Multi-family rental apartments as an investment - What loan shares %?

Hello everyone, first of all thank you to the great forum and the many useful contributions!

I am in the following situation: I own, together with my brother, about 7000m2 of building land in Brandenburg, near Berlin. The land is developed and construction is permitted (we need a development plan). Rental apartments are to be built in city villas, about 4-5 apartments per villa, for renting out. With the rental income, we want to pay off the loan and save as much as possible so that after the fixed interest period (10 years was what my bank offered me) we can pay off as much as possible should interest rates rise dramatically. If necessary, apartments could also be sold to repay the loan.

I live abroad, Australia, and I am currently considering moving back to Germany to develop this building land. Everything is still in the consideration / early planning phase. Here are first a few basic questions about financing and the maximum investment amount.

The property belongs to us - without encumbrance - value about 500,000 EUR We have about 200,000 EUR in cash Otherwise nothing - no home savings contract or similar Since I am used to different interest rates here in Australia (about 5-6%) and conditions (variable interest rate, can be changed daily by the bank) and therefore the conditions in Germany seem very good to me, I am inclined to take out a large / the maximum loan amount.

Therefore the question, does the above generally sound reasonable? What would be typical loan shares (%) for such an investment? What are realistic interest rates? Are there any other tips that someone would like to shout to me?

I will certainly have some more questions for this forum in the future and thank you in advance for the answers.

This is a huge project and takes time. For us, the last established development plan took 1.5 years. The one before that took 20 years of processing time. Depending on the hurdles that need to be overcome, the whole thing takes time. No one currently knows which conditions will be valid after the processing time. In other words: draw up a plan with an expert (the city might impose an urban developer on you) and have this plan become legally binding through a development plan. Once you have the building rights, you can take care of the realization. Perhaps a developer as a partner would not be bad, to minimize risk. For example, they build 5 apartment buildings for you, keep 2 themselves for sale, and you get the other 3 apartment buildings to rent out,...

Difficult project if you have little knowledge/experience of the subject. Considering the property value, it is rather a quiet location, is there even sufficient demand for housing there (and if so, at what price)? If you want to build maybe 20 apartments or more, you also need tenants. 20 apartments then mean costs of EUR 3 million and more. Will you get the money from the bank? Can you bear cost increases? Does the rent match the loan burden and all other ancillary costs? Does the city/municipality cooperate with the development plan? You should really team up with an expert. I would not trust myself with this project, especially if I don't live on site.

Thank you very much, Wastl! The municipality, it is a village of 5000 inhabitants, but it is located directly on the city border, has already indicated that the development plan will be relatively uncomplicated (if one may say so) because it is an "inner area," meaning houses are standing all around. I am currently in the process of selecting the expert, an architectural office, to prepare the planning as you recommend. In a preliminary meeting in September, hopefully the time horizon will be established. However, I hope, and I am also planning my professional situation here in Australia accordingly, that work can begin in 2016. That would mean that I would discuss the financing in detail in mid to late next year, right? The thing with risk minimization, with the property that already belongs to us and the low loan costs in Germany, what do you see as the greatest risks besides construction defects? I know I am probably far too naive here, but when I compare the environment with here in Australia, a 3-room apartment costs 1 million EUR here, and as I said, interest rates can change daily, I see the risks as relatively low. In my opinion (as I said, naive), the worst thing that can happen to us is that we have to sell apartments / houses after the interest rate fixed period expires. That would occur if both my brother and I do not earn a high income, the interest rates rise sharply, and rental income is low due to either low rents or vacancy.

Thank you also nordanney, 20 apartments would be the absolute maximum, I am thinking more like 15. I met with a real estate agent in the area last week and he told me that there is demand for rental space. The local rent is 7.5 - 8 EUR, so with the famous 1500 EUR construction costs approximately 4% return?, at the beginning, hopefully the local rent will rise at some point. In the preliminary discussion, the municipality signaled general willingness. I would definitely go to Germany for 1 year and would not necessarily have to work there (in Australia, after 10 years of employment, you can take 1 year 'off' with half pay - that would easily cover living expenses in Germany). I know of course that this is a big project, therefore my plan is to take care of it almost full-time.

Hello f.a.b.,

1 year will not be nearly enough if you want to manage it yourself, or else you will be spending more time on planes than you would like.

If the demand in that location is actually that high, it should be no problem to bring a property developer on board, but I suspect that their offers will be sobering, because:

I met with a real estate agent in the area last week and he told me that there is demand for rental space. The local rent is 7.5 - 8 EUR, so with the famous 1500 EUR construction cost about 4% return?

That is not the return, but the gross yield, i.e., if the agent actually explained it to you like that, throw the agent out.

Very roughly: for a 100m² apartment and construction costs of 150,000 EUR, rental income of 9,600 EUR annually would be generated. But out of these 9,600 EUR you still have to pay …

- income taxes
- reserves/repairs
- loan interest/repayment (roughly +4-5,000 EUR interest alone without repayment!)
- rental losses

And only if THERE is still 4% left for you after that, would the net yield be 4%. But you will reach this value at the earliest after the loan term is completed.
Basically, in my opinion, that is already pretty much at the limit, because at full occupancy and no cost increases you are already at 15.625 (at 7.50 EUR/m² even 16.66) annual net cold rents, if you only look at the base price. With interest you will certainly be over 20, and that is a value normally only reached or accepted in prime locations, meaning: with the costs and rental income mentioned you will earliest break even in 20 years and only if everything goes 100% smoothly – which can definitely be ruled out.

I would therefore reconsider this very carefully in your place, since you obviously have no previous knowledge.

Very important: have a financing calculation done for a property AND have a cost statement for property management presented to you. I suspect that with the financing after 10-15 years there will still be considerable residual amounts that oppose the goal of being done with financing after 15 or max. 20 years. So there is only one solution (if I haven’t miscalculated): you have to drastically reduce construction costs or you have to rent well above the local rent index.

It’s another matter if you earn very well in Australia and can declare losses/investments in Germany for tax purposes, then it can be more worthwhile...

Best regards
Dirk Grafe