Financing single-family house purchase + renovation (multiple options)

Hello everyone,

In [URL='https://www.hausbau-forum.de/threads/sanierungskosten-efh-1965-abschaetzen.42260/'

this thread[/URL] I had already asked about renovation costs. Here comes now the financing question including the purchase price.

General information about you:


[*]How old are you? 38, 38, 2, -1 (K2 is coming in summer)
[*]Are children planned? After K2 no more
[*]What do you do professionally? Employees (IT + administration)
[*]How many hours do you work? He 37, she 20


Income and asset situation:


[*]What income do you have (gross/net)?
[LIST]
[*]He: 4800€ net (tax class 1)
[*]She: 1100€ net (tax class 1) -> drops to about 600€ for 1 year parental leave from summer, then back to 1100€.
[*]Rental income: 1200€ after taxes (1000€ rent + 200€ income from photovoltaic system)


[*]How much child benefit is there?


[*]Currently 219€, from summer then 438€


[*]How much equity do you have?


[*]About 450K€ cash, of which about 50K€ invested.
[*]Property 1: terraced mid-terrace house from 1925, current value about 350K€, rent after taxes: 650€, debt-free and owned for over 10 years
[*]Property 2: small detached house in the village, current value about 350K€, rent after taxes: 350€ + 200€ photovoltaic, debt-free and owned for over 10 years


[*]How much equity do you want to invest in the house project?


[*]From cash max 400K€
[*]Possibly one of the two properties

Housing costs:

[*]Current cold rent 1000€
[*]Current warm rent 1150€
[*]Electricity 50€ (2020)
[*]Gas 70€ (2020)
[*]Telephone, internet, mobile 70€ (incl. Spotify)

Mobility costs:

[*]Monthly ticket for bus and train (also for the children!) Currently 0. When things normalize again: 250€ BC 100
[*]Car loan (or savings rate for new car) 0 (car new from 2020, family car, to be driven until scrapping)
[*]Insurance 35€
[*]Taxes 15€
[*]ADAC 11€
[*]Fuel 100€ (we both can walk/bike to work, car is mainly used for visiting friends / grandparents)
[*]Repairs 200€ reserve planned, mainly as partial savings rate for a new car in 10 (?) years.

Insurance costs:

[*]Liability insurance (also pets) 13€
[*]Occupational disability insurance 60€
[*]Household insurance 10€

Living expenses:

[*]Groceries 700€ (incl. drugstore & restaurants)
[*]Clothing adults 150€
[*]Furniture 50€ (mainly children's stuff, plus of course one-time expenses in the new house)
[*]Children's clothes and other expenses: 500€ for 2 children
[*]Daycare/school fees (and meal money) 630€ -> will rise to about 750€ for 2 years from summer '24 for both kids, then ~100€ meal money
[*]Household help 120€
[*]Donations 50€
[*]Tax consultant 40€

Savings:

[*]Vacation 600€
[*]House reserves: 300-400€ (depending on financing)
[*]Retirement provision 500€ ETF for him -> after house purchase reduction to 250€ conceivable (she secured through real estate, he through high statutory pension + very good occupational retirement)
[*]Hobbies/gifts currently 50€, but will certainly rise to 300€ again when more is possible.

Other expenses:

Income and expense totals:

[*]Total income ~7500€
[*]Total expenses ~6000€
[*]Balance 1500 + 1000€ current cold rent

It is currently relatively difficult to determine the exact expenses because we haven't had a normal year in the last 3 years:
Summer 2019 -> birth of K1 -> both parental leave taken
2020 -> girlfriend completely on parental leave (was planned differently, but Covid...)
2021 -> girlfriend has been working again since September, additionally I took another 2 months parental leave over summer

What we can say though: we were able to save quite a bit of money at the end of this year despite salary loss from parental leave (2x he = 9000€, 8x she = 9000€) plus a very expensive once-in-a-lifetime 10-week Norway trip during mentioned parental leave (15000€) (~8000€). Therefore, we are probably more frugal than estimated in the above list - we are both very safety-conscious and therefore expenses are estimated very conservatively.

General information about the property:

[*]How big is the plot? 720 sqm
[*]How high is the land value? Not relevant here - market prices are completely decoupled.
[*]New build, old building (year built), house type? 1963
[*]Garages? 1
[*]How big is the house? (living area / usable area) 150 living area, 70 usable area
[*]What is the market value of the plot and house after completion? ~1.1 million

Construction or purchase costs:

[*]Acquisition incidental costs (notary, court, property transfer tax, broker) 44K€
[*]Construction or purchase costs (incl. architect, structural engineer) 740K€
[*]Renovation and/or refurbishment costs ~300K€ (incl. kitchen etc.)
[*]Total costs 1.1 million €

Firstly, the price is of course insane, we are aware of that. However, we have been searching for 2 years now and this is a realistic price here that will definitely be paid. The owners have also made it clear that the price is fixed, but no bidding process will be sought. Whether we participate in the drawing is not yet certain, we will see...

Secondly, we are aware that we can manage it. The question is how to do it smartest. For us, there are the following options:

Option 1)
Use 400K€ equity, take out 700K€ loan. We can get this amount easily on very good terms due to the securities (last summer a similar financing was planned with 1.2%). We would then probably choose the option with 2000€ rate, after which in 20 years about 350K€ residual debt would remain. We would then see in 20 years whether to sell one of the properties to repay immediately (possibly sell earlier and park the money?) or continue financing. It should be said that we (or rather especially my girlfriend) will still inherit very well.

Good about this option:
1) You keep both rents for the next years.
2) My girlfriend can keep her personal retirement provision.
3) Even in case of total loss of my salary, theoretically both properties can be sold and be debt-free.

Bad about this option:
1) We feel uncomfortable with so much debt. Both come from middle class and now have great possibilities through the gift of the two properties to my girlfriend.
2) As soon as the renovation becomes significantly more expensive due to surprises, the loan amount in my opinion becomes too high.
3) We can hardly save for renovation costs on the rental properties.
4) About 130K€ interest which eats up the rental profit - there is certainly still room in the rent of the house to be sold, but still I think that with modernizations about 15 years of rent will be spent on interest.
5) Somehow a bad feeling to buy + renovate an overpriced property and possibly buy in a bubble.

Option 2)
Use 400K€ equity, sell one house (350K€), loan = 350K€ -> we recently got an offer for 0.8% 15 year full repayment.

Good:
1) Quickly debt-free.
2) Low interest expense (~25K€)
3) Less debt, more flexible rates
4) More or less simultaneous sale of a property cushions purchase risk in a potential bubble.
5) Even if I suddenly earn significantly less, it still fits.

Bad:
1) In the end one property less that one would probably have been able to keep due to inheritance situation. But for that you have gotten a high-quality one.

As you can see, I tend strongly towards option 2. Questions about it:
1) Does this make sense or are there other opinions?
2) Any logical errors?
3) Are there any pitfalls when selling? E.g.:
- How would one concretely finance that? Taking out a loan for house purchase and renovation, repaid via house sale? As far as I know, the bank also wants a renovation plan for the financing?
- The house to be sold has a commercial unit and a residential unit - does that have any effects?
- I don’t think selling will be a problem. There have already been inquiries for the house and I think 350K€ is not particularly expensive compared to the other offers. But even if it becomes 50K€ less the financing is not a problem.
4) How would you do it smartest to compensate my girlfriend?
- She gets more shares in the new house?
- I pay the loan alone and she invests the saved amount and we remain jointly in the land register (equity share is about 50/50 without the house, loan amount ~ house sale proceeds)
- Other options?

Thanks for your input! :)

For the first house, the yield is 2.2%, taxes should be low, for the second house even less, depending on how you factor in photovoltaics. These are very low values, so I would sell both. Property prices in rural areas have likely reached their peak now. If you want to continue investing in real estate, depending on your risk appetite, buy 2-3 small apartments in the next larger city. The yield is higher and it also has more tax advantages, especially with that salary.

Variant 2 would sell both properties. You have 13k rental income from a value of 700k. 2% return. And from that, you have to create reserves for maintenance. To fairly represent the financial situation, you should consult a lawyer. Afaik, gifts in the community of accrued gains should count towards the starting assets of the recipient and revert to your wife in case of emergency. The resulting return, however, does not, it goes into the accrued gains (dangerous layman's opinion). It’s best to ask a lawyer about this.

For the first house, the yield is 2.2%, taxes should be low, for the second house even less, depending on how you factor in the photovoltaic system.
These are very low values, so I would sell both. Prices for properties in the countryside have probably reached their peak now. If you want to continue investing in real estate, buy 2-3 small apartments in the next bigger city depending on your risk tolerance. The yield is higher and it also brings more tax benefits, especially considering the salary.

Option 2, I would get rid of both properties. You have 13k rental income from a 700k value. 2% yield. And from that, you have to set aside reserves for maintenance.
To fairly represent the asset situation, you should see a lawyer. As far as I know, gifts in the matrimonial property regime of community of accrued gains should count towards the initial assets of the recipient, and revert to your wife in case of separation.
However, the resulting yield does not, it goes into the accrued gains (dangerous layman’s opinion). Best to ask a lawyer about this.

My girlfriend does not want to sell the house in the countryside – she is somewhat attached to it and also to the tenants; both parties know very well that they are living there very cheaply. Therefore, only one of the houses is up for sale. But I also see more and more reasons for selling, among other things because we could then diversify a bit and not put everything into some real estate.

Are there any other comments on how this would ultimately be implemented in practice? My expectation is as follows:
1) You buy the single-family house.
2) The bank wants an overview of the expected renovation measures. Our architect prepares a cost overview. From that, a financing sum results (e.g., 700k€).
3) We take out a loan of 350k€ and a bridge loan of 350k€ until the house is sold?
4) After selling the property, we look at how much we ultimately received. If it is >=350k€, then the bridge loan is settled; if there is a difference, we have to refinance it?

Hello Leschaf,
nice to read that things are progressing for you and that we didn't scare you off in the renovation thread. Most of your own estimates there were already very realistic anyway.
Now I have a question about the framework:

Construction or purchase costs:

[*]Incidental purchase costs (notary, court, property transfer tax, realtor) €44k
[*]Construction or purchase costs (incl. architect, structural engineer) €740k
[*]Renovation and/or refurbishment costs ~€300k (incl. kitchen etc.)
[*]Total costs €1.1 million

First of all, the price is of course insane, we are aware of that. However, we have been searching for 2 years now and this is a realistic price here that will definitely be paid. The owners have also already made clear that the price is fixed, but no bidding process is aimed for. Whether we will participate in the raffle, we do not know exactly yet, we’ll see...

I am not very familiar with Lower Saxony. However, I keep reading that surprisingly many of the regions in Lower Saxony are supposedly places where "buying is still worth it." Now I see an average dump from 1965 where you basically have to do ALMOST EVERYTHING new (hence the €300k renovation costs) and it is supposed to realistically cost around €700k? Where on earth is that? In the pedestrian zone of Hannover?
Maybe I could still imagine that it would be searched for directly outside the gates of Hamburg with above-average rail connection. Otherwise, it seems somehow really expensive for a renovation case in Lower Saxony.

Be prepared that your bank will calculate the lending value (usually according to Sprengnetter or similar). You will definitely have to pay the difference to the purchase price out of your equity. And the renovation costs SHOULD ideally also be covered from equity. You can finance them too, but it is very complicated to properly prove the appreciation in value through the renovation. My bank wanted to see a renovation plan from an architect for that.

I can only strongly advise you to request an excerpt from the purchase price collection from the appraisal committee of your municipality (e.g. for 2020 and 2021). Then you will see whether such prices for such houses were really paid. This information costs about a hundred bucks.

Hello Leschaf,
nice to read that things are progressing for you and that we didn’t scare you off in the renovation thread. Most of your own estimates there were already very realistic anyway.
Now I have a question regarding the framework:

I’m not very familiar with Lower Saxony. However, I keep reading that surprisingly many of the regions in Lower Saxony are the ones where supposedly "buying is still worthwhile." Now I see an average place from 1965, where you basically have to redo ALMOST EVERYTHING (hence the 300,000€ renovation costs), and it’s supposed to realistically cost around 700,000€? Where on earth is it located? In the pedestrian zone of Hanover?
Maybe I could still imagine it being just outside Hamburg with above-average train connections. Otherwise, in Lower Saxony this seems quite expensive for a renovation case.

Be prepared that your bank will calculate the lending value (usually according to Sprengnetter or similar). The difference to the purchase price you will definitely have to pay from your own equity. And the renovation costs SHOULD preferably also come from your own equity. You can finance them as well, but it is very complicated to properly prove the value increase through the renovation. My bank wanted to see a renovation plan from an architect for that.

I can only strongly advise you to request an excerpt from the purchase price collection from the expert committee of your municipality (e.g., for 2020 and 2021). Then you can see whether such prices for such houses were really paid. This information costs about a hundred bucks.

The house is located so that we both can get to work (or in my case the train station) fairly quickly by bike, and we can also do everything by bike during our free time, the children can walk to elementary school, and the plot lies nicely on a slope with a great distant view. It’s really not bad at all.

Lower Saxony itself is certainly partly very cheap. If you drive 20-25 km out here, houses and plots are practically thrown at you. But as soon as you go into the metropolitan areas and into the good locations there, it becomes absurdly expensive. Here are a few examples that we know for sure because we were involved in the process:

- Two 900 sqm plots very close to the city were offered as a combination for 580,000€ each (!) . There was also a house to be demolished on it, and the costs of splitting the plot were also supposed to be borne by the buyer. We declined, know of another party who would have liked to do it but didn’t know anyone else either. The plots were off the portal after 1 week.
- A 1,200 sqm plot close to the city with a semi-detached house requiring a full renovation on it. Purchase price 690,000€, the seller was not willing to sell for 650,000€. Even after it became clear that it was better to tear it down, there was hardly any willingness to negotiate on the seller’s side.
- Slightly less close to the city but right on a main road. A small settlement house from the 60s, also a case for full renovation. Purchase price 560,000€ - after one hour of the ad being online it was noted: no chance to get a viewing appointment.
- For the current property, the sellers credibly say they had 13 viewings over the weekend and at least 5 (that was the status on Monday) will come again with an appraiser this weekend.
- Renovated house from the 60s (renovation in 2004, so almost 20 years ago), similar but worse location than the current property. Estimated purchase price: 1 million € - no response to an inquiry about price flexibility.

Overall, the situation here is unfortunately very tense, and I don’t know if we will manage to find something comparable under 1 million €. Thanks for the tip about the expert committee though. That would be interesting to know anyway – I will look into it.