Financing an Investment homeFunding of an investment residential building
Fiduciary tips for financing your real estate investment in Europe
Investment in over the counter real estate has started last year, but the noticeable thing is that my customers are opting for a high value, low return real estate than before. Talking about low returns, I mean in the order of 3-7% per year. Often, new depositors consider purchasing lower -priced, higher-yielding properties, but this is a high-risk decision.
Indeed, the best way to increase returns is to use your investment by taking out a credit. In 2015 one of my customers purchased a senior citizens' home in Germany at the following conditions: Return (annual rent income divided by real estate value) was 6.3% and IRR (internal rate of return inclusive of, but not restricted to, revenues from the loan) was approximately 8% without purchase, taxes and administration costs.
We calculate this formula on the basis of the expectation that the real estate will be sold in 15 years with similar returns, less the cost of servicing and repairs. In the past year, we also succeeded in achieving over 10% IRR for a customer by making simple use of the investment and properly structured the business. One of our clients, a Ukrainian private equity firm, wanted to buy 70% LTV real estate at a 2% per year fixed interest fee.
It was not a spectecular real estate, but a rather common investment, accompanied by a 15-year rental agreement (non-terminable), an outstanding lessee and a B+-site. The right credit facility was the one that improved the IRR, so 10% p.a. in FX is a viable option.
However there are some tips to take advantage of your investment, as we will see below. Even if they are the same in tax matters, even if they are, it is the bank's preference to support those overseas nationals who prove to be dependable. The main reason for this is that it is much more challenging for FIs to check overseas asset values and earnings.
Often, for example, only the provided (also translated) documentation can be "incomprehensible" to your bank, but they will not take on any real estate in your home countries if they cannot assess it. Purchase your first few homes completely, without credits. With the purchase of a third real estate you are refinancing the entire investment fund to raise the chances to 70% LTV.
Larger mortgages are more appealing to a bank and offer better conditions. Since non-EU depositors (in particular from the Middle East, Asia and Russia) are classified as risky, the bank will only take them over if they can generate significant profits in the near-term. An LTV of 70% is more likely to be provided if the line of credit is in excess of ?10 million.
It' s the case that this is especially useful for large scale investment, but smaller budget still have choices. Bankers consider your investment uniqueness and you are more likely to get better credit conditions if your homes are of the same mortgage typ. When you want a mortgage to fund your foreign home, make sure you invest in dependable, low-risk homes, otherwise you could be losing income and perhaps even your belongings.
Home-ownership, for example, is seen as less hazardous and profits from higher levels of consumer spending, so that foreign depositors, like my Russian customers, can usually obtain a home mortgage for their own use, which they later lease to them. Types of properties define your financing possibilities, as a bank has its own criterion for what it considers to be realisable or not.
As an example, almost all major banking institutions will fund retailing space in the main streets, but only a few are willing to consider senior citizens' shelters. The main reason for this is that residential institutions such as senior citizens' hostels are a specialized sector of the housing industry and not every single local institution has the necessary tool to estimate the value of a real estate. In the case of investments in buy-to-lease properties, these costs can be subtracted from the basis for assessment.
They are not, however, included in the mortgage, so it is important to charge them as they will charge you up to an extra 10% of the real estate value. You can get different types of mortgages. This is when the interest is payable at the end of the period as a fixed amount.
A redemption note defines a timetable for redemption and interest payments during the lifetime of the note. The interest rate is usually either set (the same over the entire term) or floating (depending on rate of return, Euribor, Libor). Certain credits can be repaid before maturity, while others prohibit it.
Even the most costly credits have set interest and a prepayment covenant. There may be more favourable terms for short-term borrowings (i.e. five years or less) than floating interest rate fixes. Depending on the nature of the real estate and the applicant, business real estate credits to corporate bodies are more costly than credits for home ownership to private people.
Similar to the returns on real estate, the more you use your investment, the more you take the risks. These are the two most serious things you should be avoiding at all costs: negatively, but not critically: you use a credit to buy real estate, and when the contract runs out, your interest rate rises.
They have to fund the real estate higher and the returns fall. Adverse scenario: The credit contract will expire if the markets experience a "correction" and price falls by 20%. When this happens before you disburse most of your capital, the banks can assume that your investment is a venture and requires you to recapitalize.
It' s simple: take a balance when taking out a credit and never slow down the disbursement of the capital: the objective is to repay at least 40-50% of the capital before the arrangement is over. Once the current state of the markets is good, try renewing your credit for a further 5-10 years in 5-7 years after receiving your permit before the end of the term.
That can reduce the risks of prolongation in a poor period of the markets, which is why I strongly suggest that you include this provision in your arrangement with the banking before signing it. So, if everyone would pay back their credits prematurely, the banking institutions would still be obliged to this finance institute, which means that if you try to pay back your credit prematurely, they will probably punish you.
Your credit period should not be longer than 20 years, but if you make it, 10-15 years is even better. Longer maturities are more costly and more affected by declining markets. Credits always contain stipulations (covenants) set by the credit institution for certain acts that are either approved or forbidden during the credit period.
With the exception of the default commitments, the agreement may contain the following terms for industrial real estate investments: the institution may require you to repay the liability before the maturity of the credit. When you cannot afford it, the house is taken back by the house and auctioned off. The house can ask you to recapitalize in the event of a sharp fall in value (e.g. the price drops by 20%).
When you can't, it can be closed off or you can provide another line of line of credit. If you are in arrears with your payments, the banks will get the statutory right to the real estate. As a rule, credits to business properties with long-term lessees and a non-cancellable leasing relationship have no such convenants, because even if the markets "fall", rent income stays the same.
It is always important, however, to examine potential markets that could impact on default rates. This is my top recommendation for customers who want to get a credit at good rates and minimize the risk: