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

In addition, there is the tax consideration, especially in this special situation. A professional tax advisor is an absolute must.

Dirk, no one has ever rushed us through doors but a few developers have inquired from time to time, we have always declined because we were actually against selling and rather in favor of generating regular income.

Regarding equity:
My land valuation was rather conservative, the standard land value is 96 EUR / M2 so with 7000 M2 that is 672,000 EUR, and I was also thinking more in terms of 15 apartments rather than 20, so then the construction costs would be 2,250,000 EUR with equity of 872,000 EUR and that is 38% equity. So I think I can manage the equity side, if not I will build less / smaller. The favorable loan (and the existing land) are the reason why I want to build, so if the loan costs rise due to high risk / low equity then it is no longer profitable, so it will not be done.

Regarding interest rates:
My bank, I have known the branch manager very well for 20 years, offered me 2.2%, that was in December last year. The branch manager has now emailed me upon request again that the interest rate environment has become somewhat more favorable. Then I also included the KFW financing and therefore come to about ~2%. Of course, I would secure all that more concretely before I start.

Regarding return / questions:
In general, at the moment I have concerns triggered by your comments and advice that the 'worst case' of 4% is really too low and even the more optimistic ~6% is still not all that great. I of course know that taxes and interest and repairs (and the rest then for repayment) still have to be deducted, my small percentage calculation is like EBITDA for companies. The rest, meaning the repayment, seems too low to me as well, as it does to you. Could you tell me which ratio, i.e. return on investment, one would accept in such a 'B-location' with ~100 EUR standard land value?

Thanks and best regards from Sydney!

Everything is difficult! What does the branch manager of the bank say? Does he happen to know project companies that start similar things?

Some people have overestimated themselves with something this big,

Hello f.a.b.,

in principle and especially from an entrepreneur’s perspective, I find your enthusiasm and commitment totally great. It always takes people who dare to take risks, otherwise nothing happens – just to say that upfront before I start complaining again. :)

Now back to the unemotional numbers and let’s play through another scenario:

Let’s assume you could sell the property within 3 months to an investor for 750K€.

Then each of you could set aside 100K€ (the maximum amount of deposit insurance in Germany for banks) as a reserve and invest 500K€ in liquid capital (plus 50K€ incidental costs! for acquisition) into an already existing or planned property. Depending on the (desired) equity ratio (33-50%!), a total investment of 1 to 1.5 million would be possible.

Advantages:

1. Your existing equity of 200K€ remains untouched (but could be included)
2. Additional free capital is created (possible investment with interest income in Australia)
3. Less time required (more own earnings in Australia)
4. Lower overall risk
5. Immediate/much earlier capital return flow if, for example, invested in an already existing/rented property
6. When investing in an existing property, all numbers are on the table at the time of purchase, including the actual rental income, i.e., you calculate with real figures.

Disadvantage:

1. It’s not your “own baby” on your own property (at this point also check your own emotional attachment to the property! If you calculate strictly, you have to be able to sell the property at the right price without batting an eye!)
2. Possibly lower (in absolute terms, not percentage-wise) overall return (but also less risk/capital deployment!)

Regarding equity:
my property valuation was rather conservative, the standard land value is 96EUR / m2 so with 7000m2 672K€, and I was also thinking more of 15 apartments rather than 20, so then the construction costs would be 2,250K€ with equity of 872K€ and that would be 38% equity. So I think I can manage the equity, if not I’ll build less / smaller.

Just a note on that. An investor will squeeze the property down to the last centimeter, only in this way can you achieve a market-appropriate return. The idea that one could build less and thereby generate more return or avoid risk, I fundamentally consider wrong. A large garden will presumably not be paid for by a tenant, but the capital input in the form of building land is the same, unless you first build 15 apartments and leave 1/4 of the land free for later development. Another option would be to differentiate yourself from the local standard and sell generous garden areas as a plus – but there must also be a corresponding demand (with upscale equipment, possibly age-appropriate).

In short, I don’t want to dissuade you, but I believe you have very good alternatives and for various reasons cannot do without an external investor.

Best regards!
Dirk Grafe

P.S.: When investing 1.5 million, about 150K€ incidental costs occur; above only 50K€ are assumed...

Hello my Friday here in Sydney is over for now, I’m going to bed early to watch the World Cup games in the middle of the night. I will talk to the bank director to see if he knows any investors and also, as Dirk suggested, ask around for investors and at least have a conversation. If anyone possibly has a good start/contact person, please send me a PM. Dirk, very briefly, well, that’s also what I thought with ‘building less’, plan the entire property (development plan) and then implement as much as possible as long as good loan conditions can be secured, the rest later if successful. In general, especially since the numbers/returns are rather limited due to the location, I also think that whoever does it should build the property efficiently, or even squeeze it out. Regards and thanks again!