Real Estate Financing: FAIL!

We thought we were smart and tried a (for us) new Real Estate Financing: Fail! What happened? We had applied for a personal loan of €75k to supplement our cash and find a property in the €85-110k range. But we got turned down, and not for the reason we thought! Keep on reading for the details 🙂

Real Estate Financing

Real Estate Financing

Real Estate Financing

In the Netherlands there are many several ways to finance real estate, but the options available to you depends primarily on the size of your wallet (or your income). Or in different words, how much cash you have available.

Quick overview of your main financing options (see also this post for details):

  • Cash;
  • Investment Mortgage;
  • Personal Mortgage;
  • Crowd Funding; and,
  • Personal Loans.

Cash

Buying a house in cash is only available for a select few. Don’t know about you, but we don’t have about €100K in cash laying around. Cash can be king in real estate, but using other financing means to purchase the property can give you much better return on investment. This is also why we prefer mortgages and loans for real estate investing: leverage!

Cash is king

Cash is king

Investment Mortgage

The investment mortgage market is rather difficult as you need specialized assessments (about €1000-1500 depending on the property) and you mandatorily have to hire an advisor (1% or property mortgage or flat fee of around €1500-2500) to prepare the application to submission to the lender.
Another drawback is that you can only get up to 70% of the assessed market value in rented state. This is commonly much less than market value. In short, you probably need a minimum of 30-50% of the market value in cash to purchase the property via this financing method.

The next drawback is that the minimum value of the investment mortgage is often €75k. Based on the above notes, it will be hard to finance properties below about €125-150k. This is unfortunate as this section of the market can be very profitable. The interest rates are reasonable at between 3.45% and 4.75% depending on Loan-to-value ratio and fixed interest period (for 1-10 years).

Personal Mortgage

The next method is using the house (or a portion thereof) for yourself and finance the whole property as if you will be using it for just yourself (you will have to declare this at closure of the mortgage). According to the terms of your mortgage, you would have to notify the bank if you want to rent out a portion. The answer you will get back is most likely NO (except under special circumstances, like your previous house does not sell).

The reason is that the banks don’t want the risk of having tenants that they cannot evict in this case that you cannot pay the mortgage and they have to foreclose on the home. You have to understand that tenants are extremely well protected in this country.

You can choose not to disclose to the bank that you are renting out units in your house, which commonly goes perfect as long as you pay the mortgage. But you will be violation of the terms of the mortgage. We officially cannot recommend you do this, but it is very often done as this is by far the cheapest way to finance a rental property. Interest rates are hovering around the 1.5-2.75%, depending of Loan-to-value ratio and fixed interest period (for 1-10 years).

Crowdfunding

You could in theory finance the entire property this way, we have seen this a couple of times already. But the interest and fees are quite high. It’s not uncommon to end up paying 6-7% overall.

Another drawback is the relatively short (usually less than 10 years) repayment period. So your cash-flow quickly become negative due to the high monthly loan payments.

Crowdfunding of Real Estate

Crowdfunding of Real Estate

Personal Loan: FAIL!

Having reviewed the above, we figured that a personal loan would be an option. We have good incomes, so we decide to apply for the highest possible personal loan at Freo.nl, which is €75k. No affiliate links to the company, but they have the best interest rates at time of writing this post. We decided to go for a 120 month repayment period. Monthly payments of €775, at an interest rate of 4.2%.

We filled in the application and waited for a call back. They were pretty quick actually and called within 1 business day. So far, so good. When we got chatting, one of the first question you get is where you will be using the money for. Being honest, we said for the purchase of a property. That was no issue.
But then the lady on the phone started asking if this was our only property. So again we answered honestly and said that we owned 5, including our own house. She returned by saying that she had to talk to a manager.

NO!

A few minutes later she returned with an unfortunate answer. They could not provide us with the loan as we had more than 4 properties. Apparently, if you own more than 4 properties you are seen as a business (even though we own the properties privately). We got told to look for a business loan and that the application was not going to be processed further.

A little miffed we asked if there was any other way to still obtain a loan, but that was pretty much a done deal (and we don’t have to try this again any time soon). Unless you want to commit fraud and change the application to a home renovation (which would be sort of true). But that’s not our style, so we have to revert back to the above options if we want to finance another property….darn.

We did ask if our income would support the personal loan, at least the answer to this question was yes. This was a bittersweet conclusion of the conversation.

We are still considering another personal loan company to see if their regulations are less strict. Do you have any other suggestions? Ones we have not thought about? We have considered a personal loan with the seller, but there are few sellers interested in such a setup unfortunately.

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32 comments

  1. These are the potentially frustrating paradoxes of the Dutch real estate market. >100% LVRs at very low interest rates and deductable mortgage interest, but only on a primary place of residence. Great rental returns, but restrictive mortgage T&Cs and very pro-tenant laws.

    Why are you looking at such low priced properties? Isn’t there a significant risk that the property doesn’t have enough points to be considered as “vrij huur sector” and you risk a rent tribunal event?

    For us it’s a key selection criteria to determine whether a property is a viable investment ie. points must well exceed the threshold.

    Regarding financing, good luck! I know someone who recently managed 2.8% on an investment mortgage. Their price point was ~280keur though, and LVR ~70%. On our properties, this financing structure would still have a net ROI of ~8%, which is attractive.

    However, as you said, to get such a deal done would require circa 100keur own equity (cash). All that said though, (some of) the up-front costs diminish proportionally (broker) when the purchase price is higher like this.

    I believe philosophically what you said in some of the comments. There is a way, but it’s a puzzle to solve. Just a matter of arranging and rearranging your affairs until you’re in position to take advantage of the opportunities you’re seeing. I said, “just”, but it’s quite some leg and brain work. A wonderfully rewarding challenge though!

    1. Hey Cameron,
      Thanks for the comment, always appreciated! But you got us curious, so we have a couple of questions/comments:
      – was the €280 the assessed market value in rented state or the market value? This matters for the LVR and thus required cash.
      – who is the mortgage provider? Looks like a foreign party (have not seen 2.8% at NIBC, but could be wrong).
      – as you note, a 70% LVR with a €280k property, that is still €84k of your own many plus closing fees and any renovations/repairs. That is a lot of money! We don’t have that laying around 🙂
      – we actually aim for a property right above the “vrije sector huur” value. In short, about a 65-70m2 condo or 50-55m2 small house (both subject to level of finishings). These are very hard to find below €100k, unless there are lots of things to reno.
      But we are onboard with your last comment, it is a great challenge finding one!

    2. I’m not sure of these details. I’ll try to find out and report back. In the meantime, I’ve got another apartment in the pipeline myself. It’s in a randstad city, very central, penthouse, 66 sqm, recently built ie. >2000. By my estimate it’s market value is 210-220keur and might rent for 1,050e per month. I haven’t tried to calculate the points yet. That will be a following due diligence step. I’m also not sure how to finance it. I’ll try to make something up 😉

    3. With a penthouse of 66sqm in the Randstad at that purchase price, you will definitely have enough points to determine your own rental price. Do the calcs to check, but I’m pretty confident you are good to go. My only question would be why this one? Cash-flow wise this one does not seem to be a great opportunity (not sure what your VvE costs are). But you probably have your reasons (I’m just being curious!), perhaps a furnished rental??

    4. Financing was by Rabo. Not sure of exact LVR details, but expect it would be <65%. A significant amount was spent on improvements, then it was rented furnished for a yield of 6%. That's actually pretty low for furnished.

      I thought 5.7-6% was a pretty good yield for unfurnished in the Randstad. The ROI would be about 8%.

      There are a lot of TCO factors that cash flow figures don't always include. Vacancies, long term maintenance, for example. And hassle. What goes into achieving the return. By my estimation, two 100keur apartments have potentially at least double the hassle of a single 200keur unit.

      Still not sure exactly how I'm going to navigate the financing maze.

    5. Cool, thanks for the clarification. Around 5.7-6% is not too bad for net yield. Keep us posted on how you get the financing sorted.
      Good luck mate!

    1. Nope, not enough money available yet. We only move into our home last year and have not paid off that much yet. But perhaps in a few years that becomes an opportunity.
      Good thinking!

  2. No useful suggestions here, but am interested to see how you end up working around this problem. I know you are not going to let it stop you on your path to becoming real estate moguls.

    1. You are right about that! Just another puzzle to solve, we will get there. But in the mean time we have picked up options trading with the available capital.

  3. Sucks you didn’t get the personal loan!

    Ik zal even in het Nederlands uitleggen wat ik als mogelijke oplossing zie. Ik ken de Nederlandse wetgeving en mogelijkheden niet, maar in België is het mogelijk om een patrimoniumvennootschap op te richten en daar je vastgoed in onder te brengen. Dit heeft enkele voordelen zoals: intrestkosten aftrekken van winst, interessanter voor belastingskosten… nadeel is wel dat je belast wordt bij verkoop op meerwaarde. In België is zo’n systeem interessant als je meer dan grootte-orde €700k bezit aan vastgoed. Ik denk dat jullie aardig in de buurt komen waardoor het misschien een optie is. Then again, dit is voor België. Misschien eens informeren voor iets dergelijks in NL?

    1. We just actually dismantled our real estate company for financial reasons (taxes primarily). We just got to be creative and find away around the personal loan, it will work out in the long run! But appreciate the comment, great to get some other perspectives.

    1. Financing is commonly the most tricky thing in real estate, but there are options and creative ways can still got you a property for a reasonable price. It just takes time and efforts to find the right combination. It should also work in Belgium, just not sure how.

  4. Things are the same in the U.S. If you own more than 4 properties, you can no longer get personal mortgages. I don’t know if they have them in the Netherlands, but in the states, we have multi-unit properties (not apartments) that are basically big houses split into 2, 3, or 4 individual units. Duplexes, triplexes, or fourplexes. If you are looking to expand, it might be worth looking at selling a single family house and buying one of these in its place. You’d still be at your 4 loan limit, but you could have more units total to rent.

    (By the way, my family was in Germany over Christmas and on the way back, our plane stopped in the Netherlands. The customs agent really liked my daughter’s name: Holland 🙂 )

    1. Funny you mention that, we actually own a duplex and a triplex. But because they all have their own front door and house number, they are recognized as individual units for the lending institutions (they are also registered that way with the municipality = we pay taxes on this basis). So no luck here either…. but love your thinking!

      By the way, your daughter has an awesome name! Nothing can beat that 🙂

  5. Would never suspect you own a real estate business now 😉
    You guys are in a difficult situation… I’m very curious whatever will work for you, but it will be a though one probably.

    Oh and really like these real estate update btw, you got Mr. Divnomics hooked on real estate now as well.

    1. Ha, neither did we! Although we actually had an business until last year, we actually liquidated that one because financially it was no longer a good fit for us. Ironic that now we don’t have a company, the lending institutions still see us as one!
      And sorry about getting Mr Divnomics hooked on real estate 🙂

  6. I don’t know if you are married, but wouldn’t it be an option to split the real estate between the both of you, or at least make one of you both the owner instead of both? In that case you can have a total of 8 properties before you are considered to be a business.

    I’m reading your real estate blogs with special interest because I might want to jump in one day as well. But up to now I still have so many questions… Good luck with finding a solution!

    1. Yes, we are married, but “in gemeenschap van goederen”. The split would be financially expensive (notary costs an all) and would likely not add any value as we are both still responsible (we would be financially and legally considered as one household, as far as I know, need to read up on this actually). I still need to check up on other loan providers, but those require actual appointements. Need to find the time for that.
      On the other hand, due to the rising real estate market, deals are far and few right now. Have not seen a good deal in a while. If you want to talk real estate, just drop us an email.

  7. These are the same problems we’re facing currently. Our target is also a property around 100k and investment mortgage falls outside the scope of it as you say.
    Now what we’re discussing with our current mortgage company is to increase the mortgage on our home up to it’s market value and use that money to buy a rental property. We didn’t receive the green light yet, but fingers crossed. Maybe it would be an option for you guys too. Interest rates would be lower.
    If it won’t work, we might also go for the personal loan. We only have our own house and no rentals, so hope it won’t be a problem.

    1. We are starting to consider our house too, but we have not paid that much of the existing mortgage (only moved in July last year), so there is not much money to be made available (at least not at reasonable interest rates). Best of luck to you too!

  8. Ouch, that’s not nice. The Dutch mortgage market is not aimed at private investors as you’ve experienced. Did you contact NIBC? They have a special product for private real estate investors, but it’s a bit hidden on the website. I’ve heard the rates are ok.

    1. The investement mortgage and associated numbers are actually from NIBC. There are a few foreign banks too that appear to provide mortgage Some appear to even do 80% of market value in rented state, but without an advisor it’s hard to go this route. This still is an option, but we would have to find a douplex to make it work (and need more cash).

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