Why Cash is Not King This Time: The Compelling Advantages of Financing Your Yield Portfolio!

July 6, 2018

Many of our clients initially plan to buy real estate in Germany with cash. They view mortgage debt as a burden and believe that obtaining a mortgage in a foreign country is difficult. After the 2008 financial crisis, skepticism about bank loans is understandable. However, the stable German economy and the currently favorable loan conditions suggest a different approach.

So why choose a combination of cash and a mortgage? With a mortgage, you can acquire higher-quality properties and therefore achieve higher rental income. Let’s say you have €350,000 in cash: you could either buy a high-quality apartment in a central location or two apartments on the outskirts of the city. If one of these apartments is vacant, you lose 100% of your rental income with one apartment, but only 50% with two apartments. This is why many investors opt for the strategy of owning multiple rental properties. With a mortgage of 65% on your €350,000 in equity, you could purchase a property worth €1,000,000 – for example, an entire building with 10-15 rented apartments. This reduces vacancy risks and allows for higher rental income.

Currently, interest rates are historically low, so you can borrow money at just 2% interest and lock in this rate for the next 10 years. This makes it easier to plan your long-term expenses. We advise our clients to pay attention to the Mortgage to Rent Ratio (MRR) so that rental income can cover all mortgage costs. An MRR of up to 55% leaves enough cash for other expenses and reserves.

An example:

  • Purchase price: €1,000,000
  • Mortgage: €650,000 (65% LTV)
  • Annual rental income at 6%: €60,000
  • Annual mortgage repayment: €32,500 (5% annuity)
  • MRR: 54.1%

When purchasing a property with cash, the mortgage costs are eliminated, and you keep all the income. This is advantageous if you need immediate income. However, many overlook the fact that part of the mortgage cost is the repayment of the capital. This repayment acts as your silent future savings account. After 10 years, you could have paid off 25% of your mortgage, increasing your equity by 25%. This amount remains secured for you, whether you sell, refinance, or hold onto the property. The main advantage of financing is that, in addition to rental income, you also increase your equity through the repayment of the mortgage.