourself as tax poor.

What surplus after deducting all costs and taxes have you had in the last 3 years?

In 2017, 2018, and 2019 I have approximately the above-mentioned figures. 2016 was not yet "presentable" because of the establishment of the self-employment. The 2019 tax assessment is understandably not yet available. Incoming payments + outstanding invoices + invoices that will be created and paid by the end of the year show the above-mentioned trend.

400€ per month is not enough.

How do you come to 400 €? there remains a surplus of 1700 €. Current rent 360 €, which no longer has to be paid, results in 2000€ surplus, from which the 900 € installment and 400 € overhead costs leave still 700 € surplus per month. With the purchase of the property, the willingness to generate more turnover increases (this is possible).

Moreover, you (understandably) calculated yourself tax poor

Well, unfortunately it’s not that simple to calculate oneself poor. I do the bookkeeping myself, as everything is quite manageable. The only thing that might come close to calculating oneself poor is the company car, which reduces my profit (depreciation, operating costs) where others have to pay. Sure, I just treated myself to nice low-value assets last year that "spoiled" the annual result for me. Otherwise, unfortunately, there is nothing with tax reduction. With the property, other possibilities arise...

I’m not very familiar with the self-employed, but what matters is how it has been in the last years, not what you think the future might bring.

For the current year it would still be a forecast, as the EÜR (income surplus calculation) is still missing. Likewise, receivables have not yet flowed in as cash. A plausible forecast for the future will certainly not be unimportant, even if the last years were OK. As a manufacturer of tube TVs with great sales in the past, I probably wouldn’t get a cent more as a loan nowadays. With self-employment, I have a certain monopoly position, similar to a licensed doctor, for example.

Good that you have already been to a broker, so it seems it will work out after all.

I found the conversation quite OK. He also told me at which banks it’s not even worth asking and which do not query certain parameters and the possibility of success exists.

But I worry that you completely misjudge the renovation project. If you renovate on your own, you still have to buy materials. Can you even live in the house while renovating or how long do you plan to renovate? What actually has to be done? You definitely lack a plan here!

How long? Until it’s finished would be a good answer. I think everyone miscalculates here. Unfortunately, I do not misjudge it, I know what is coming my way. Especially with a 60-hour job, no vacation. I’m aware that you have to buy materials. But there is a difference whether you let the tiler lay the floor or do it yourself. The bathroom, too, you can easily spend 20,000 and more if you have it done, but you can also spend only a fraction if you are not completely unskilled.

Living there already would be possible, I’m quite relaxed and can also live on a half construction site (the current partial owner still lives there), especially no children, no wife who makes my life hell *g*. And depending on the budget left for the renovation, I can also gladly delegate. I have an experienced building renovator who will definitely teach me.

Does anyone perhaps have an idea regarding the questions?

1. In the forum, I read that from 01.10.2019 the KfW grants up to 100,000€. Would an increase in the KfW share be worthwhile? After all, only 10 years are secured here.

If you want to take a KfW loan, then you have to build according to KfW standards. I believe there is the modernization KfW, you should google it. The insulation and heating KfW, i.e. according to KfW 55, I would not do because of the requirements if you want to do a lot yourself. In my opinion, a renovation requires more than just “skill” and two right hands. With some skill you can renew floors and paint walls... but no electrical work and no plumbing. For points 4-6 you should talk to the banker. I wouldn't have thought that you would get a loan at all with your 2600€ income as self-employed. That should be secure if you want to bid. If you win the auction, you have to present a check for 10% immediately. Maybe nowadays it's also possible with a debit card... no idea... the money has to be available immediately, then you have 2-3 months time. At least that’s how it was “some time ago” ... ahem, how time flies. Usually, however, the auction is already “negotiated” beforehand, then wildly overpriced bids are made or agreements are reached beforehand.

If you want to take out a KfW loan, then you also have to build KfW.

KFW 124 would still be an option there.