Great news for Dutch real estate investors! Dynamic credit just came out with news that they now have a financing proposition that lets you finance up to 90% of the Loan-to-Value in rented condition. For those who are not shy of somewhat higher leverage, this is a great opportunity. Let’s find out why.
My previous search of an investment property in 2018
About a year ago I was looking to buy an investment property. My hope and expectation was to buy an apartment in a good location at somewhat lower than fair value. But it turned out that every potential buyer has their own perception of fair value.
After looking at different properties and discussing pricing with the real estate agent, they couldn’t care less what my view on fair value was. Although they agreed on many points that indicated a lower value than the listing price, their response was: ‘we have 10 more potential buyers standing in line for this property, take it or leave it’.
It’s all about math
I was smart enough (or not, depending on what the real estate market will do in the future) not to overbid what I thought the property was worth. Because in the end it’s all about math. And the math just didn’t work out.
If I paid what they wanted me to pay for the property, my return-on-equity would drop to around 3-4%. By far, not worth the risk and hassle of actively investing in real estate. In that scenario I could finance about 60% of the purchase price.
I could finance only 60% because if you want to buy a property and turn it into a rental, the bank applies certain safety measures. Normally in The Netherlands it’s common to finance 100% of a home. But because of increased risk of default and very generous rights for tenant’s (almost impossible to evict), banks apply a discount.
Based on the previous example, they applied a discount of about 10-15% of the purchase price. They call that the ‘value in rented condition’. Of the value in rented condition it’s possible to receive about 70% of financing. So you need to invest about 40% of your own money to buy the property. On top of that, you need to pay about 5% in fees for the broker and legal arrangements.
The financing proposition of Dynamic Credit
Dynamic Credit, as of two days ago, offers a financing proposition that lets you finance 90% (!) of an investment property. In The Netherlands that is unheard of. Especially among the largest banks in the country. According to Dynamic Credit, the reason for the increase to 90% is to promote private investments in real estate.
This will increase the rental properties inventory and hopefully increase a shift in the real estate market. The real estate market in The Netherlands is pretty much stuck. There are not enough houses for sale and for rent. The potential increase in the rental inventory will most likely increase the problem of the limited supply of houses for sale, but time will tell.
A simplified example showcasing the potential of leverage
Let’s compare two financing possibilities that show the potential of financing through Dynamic Credit.
Let’s assume a purchase price of €135,000, a 30-year loan and an interest rate of 2.8%. I will leave fees out of the equation as this is the same for both situations. Let’s also assume a €850 monthly rent.
The difference in return-on-equity is enormous. That’s the power of investing in real estate and using leverage to boost returns.
Obviously, this is a very simplified example. But the point of this blog is to show the power of leverage and the potential that Dynamic Credit is offering. Hopefully, other banks will follow increasing competition.
Leverage is a wonderful tool to give a boost to return-on-equity. But with increased leveraged comes increased risk. Always be careful. One lesson I learned from Warren Buffett that he minimizes leverage. He fully knows the possibilities but also the risks. To conclude with a quote of Buffett:
“Don’t risk something you have and need for something you don’t have but don’t need.” Warren Buffett
To my readers: what is your view on maximizing leverage? What level of leverage do you feel comfortable with for your personal home and for an investment property?