When financing a rental property, we hear time and time again that "for tax reasons" buyers don't have equity or. So little equity ". How absolutely necessary. "Want to use. But does it really make sense not to use equity? How much own money is really necessary and reasonable when buying a rented apartment?
To be clear: there is no golden rule or even a mathematical formula that spits out the optimal equity investment when buying a rented condo. There are just a few ground rules, for example, when it comes to financing. Which of these basic rules are important depends on your personal situation, the property and your investment motivation (= why am I investing in a rented property in the first place??).
It is best to pay completely with your own money!?
Who wants to make the maximum profit with a rented condominium, should pay for it in principle completely with own money. As a result, you almost always make a current profit, i.E. Positive income from rentals and leases, immediately and pay income taxes on it. The amount of taxes to be paid on the profit then depends on your personal tax rate (calculate there with your personal average tax rate, but also take into account a possible tax progression). Should you sell the property again at some point, the possible surplus will end up in your pocket (usually even tax-free, if you buy the property at least once a year). 10 years had personally in the portfolio and are not classified by the tax office as a commercial property trader).
Who finances a real estate completely with own means, a positive equity yield will obtain as a rule; always presupposed that the real estate gains actually current and after taxes profit. I put what is left on the bottom line in relation to the equity originally invested and then I have the actual return (comparable to interest that I earn on a net capital investment). A gain on sale would again significantly increase this rate of return.
How much equity should you invest at least?
Who wants to buy a rented condominium, usually does not have enough capital to be used as sog. To be able to act as a cash payer. Banks are then required to finance the major part of the investment. And it is the banks who then set the rules for equity capital.
Basically, you should pay the incidental acquisition costs incurred during the purchase (land transfer tax, notary, broker's fee) yourself. Although there are certainly -few- banks that also finance these costs with appropriate creditworthiness, but these banks also let themselves pay well by appropriate interest surcharges. And ultimately, of course, this is fully at the expense of the much-cited cash flow. This minimum equity provides more choice with banks and overall better feasibility for financings.
Whether further equity is useful or necessary in addition to the incidental acquisition costs depends to a large extent on the valuation of the apartment by the banks. As a general rule, the higher the loan-to-value ratio (the ratio of the loan to the value of the property as determined by the bank), the higher the interest rates. However, the interest conditions do not change linearly, but mostly in steps (z.B. 60/80/90/100 percent). There it can quite happen that only 1.000 euros more equity will result in 0.10% less interest on the total financing. Since each bank determines the value of the apartment differently, it is real fiddling to find the optimal equity share (so our daily business).
Apart from the interest conditions, which determine the yield of the real estate substantially, you should pay attention however also to the fact that after the own capital funds employment also still enough reserves are to you at the disposal. It makes little sense to put all your own funds into the financing of a rented apartment, if in return you will soon have to buy the broken washing machine on credit. But also for the property itself you should have reserves in the backhand, so as to compensate for loss of rent or minor and major renovation work, or to pay for the property itself. To be able to pay.
If you do not have any own funds, you should generally refrain from buying a rented apartment. There is a risk that rent defaults or minor and major repairs will tear a noticeable hole in the household budget. Just imagine the horror scenario of every landlord: the tenant disappears overnight and leaves behind a ruin. If you could pay this from your own resources without burning your overdraft facility, you are "ready to be a landlord".
No golden rule!
If you have read this far, you will see that there is no golden rule for the optimal use of equity capital. How much equity is necessary and reasonable for the purchase of a rented property depends in each individual case on your personal requirements and the property itself. For this reason, when financing rented properties, we always play through several scenarios with different levels of equity (sometimes it actually comes down to 1.000 euros more/less).