Vision House No. 3: Is property lending possible for credit?

Hi dear house building forum,

I would like to discuss the following project with you. As my username suggests, I am currently in the process of implementing my vision (Haus_Number3). I have been a silent reader for some time but have not been able to find much information on the internet for my case and am seeking help regarding liquidity planning.


General information about us:

[*
36/36 years old
[*]3 children (6,4,1 years)
[*]He: engineer 35h / She: controlling (currently on parental leave)



Income and asset situation:



[*]He: 6,500 Euro gross / She: 3,500 Euro gross (currently still on parental leave)
[*]Child benefit for 3 children
[*]Equity approx. 50,000 Euro (in stocks + account) – can be liquidated and fully used.
[*]Vehicles paid off
[*]Property 1: Owner-occupied single-family detached house.
[LIST]
[*]Year built: 1984
[*]Purchased: 2016 for 420,000 Euro
[*]Remaining debt: 200,000 Euro
[*]Total: Current value – remaining debt: 450,000 Euro – 200,000 Euro = 250,000 Euro
[*]Monthly burden: (1.88% effective interest fixed for the entire term) = 1,600 Euro per month


[*]Property 2: Multi-family house (4 units) already transferred as a gift from parents with usufruct rights. This means all costs as well as rental income continue to run through my parents. My parents do not live in the house.


[*]Year built: 1992
[*]Value: (estimated) at least 700,000 Euro
[*]Remaining debt: 80,000 Euro
[*]Total: 700,000 Euro – 80,000 = 620,000 Euro

Expense situation:
After all expenses, we have a monthly savings rate of 500 to 1,000 Euros with current income.

Question (liquidity):
We might currently have the possibility to redeem a plot of land from the family, on which a building from 1950 stands.
My vision is to demolish and rebuild a multi-family house. On the one hand, I am attracted to the house-building project; on the other hand, I would like to create living space. I am very interested in building technology (renewable energy, heating, solar, insulation) and would also like to do quite a bit myself if possible. The same applies to janitorial duties. Additionally, I am attracted by the leverage effect of external capital.
I know that the current time is naturally very difficult for such a project. Interest rates and construction costs are high, many construction projects are on hold, etc. However, this should not be the question in this thread. Furthermore, I would at some point open another post regarding layouts/construction plans, etc., in the respective subforums.
Let's assume construction costs of approx. 1.5 million Euro for the future multi-family house (4 units).

[*
The question I currently have concerns liquidity/loan approval:
[LIST]
[*]My equity is currently relatively low at 50k Euro, but I could, however, mortgage Property 1 and Property 2 (partially). Do you think this could be enough to get a loan in the amount of 1.5 million with a detailed business plan (future rental income, etc.)? How much equity would I need at least?
[*]Can I mortgage Property 2 even though there is a usufruct right on it? Would my parents then have to come to the bank with me to approve an entry in the land register? (That would not be a problem, I just don't know the process)
[*]I know that pledged stocks, for example, can be accounted for a loan with a value of approx. 60%. How does it look with real estate? Is there a percentage value when I mortgage a property? For example, if I mortgage a property worth 100k Euro, are only 50k then counted as collateral?

Thank you very much in advance for your information/answers.
Regards
Haus_Number3

Hi dear house building forum,

I would like to discuss the following project with you. As my username suggests, I am currently in the process of realizing my vision (Haus_Number3). I have been a silent reader for a while but could not find much information on the internet for my case and am seeking help regarding liquidity planning.

General information about us:

[*
36/36 years old
[*]3 children (6,4,1 years)
[*]He: Engineer 35h / She: Controlling (currently on parental leave)



Income and asset situation:



[*]He: 6,500 Euro gross / She: 3,500 Euro gross (currently still on parental leave)
[*]Child benefit for 3 children
[*]Equity capital about 50,000 Euro (in stocks + account) – can be dissolved and fully used.
[*]Vehicles paid off
[*]Property 1: Owner-occupied single-family detached house.
[LIST]
[*]Year built: 1984
[*]Purchased: 2016 for 420,000 Euro
[*]Remaining debt: 200,000 Euro
[*]Total: Current value – remaining debt: 450,000 Euro – 200,000 Euro = 250,000 Euro
[*]Monthly burden: (1.88% effective interest rate fixed for the entire term) = 1,600 Euro per month


[*]Property 2: Multi-family house (4 units) already transferred as a gift from parents with usufruct rights. This means all costs as well as rental income still run through my parents. My parents do not live in the house.


[*]Year built: 1992
[*]Value: (estimated) at least 700,000 Euro
[*]Remaining debt: 80,000 Euro
[*]Total: 700,000 Euro – 80,000 = 620,000 Euro

We might currently have the opportunity within the family to redeem a plot of land on which a building from 1950 stands. My vision is to demolish and build a new multi-family house. On the one hand, I am attracted to the building project, on the other hand, I would like to create living space. I am very interested in building technology (renewable energy, heating, solar, insulation) and like to do quite a bit myself if possible. The same applies then to the caretaker duties. Additionally, I am attracted by the leverage of borrowed capital.

Helmut Schmid spontaneously comes to my mind here: “Who has visions should go to the doctor”

As a young father of three with an apparently unrenovated self-occupied old building and a moderate monthly surplus in the household budget, I would make sure to build up proper reserves for the renovations due in the next few years (or personally, I would do them right away). If there is anything left over after that, a use will surely be found (children grow older and more expensive, they don't play forever with collected chestnuts and don't wear secondhand clothes forever either).

I would prefer to spend my free time with the family beside a full-time job rather than roaming construction sites or acting as caretaker & agent for renting (from my own experience, that might be fun at first, but eventually it becomes annoying. I have also found the time effort higher in recent years; tenants nowadays feel “less knowledgeable” and expect more service from landlords). For property 2, that has to be done now or at least in the future if the parents can no longer do it.

I consider using the family home as collateral for a rental house that is 99% financed by debt to be harakiri and would never do it, especially since you are not even finished with the loan for it and 1,600 Euros monthly is not exactly peanuts! The usufruct property is also not yet paid off; can it actually be sold in an emergency? And what about renovation needs in a few years there?

Regarding a loan over 1.5 million with only 50k equity: I don't think a bank would be thrilled about that, even if you can offer certain securities. And what exactly does “redeem a plot of land” mean? Does someone still have to be paid out? That would be an additional cost, plus the demolition of the old building and should be included on the cost side. I would also roughly calculate the interest burden plus repayment, then compare with the expected rental income. The tax savings are likely to be limited.

Unfortunately, the most important point of the entire project is not supposed to be part of the discussion. The economic viability in the current interest rate and cost environment.

If I were you, I would take a deep look inside myself and realistically calculate how high the monthly rental income could be. Also, don't forget to account for a certain percentage of vacancy.
Then, with these realistic values, calculate whether this thing even generates a surplus at today's interest rates.
With a 1.5 million loan and a good 6% return, you would have to generate 7,500 EUR income!!!
With 4.5% interest and 1% repayment, however, you are already paying a monthly annuity of 6,875 EUR. From the remaining surplus, you would then have to finance taxes, reserves, etc.
So at most there remains a very small cash flow.

And you seriously want to risk and mortgage your family home for this?

I don't know what you took, but I want that too! :cool:

I don't see 50000€ as the basis of a vision and wouldn't call that amount "liquidity".

That is (good) savings of a family. Nothing more.

I would also rather sweep in front of my own door than serve other doors, meaning bring your own house, your children's home, to a current value instead of risking it.
The same of course applies to your parents' retirement provision.
There are things that are taboo! For some, even the thought of it.

Fortunately, there is the [Nießbrauchsrecht], who knows what else might cross your mind about what you could do with your parents' retirement provision. You already call it your house No. 2… :confused:

Let's assume construction costs of about 1.5 million euros for the future multi-family house (4 units).

So about 400 sqm as a maximum, you also need storage rooms, parking spaces, etc.
To make sense, the rent should therefore not be below 18-20€/sqm ==> that’s why there are currently hardly any new builds. This way you generate the above-mentioned 6% pre-tax return on your construction costs.
Is the rent realistic?

The question I currently have concerns liquidity/loan approval:

[*]My equity capital is currently relatively low at 50k euros, but I could partly mortgage property 1 and property 2. Do you think that could be enough to get a loan of 1.5 million with a detailed business plan (future rental income, etc.)? How much equity capital would I need at minimum?

Cash equity is practically not available.
Property 1 then has a lending value for the bank of about €400k. Real security (mortgage loan = what the bank expects in a foreclosure sale) is 60% of that, so already fully used by your financing. Subordinated, a bank will 99% not finance any more since the land charge is formally to be considered worthless.
Property 2 naturally gives you some room. BUT: Either the financing bank gets priority (before the usufruct), then the usufruct is lost in case of your economic distress (it is excluded in foreclosure sale), or a bank must accept subordination. And that is 100% excluded.
So only an option if your parents waive the usufruct in the long run. I would never do that!
That also answers your second question. The parents have to be involved, otherwise there is no financing (with a senior land charge).
And question three is also answered. Recognized security is 60% of the lending value - not of the market value. That’s why there is a good condition with the bank up to 60%. Beyond that the risk is higher and so it gets more expensive.

As a result, I can conclude for myself (I’m a real estate financer myself) that the house build number only works if your parents give up their usufruct. Or you build in such a good location that 25€/sqm rent is achievable.

I also believe that it is not 1 size too big, but at least 3. For [Immobilie 1] you only get money from the financing bank and probably not up to the value you estimated. For [Immobilie 2] you don’t get any money at all, it probably doesn’t even serve as additional collateral if the bank goes into second position. Rental yield for new builds is likely around 3%, with interest rates over 4%, meaning that even without repayment you have to pay more every month than your savings rate. I don’t even want to talk about what happens during a construction period of almost 2 years from purchase, demolition, permits to occupancy.