Hello everyone,
I have been an active reader here for a long time. I have already discovered many useful tips and learned a lot from you. Thank you for that.
Now to the actual "problem."
We live in a nice 4-room condominium, which we have almost paid off – the value of the apartment is about 380,000 euros (approx. $410,000), with current debt of around 115,000 euros (approx. $124,000). There is about 90,000 euros (approx. $97,000) in our bank account. After the fixed interest period ends (beginning of 2022), we could make use of the special repayment option and pay off the remaining amount in full. That is the background.
Our municipality will sell about 50 plots of land in a new development area this spring (the infrastructure work is in full progress). Since we have two children, our chances of getting a building plot are good.
Price: about 300 euros per square meter (approx. $325 per square meter).
We would like to build. Since I am a teacher, I need a dedicated home office. I am tired of constantly working at the kitchen table. School materials are scattered all over the living room.
I estimate that the dream of owning a home would cost us about 600,000 euros (approx. $650,000).
About our income:
Monthly net income: he earns 2,600 euros (approx. $2,800), I earn 2,500 euros (approx. $2,700) working 75%, private health insurance already deducted, plus child benefits of 400 euros (approx. $430), totaling 5,500 euros (approx. $6,000).
How should we best proceed now?
a) Pay off the apartment completely, sell it, and finance only the difference?
b) Keep the apartment, rent it out (rent about 900 euros (approx. $975)), do not pay it off, but take on additional debt to finance part of the house?
c) Use the equity as a down payment for the land (+ a small variable loan), sell the apartment after the fixed interest period ends, pay off the remaining debt with the proceeds, and put the remaining "profit" into the new house...
d) ???????
I know that was a lot. I hope you can help me a little...
I have been an active reader here for a long time. I have already discovered many useful tips and learned a lot from you. Thank you for that.
Now to the actual "problem."
We live in a nice 4-room condominium, which we have almost paid off – the value of the apartment is about 380,000 euros (approx. $410,000), with current debt of around 115,000 euros (approx. $124,000). There is about 90,000 euros (approx. $97,000) in our bank account. After the fixed interest period ends (beginning of 2022), we could make use of the special repayment option and pay off the remaining amount in full. That is the background.
Our municipality will sell about 50 plots of land in a new development area this spring (the infrastructure work is in full progress). Since we have two children, our chances of getting a building plot are good.
Price: about 300 euros per square meter (approx. $325 per square meter).
We would like to build. Since I am a teacher, I need a dedicated home office. I am tired of constantly working at the kitchen table. School materials are scattered all over the living room.
I estimate that the dream of owning a home would cost us about 600,000 euros (approx. $650,000).
About our income:
Monthly net income: he earns 2,600 euros (approx. $2,800), I earn 2,500 euros (approx. $2,700) working 75%, private health insurance already deducted, plus child benefits of 400 euros (approx. $430), totaling 5,500 euros (approx. $6,000).
How should we best proceed now?
a) Pay off the apartment completely, sell it, and finance only the difference?
b) Keep the apartment, rent it out (rent about 900 euros (approx. $975)), do not pay it off, but take on additional debt to finance part of the house?
c) Use the equity as a down payment for the land (+ a small variable loan), sell the apartment after the fixed interest period ends, pay off the remaining debt with the proceeds, and put the remaining "profit" into the new house...
d) ???????
I know that was a lot. I hope you can help me a little...
S
Seven19843 Nov 2020 08:24Piotr1981 schrieb:
If a condominium (depending on its location) has already significantly increased in value, I would use the property as collateral with the bank. This could greatly improve the loan terms and result in better interest rates. Once the condominium is paid off, increase the repayment rate and use the income to support the house payments.Paying off a rented property first and the owner-occupied home later? That makes no sense economically or from a tax perspective.
That’s why I also suggested: keep repayments to a minimum and let the tenants cover them. Nice and easy.
And we’re talking here about additional taxable income, while you’re actually selling an extra cash flow source over many years.
Doesn’t anyone see that a potential significant increase in value is about to be sacrificed just for a few euros less in taxes?
And we’re talking here about additional taxable income, while you’re actually selling an extra cash flow source over many years.
Doesn’t anyone see that a potential significant increase in value is about to be sacrificed just for a few euros less in taxes?
P
Piotr19813 Nov 2020 09:58Seven1984 schrieb:
Paying off a rental property while buying your own home later?
That doesn’t make any sense economically or from a tax perspective. What exactly doesn’t make sense?
Financing and paying off the property with rental income? Then please explain to me what is illogical about that.
S
Seven19843 Nov 2020 10:55Your suggestion was to pay off the condominium before using the income to cover the liabilities of the owner-occupied property.
From a tax perspective, it is more advantageous to avoid paying off the condominium further or pay as little as possible, and instead invest the free cash flow in the owner-occupied property.
The reason is simple: mortgage interest on the owner-occupied home is not tax-deductible, but it is for the condominium. The amounts are not large, but still relevant.
Specki’s suggestion is an excellent way to address this issue if the situation allows for this kind of flexibility.
From a tax perspective, it is more advantageous to avoid paying off the condominium further or pay as little as possible, and instead invest the free cash flow in the owner-occupied property.
The reason is simple: mortgage interest on the owner-occupied home is not tax-deductible, but it is for the condominium. The amounts are not large, but still relevant.
Specki’s suggestion is an excellent way to address this issue if the situation allows for this kind of flexibility.
H
Hausbau20223 Nov 2020 12:27The problem with this property is that your rent will easily be around €1,000 (approx. $1,100) including the parking spaces.
This generates income of about €12,000 (approx. $13,200), plus depreciation (AfA) of nearly €4,000 (200,000 * 0.02).
That leaves a taxable profit of €8,000 (approx. $8,800). For simplicity, let’s assume a tax rate of 50%, resulting in a tax payment of €4,000 (approx. $4,400) per year, or about €333 (approx. $370) per month.
In reality, once your mortgage is paid off, you will have around €700 (approx. $770) surplus. If you exclude operating costs that are usually chargeable to tenants, such as property management fees and reserves, you’re left with about €600 (approx. $660)...
You could either use these €600 * 12 = €7,200 (approx. $7,900) annually as extra mortgage payments or reduce your monthly expenses accordingly.
You should not ignore the future value development of the property. It costs €380,000 (approx. $418,000) today but could be worth €480,000 (approx. $528,000) in 10 years. Although you pay taxes now, after tax you generate €7,200 * 10 = €72,000 (approx. $79,000) plus €100,000 (approx. $110,000) in capital appreciation.
Against this, you need to calculate how much interest you would save if you paid €380,000 (approx. $418,000) upfront. This can be done practically.
€600,000 (approx. $660,000) at 1.5% financing = €90,000 (approx. $99,000) interest (note: this calculation excludes principal repayment for simplicity)
€220,000 (approx. $242,000) at 1% financing = €22,000 (approx. $24,000) interest (also excluding principal repayment)
This results in an additional interest cost of roughly €70,000 (approx. $77,000).
My general recommendation would be to sell, since tenants can also be a hassle, and the real advantage here is mainly the property’s value growth, which is uncertain.
This is a simplified calculation before someone jumps in here right away 😉
This generates income of about €12,000 (approx. $13,200), plus depreciation (AfA) of nearly €4,000 (200,000 * 0.02).
That leaves a taxable profit of €8,000 (approx. $8,800). For simplicity, let’s assume a tax rate of 50%, resulting in a tax payment of €4,000 (approx. $4,400) per year, or about €333 (approx. $370) per month.
In reality, once your mortgage is paid off, you will have around €700 (approx. $770) surplus. If you exclude operating costs that are usually chargeable to tenants, such as property management fees and reserves, you’re left with about €600 (approx. $660)...
You could either use these €600 * 12 = €7,200 (approx. $7,900) annually as extra mortgage payments or reduce your monthly expenses accordingly.
You should not ignore the future value development of the property. It costs €380,000 (approx. $418,000) today but could be worth €480,000 (approx. $528,000) in 10 years. Although you pay taxes now, after tax you generate €7,200 * 10 = €72,000 (approx. $79,000) plus €100,000 (approx. $110,000) in capital appreciation.
Against this, you need to calculate how much interest you would save if you paid €380,000 (approx. $418,000) upfront. This can be done practically.
€600,000 (approx. $660,000) at 1.5% financing = €90,000 (approx. $99,000) interest (note: this calculation excludes principal repayment for simplicity)
€220,000 (approx. $242,000) at 1% financing = €22,000 (approx. $24,000) interest (also excluding principal repayment)
This results in an additional interest cost of roughly €70,000 (approx. $77,000).
My general recommendation would be to sell, since tenants can also be a hassle, and the real advantage here is mainly the property’s value growth, which is uncertain.
This is a simplified calculation before someone jumps in here right away 😉
Seven1984 schrieb:
Specki’s suggestion is a great way to solve the issue if the situation allows for that kind of flexibility.Yes, that would really be a good idea. Unfortunately, we are both owners of the property.