Author Topic: How do we make the best of it?  (Read 2544 times)

RailroadBill

  • 5 O'Clock Shadow
  • *
  • Posts: 1
  • Location: Germany
How do we make the best of it?
« on: March 02, 2014, 02:14:18 PM »
Long time lurker, first time poster. Thanks for taking the time to read!

We:
- both 25 yrs,
- no kids,
- started working in late 2012/early 2013, currently making about KEUR 57/yr but going to make KEUR 71/yr from 07/2014 on,
- savings rate of about 33% (guess we could do a little better)
- savings of KEUR 40 (mostly equity ETFs, fixed income, and a little cash)

currently live in a rented 2 room apartment (60 sqm, about 645 sqft) which is located on the upper floor of a formerly single family house. The ground level is rented to the landlord's small business (office space). There also is a small commercial space in an extension to the building, leased by a hairdresser (sole proprietor with one employee). The property is about 1,300 sqm (around 13,900 sqft) and located on the outskirts of a major German city in a prime single family residential area where housing property (just the land) is sold for around 500 EUR/sqm (around 64 USD/sqft). Prices have been rising for decades, pretty steep in the years since 2000, a little less in recent months. No sign of a bubble in my opinion though, since the prices are backed by increasing demand due to the city’s population growth and attractiveness.

The building was constructed in 1952 and hasn’t seen much modernization since, that is to say it’s in a pretty bad overall condition. Examples are rain sometimes leaking through to the hairdresser’s, a cheap, very ugly and already crumbling insulation layer on the outside walls (done in the early 90’s), and a heating system (natural gas with old and inefficient radiators) that’s been so poorly cared for it has quitted service several times since we have been living here (late 2012).

The property used to be owned by the landlord’s wife, who passed away in late 2012, shortly after we moved in. Now the landlord’s son happens to demand part of his inheritance. Not only does it shed light on the relationships within the family, but it also forces our landlord to sell the property in order to pay him out.

The rent for all three parties is currently roughly KEUR 28 p.a. The price currently demanded by our landlord is about KEUR 690 (his initial offer was KEUR 800 in December 2013, he has been reducing it several times since then). Taking into account expenses in connection with the acquisition (the largest part of which is the realtor, who gets paid by the buyer in Germany – regardless of whether you used his services, just because the seller engaged him), the net purchase price would be KEUR 760. No sane man would buy the property on these terms and keep things as they are. There is a lot of tearing down old houses and constructing new fancy houses in this area, often two of them where once stood one.

As is happens to be, the legal position of residential tenants is a very strong one in Germany, making it very hard to throw him out if he is paying the rent, even if you need to move into your own property yourself. This makes purchasing a rented out real estate very unattractive if it doesn’t provide a decent rate of return. So we’re in the rather unique situation that for us, the property is worth more than for any other person who would need to get rid of us in a long and costly legal battle (if we choose so) or reach a compromise settlement with us before being able to tear down the old house and make a profit with the property.

The question is how to realize our competitive advantage best? Even if he accepts a lower offer (a competitive market value for the property would be about KEUR 640, minus a “tenant discount”), the amount needed as a loan would still be tremendous just for acquiring the property.
As we see it, we have the following options:

1) Moderately refurbish the house, just fixing what needs to be fixed, and keep the other tenants (much less protected by law due to them being commercial tenants, not residential). We would possibly be able to pay the interest on the loan with the other tenants’ rent and our rent saved, but we would still be left with the redemption payments on the loan. Upside: least debt required, and we might have a rather diversified tenant structure financing part of our debt. We could do most of the work ourselves. Downside: Very low return on equity.

2) Tear down the house, build two new houses on the property, either sell both of them or keep one for ourselves, or rent out the second. Upside: Possibly the best return. Downside: Very high debt required, and considerable risk associated with the construction. Not possibly for us to do most of the work.

3) Fix up the house completely, consolidating the apartment on the first floor and the office on ground level for a single family dwelling. All the while keep the hairdressers in the separate commercial space for constant cash inflows, and rent out the single family house with garden once it’s done. Or sell the whole thing after fixing it up? Upside: We could do most of the work ourselves. Downsides: We wouldn’t be able to live here anymore ourselves (wouldn’t be a deal-breaker, though), and possibly a lot of the property’s cash generating capacity would be wasted, as there would be room for a second house – but not with the old house’s position on the property.

4) Buy it, keep it a few years without investing more time and money into it, and sell it without a residential tenant (us) and without the current landlord’s tight time budget and hope to make a cut that beats our acquisition fees.

What would you guys do? Another fact to consider is that ending the hairdressers’ lease contract would have a high chance of dooming them to  - at least temporary – unemployment, since it should be very hard to find a similar location in this otherwise purely residential area and much of their business is dependent on their location.

Is there any option we should also consider? Are we being too afraid of a high degree of leverage? Thinking too small? I would hate to miss a good opportunity because we didn’t see it or didn’t have the courage.

Thoughts are very much appreciated.

unpolloloco

  • Stubble
  • **
  • Posts: 185
Re: How do we make the best of it?
« Reply #1 on: March 03, 2014, 10:31:58 AM »
You said yourself the property's overpriced.  I'd run your potential scenarios and see what you expected yields are.  To me, knowing nothing about the potential yields in the area or availability of financing, the best option would be to wait it out and reach a settlement price with the new landlord for you to get out.  You can probably find a better deal elsewhere...

Captain and Mrs Slow

  • Bristles
  • ***
  • Posts: 414
  • Age: 59
  • Location: Munich Germany
Re: How do we make the best of it?
« Reply #2 on: September 08, 2014, 09:39:24 AM »
The best resource for all things Germany is toytowngermany.com
 You find answers to all your questions and more there

mustachian_germany

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: How do we make the best of it?
« Reply #3 on: October 15, 2014, 01:41:50 PM »
Hi there. I just started a case study too, if oyu have any suggestions, feel free to post:

http://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-reaching-fi-with-rental-appartments-and-2-kids-in-germany/

Also, maybe the reposnses might be helpful for your situation too...