Recently I had an overseas client visit our head office in Berlin, who had never invested in the German Buy-to-Let market before. Like many investors, he wanted the ‘perfect’ (or technically impossible) investment: Low equity + high loan to value mortgage to be repaid by rental income = regular cash surplus pay-outs. This is a largely common misconception about Buy-to-Let property investments and if the critical numbers are done property many investors could see from the outset that this strategy doesn’t work. And whilst there are many hugely beneficial reasons why German Buy-to-Let is very attractive to investors, there is no “perfect” property investment like this anywhere in the world.
‘All-cash’ in means more private funds but immediate and regular income
For investors looking for immediate and regular income, an all-cash investment is really the only option as any mortgage repayments would take up a vast chunk of the rental income. The rental yield must cover all the costs of running the Buy-to-Let investment as well as to generate a return for you. So, say you achieve a rental yield on a multi-family home of 6%, approximately 15% of this income would go to costs of running the investment building.
Then I would recommend you should budget another 20% of the rent to cover some ongoing maintenance as well as potential losses such as unpaid rents, vacancies, re-renting fees. So really your 6% rental yield is now 4% to provide you with an income. I don’t need to budget 20% every year but it is always wise to build your business plan this way so I can be pleasantly surprised when I have accumulated extra cash some years. Remembering that’s a 4% return on my investment funds without considering any capital appreciation which could be an additional 2%pa or 3%pa or even 5%pa depending on where and when I bought the property.
‘Mortgage’ means less private funds but future income
After discussing with my potential investor, he wanted 10 years plus investment with no real need for any immediate income, though future income is important. So, for him, obtaining mortgage finance at an acceptable rent-to-mortgage ratio is vital to ensure the rent covers the mortgage repayments as well as the costs and potential property losses. Using the above 35% of the rent to covers costs, maintenance and potential losses, his mortgage repayments (capital and interest) take 55% of the rent which means that he is well able to repay the mortgage.
Unfortunately, we still hear the horror stories from investors who have bought buy-to-let investments with mortgage finance with the expectation of regular income who ended up topping-up their investment each month as the rental income doesn’t cover the repayment (even when their property is occupied by paying tenants!)
Nobody wants to be the investor who waits and waits for the “perfect” investment to magically appear and then regret it later that they didn’t invest in a German property investment that could have met the majority of their goals but maybe not all of them!
So if you want income now, buy with cash. If future income is needed, then get the right mortgage. But whatever you do, crunch the critical numbers!