Cash is king? Not when it comes to yield properties

November 6, 2018

Most of our foreign clients come to us with the belief that they need to bring large sums of cash to make a proper investment in Germany. Mortgage debt sounds like an unbearable burden to them that could lead to potential losses, and they assume that taking out a loan in a foreign country is simply impossible. After the credit crisis of 2008, which led to millions of investors losing their money, it is a legitimate concern that bank loans are not the most trustworthy option. However, it is important to consider the stability of the German economy and the attractive current lending conditions that allow you to borrow money cheaply but with minimal risk.

So why should investors now opt to buy properties using a combination of cash and a mortgage, rather than just with cash? After all, it involves a commitment and might entail some level of risk, right? We have summarized several benefits of taking out a mortgage for you.

Taking out a loan and receiving higher returns: it’s possible!

Imagine you have €350,000 in cash—this would allow you to buy a nice apartment in a good area or perhaps two apartments in the outskirts of a city. Regardless of which option you choose, let’s assume the rental income is the same. However, the risk of loss when buying one apartment is higher! If a tenant moves out of one apartment, you risk losing 100% of your rental income, whereas with two apartments, you’ll still receive 50% of your rental income if one becomes vacant. Experienced landlords reduce their risk by owning multiple apartments, thus minimizing vacancy risk.

Now, if you were to invest €1,000,000 in a whole building with 10 rental apartments, your vacancy risk would be reduced tenfold with higher rental income.

Loan repayment plus rental income returns?

Thanks to historically low interest rates, our investors can now also take out loans at historically low rates. The best part is that these low interest rates, such as 2%, can be “fixed” for the next 10 years, allowing you to plan your expenses accurately and predict all costs that you will have to deduct monthly from your rental income. Of course, interest rates could rise again, but with the fix, you’re initially protected.

We recommend to our clients not to focus on the ratio between loan amount and purchase price but rather to ensure that rental income fully covers the mortgage costs, i.e., pay attention to the ratio between income and repayment. In most cases, the repayment amount should not exceed 55% of the rental income in order to secure enough surplus to cover other costs and for reserves.

Our example calculation:

  • Purchase price: €1,000,000
  • Loan amount: €650,000 (65% of the purchase price)
  • Rental income at 6%: €60,000 annually
  • Annual loan repayment: €32,500 (5% of the annual rental income)
  • Loan repayment to rental income ratio: 54.1%

Why take out a loan and wait longer for the return on investment?

Real estate investments are usually considered long-term investments where the investment volume is initially quite high but yields safe returns in the long run.

Immediate returns might be higher without a loan, but why not take advantage of a double investment and acquire an expensive property that will generate significantly higher returns once the loan is paid off or can be sold for much more money?

Regardless of whether you choose to sell your property, refinance it after 10 years, or simply keep it, the value of the investment increases in the long term with a loan. The main advantage of financing your property is that, in addition to the net rental income you have every month (just like with an investment), you also increase your equity as the loan is paid off at a certain point.

How can German banks offer loans to foreign investors?

The collaboration with Investix offers this advantage thanks to years of working with well-known German banks and sophisticated investment structures and strategies.

Most of our properties come with pre-agreed mortgages. We maintain excellent relationships with the largest banks in Germany, they know our business, they know us, and they trust the properties we buy. This allows us to benefit from favorable loans for our investors and save them from the hassle of application procedures or discussions with German banks. The mortgages we have negotiated do not include recourse to the investor, which means that, even if the property fails, the bank can seize the property but cannot hold the borrower liable for further compensation.

As you’ve probably already realized while reading our blog, it is not difficult to recommend financing an investment, especially when our company can support you extensively with it. Of course, this option is particularly attractive now, as financing in Germany is very favorable due to monetary policy, the stability of the real estate market is currently well foreseeable, and the investment risk is minimized through optimal structures. So, what are you waiting for?