As noted in our previous article on our latest real estate project, we were looking into property financing. The turned into a rather interesting investigation and a steep learning curve. We will try to provide you with a summary of what we have learned so far, and what you should be aware of in case you will attempt something similar.
In the Netherlands are basically three main types of financing real estate investments, or a combination thereof, being:
- A mortgage (residential and/or investment);
- Cash; and
- Crowd Funding.
Nope, still not the actual property
This is where it started to get interesting, here is why. In most mortgage contracts on residential properties you are not permitted to sub-let without written authorization by the mortgage lender (hint, they are not keen on providing this approval either). This is irrespective of how much of the property is yours, or how easy you may be able to afford the cost of the mortgage on your income (and/or rental income). The same applies for “temporary” renting out a room (think AirBnB, etc.) or your entire house/Condo/etc. You are technically not permitted to rent out your home on AirBnB to make additional income.
In practise, many lenders will permit you renting out your home, but only when you are on holiday or business trips (i.e. generally short periods of time). Long term income via AirBnB will never be permitted under normal mortgage conditions. Considering you do need a place to live (ideally with low costs), you really don’t want mortgage penalties or battles with a mortgage lender.
The way to get around this problem is by trying to get an investment mortgage (i.e. “beleggingspanden hypotheek”). The downside is that since the financial crisis of 2008-2009, virtually all Dutch banks have decided to scrap these mortgages and it is extremely difficult to find banks that still do. For the smaller Real estate investors (i.e. us), there really is only one bank in the Netherlands that will even consider your application. This is the NIBC (see www.vastgoedhypotheek.nl), sorry in Dutch only.
There are however a few conditions and limitations:
- You need to have a specialized evaluation done (cost about €1.000), without the guarantee that they will approve your application;
- Your property needs to be located in, or at least very close to, major cities (they have a list on their website);
- You are limited to a maximum mortgage of 70% of the taxation value, so you need a lot of cash to get started; and,
- The minimum mortgage they provide is €75.000 (i.e. assuming this is 70% of the market value, your property has to be worth at least €107.150).
Their interest rates are around 3.9-4.6%, so not too bad. But considerably more than residential mortgage rates which start as low as 1.5-1.6% for a one year mortgage (@ 60% of the market value) and about 2.3-2.5% for a 5 year fixed mortgage (@ 100% of the market value).
As you can imagine, these rules and limited options make it very difficult for most people to get going with a real estate investment. You are therefore probably not surprised that most people take the risk of renting out (a portion of) their property with longterm tenants. Which generally seems to work out, as long as you pay your mortgage every month without missing a payment and you have good insurance coverage (the insurrance company does need to know you are renting out your property, otherwise you may not be eligible for payments in case of a claim!).
Cash is King! Especially in real estate investments, if you have enough you can use it for leverage (i.e. you use the cash to pay 30% and finance the remainder with a investment mortgage). Problem with cash is that it takes time to gather and when it sits idle, it does not do much (you actually loose purchasing power due to inflation/taxes). But you need a lot of it to get started. So you may want to consider investing money first into Index Funds or individual stocks and cashing out once you have sufficient to invest into real estate (when real estate is part of your FI strategy, obviously).
This is the newbie in the financing options, but one that has a lot of potential for both investors and lenders. As noted above, a lot of cash is required to start into the real estate game (if you follow all the rules, anyways). For this reason many people actually invest cash into crowd funding sites that offer Real estate projects. For example, on www.geldvoorelkaar.nl (Dutch only), we have seen and invested into several projects related to real estate investments. These generally provide interest rates of 5.5-8.0%. We have seen many projects in the range from €30,000 for renovations to €500.000 for refinancing and new purchases over the course of just a few months. Most of these project attracted their funding within a few days, and sometimes within one day!
The good thing about this development, is that if you require funds for a real estate purchase, refinancing or renovations, you have an alternative to the (generally hesitant) banks for funding. You generally will, however, pay higher interest rates and also associated fees (which can easily add 1.5-2.5% to your proposed interest rate).
From a cash flow perspective, these loans are quite high. This is generally because of the relatively short repayment periods (generally between 60 and 96 months) and the aforementioned higher interest rates and fees. None the less, they can be a interesting way to get (a portion of) your financing.
Beside the main three options, you can always try to secure a private loan (but you will need to know some very wealthy people/family). Alternatively, you can consider making arrangements with the current owners that they transfer the property to you, and you pay them back over an X amount of years the amount of the sales price + agreed interest (i.e. they become your bank). However, these options (and others) may only come by once in a lifetime.