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
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):
- Investment Mortgage;
- Personal Mortgage;
- Crowd Funding; and,
- Personal Loans.
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!
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).
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).
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.
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.
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.