You want to buy a property as an investment? But you do not know how much equity you should bring in?
As little equity as possible, as much as necessary! This is my answer to the frequently asked question about the optimal amount of equity capital.
How much equity is needed to buy real estate?
Did you know that the less money you invest, the higher the return on equity??
This is an exciting topic that we want to address here. Because you have the opportunity to increase the return on the equity you have invested yourself with a higher use of outside capital (i.e. bank loans, for example).
Are you one of those people who get a sinking feeling in their stomach when they think about debt?? If yes, then you should know that there are good and bad debts.
Bad debts in real estate
Bad debts are debts that are not matched by any value that will make you money.
This starts with private debts for furniture, technology or simply the overdraft of your bank account. These debts take money out of your pocket. The same applies to loans taken out to buy a car for private use.
And it also applies to loans that serve to finance the owner-occupied property. This property costs you money month after month. Can you earn money with it? If no, then they are bad debts that you should keep as low as possible.
Good debts in real estate
Good debts are debts that you take on because of an investment. Of course, this investment should be well thought out and planned and should yield a return. To this belongs the investment in capital investment real estates, if you consider the points, which I present to you with everyone-can-real estates.
According to this, the good debt only applies to those properties that are rented out and bring money into your wallet or bank account every month. So the rental income must be higher than the monthly expenses. Only then you earn money with the investment property. If you pay more every month, it is no longer a good investment property.
By the way, the good debts are also lower than the assets, which are in comparison with them and with which you earn money. Thus the debts serve to earn money. That sounds quite different, doesn't it??
How much equity capital should you put in when buying real estate?
As a financing specialist, I have calculated hundreds of real estate financing for my clients. I have found that with approx. 15% equity (of the total investment cost) seems to be a magic limit.
If you bring in less of your own money, you will pay a much higher interest rate for your bank loan, because the banks simply expect a certain amount of equity when buying investment property.
If you bring in more cash, then we again have the effect that the return on equity is lower. Because the less own money you bring in, the higher is the return on this own money. Therefore, I recommend for capital investments an equity ratio of approx. 15 % of the total costs. Of course, the bank must accept this and it must fit your personal creditworthiness.
Total cost of buying a property
As we have seen, the share of equity refers to the total cost of buying a property. These total costs are made up as follows:
- Purchase price
- Purchase additional costs
- Brokerage fee
- Notary fees
- Land registry costs
- Real estate transfer tax
- Renovation costs or costs for a renovation
So, in addition to the purchase price, there are a number of costs that the buyer has to bear. Let's take a closer look at it below.
Explanation of the ancillary purchase costs, which one almost always pays
If you buy a real estate, then you have to pay thus on the one hand the purchase price. A few additional costs are added to the purchase price:
After the purchase, an invoice arrives within a few days from the notary who notarized the purchase contract with you and the seller. The local court will also bill you, because it will register you as the owner in the property's land register. For this, both the notary and the land registry have tables that show the costs, depending on the value of the subject of the contract.
And of course you still have to pay the land transfer tax: 3.5 to 6.5% of the purchase price is currently due here, depending on the federal state. Most of the time, this is one of the last bills you'll receive during the real estate buying process.
Explanation of the incidental purchase costs, which you do not have to pay in every case
You found the apartment through a real estate agent? The latter normally wants 3 to 6% (net) of the purchase price as commission from you. The amount of this commission basically differs depending on the federal state and also depending on the person, depending on the real estate agent. Sometimes you can still bargain here if you don't have a lot of competition when buying. Otherwise, the real estate agent will probably prefer to place the property with the person who is willing to pay the full commission.
You still want to do some renovations or conversions? We also include these costs in the total costs.
Purchase incidental costs in the financing
The ancillary costs described are generally incurred (except for the broker's fee and renovations/renovations) in any real estate purchase. It is therefore common to mention this to the bank when asking for a financing offer. The bank then includes these costs in the total costs and sometimes it also works out that it co-finances a part within the framework of the loan.
However, it is more usual for ancillary purchase costs to be covered within equity. Then the acquirer can pay the bills out of his own pocket. He does not need to resort to the loan until the purchase price is paid, so he does not have to pay interest on the loan until then either.
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