€5,000 up-front for apartment, loan with developer

pawnacide

I tried to get some opinions in a related thread but received none so hoping to receive a few by starting this thread.

I know of 2 bed apartments for sale at 75,000, not rock bottom or anything and not that uncommon these days in the area.

What makes them different is the terms.

Developer is giving finance himself.

• He's looking for 5000 up front and 550/month fixed for 5 years. (15.2 years in total)
• That works out at 4.9% fixed for 5 years, after that it becomes variable at the average of the rate charged by the two major banks.
• I can get a regular mortgage at any time and pay of balance of principle or reduce principle at any time with lump sum payments.
• That is or very close to current rental value in the area.
• He's willing to furnish them for cost or I can do it myself.
• There's an annual management fee of 800.

Assuming the financing is all above board and he can't take a lean on the properties etc

Does this sound like a good deal as I have a smallish lump sum earning 2.75% at the moment?

Any and all feedback wellcome.

not even wrong

There's an annual management fee of 800 per month.

What?

Lantus

800 service fee sounds very cheap for an apartment, either theres hundreds of them or theres no lift or secure car park or bins included.

Is the fire alarm connected?

Who is the developer giving finace through? a bnk or is it really themselves? If it is then what is the contract and come back like on a company that may not be around in 15 years time!?!

The banks may be a better deal as being able to make lump sum payments is a huge advantage if your able to.

whiteandlight

Its not very cheap per month?? I assume its a misprint and should be per year in which case its ok?

pawnacide

Musicmental85 wrote: »

Its not very cheap per month?? I assume its a misprint and should be per year in which case its ok?

yep it's 800 per aunum

pawnacide

Lantus wrote: »

800 service fee sounds very cheap for an apartment, either theres hundreds of them or theres no lift or secure car park or bins included.

Is the fire alarm connected?

Who is the developer giving finace through? a bnk or is it really themselves? If it is then what is the contract and come back like on a company that may not be around in 15 years time!?!

The banks may be a better deal as being able to make lump sum payments is a huge advantage if your able to.

There's 47 apartments in total in a mixed development with semi houses and larger 4 bed detached .. parking and bins included (there are no lifts). The developer is retaining 15 apartments for himself.

As regards finance I know he is giving it himself and no bank involved. The reason I said assuming the finance arrangements are all above board is I haven't gone into that much detail with him yet and am gonna leave that to solicitor before I part with any money .. obviously if there's any ambiguity there at all I won't be going ahead.

The reason this attracts me is I know I wouldn't get a mortgage from a bank as I already have one and whatever about first time buyers they certainly aint giving mortgages for buy to let.. unless of course you don't need one.

jerry2623

If your buying this as an investment don't bother It will not increase in price and you will always have ongoing maintenance and periods where it will be empty . If you are buying it with the intention of living in it for at least 10 years it seems OK
Sorry did not read your last post fully .
If you want to get involved in the buy to let game I suggest location location and location stick to a small self contained house rather then Apartments .But be aware prices wont increase and you are only doing it for the return on rent so research your area properly with regards the rental market

pawnacide

It would be an investment as in I would probably never sell but thats based on the assumption that rents would increase at roughly the level of inflation or perhaps slightly better if new builds remain stagnant for the next 5 to 10 years.

The area is fine insofar as it's the Dublin road out of a midlands town and opposite the hospital where the trainee nurses and consultants change every year. Unless of course they close the hospital but still high demand area.

I suppose what I'm really wondering is .. would I be better of leaving 5000 in the bank and I really don't think I would.

5000 + annual 800x15 = 17000 + downtime + expenses to earn whatever the rent will be in 15 years.

the groutch

I would avoid getting finance with the developer if possible, and go with a bank instead.
If you did have to go with him, contact the Financial Regulator/Central Bank, make sure he's authorised to provide finance like this.
And I would look for a WRITTEN statement of what's covered by the €800 management fee, as it seems very low

the_syco

If he goes bust, and the apartment block is taken over by the bank, will there be a record that you paid money towards the apartment, as opposed money for rent?

I'd run a mile, tbh.

Rabidlamb

the_syco wrote: »

If he goes bust, and the apartment block is taken over by the bank, will there be a record that you paid money towards the apartment, as opposed money for rent?

I'd run a mile, tbh.

+1

OP, get a mortgage for the €75k minus the deposit.
I'm not up with what banks are offering on apartments in your area, can you still get 80%.

pawnacide

Rabidlamb wrote: »

+1

OP, get a mortgage for the €75k minus the deposit.
I'm not up with what banks are offering on apartments in your area, can you still get 80%.

I'm not concerned with the financing end at this point .. as I said If I go for this I will be very thorough on checking all is in order and If not I'll be running a mile as several have suggested.

If I get a mortgage from a bank and It's very doubtful I would I would need min 30% up front which changes everything i.e. 22,500 euros.

What I really wanna know is assuming everything is above board is it a good investment given my initial outlay will be in the order 8800 including furnishings and 1st years management charges ?

Here's the best I could get fro BOI quick calc
Product %STD %APR
15 years

5 Year Fixed rolling to Variable BTLVRP2 - LTV 50% to 75% 6.15 5.6 €596.38

killers1

This is a rent to buy scheme, nothing more, nothing less. The developer isn't actually supplying finance to anyone. He owns the development (well, his lender does), probably mortgaged to the hilt in massive negative equity He's worked out a repayment structure with the bank and by offering the apartments on a rent to buy basis can generate an income quicker than trying to sell 47 units in the 1 development in this market. This is probably the only way he has any hope of servicing his own agreed repayment structure with the lender. If he fails to occupy the majority or all units within a certain timeframe the bank will probably foreclose on everything.

There is no developer out there who has the 'cash' to give to potential purchasers of a 47 unit development...

My concern would be that you go for it, he fails to fill the development, the bank take it off him, units remain unsold so a management co can't be put in place or the empty units deteriorate quickly bringing down the value of the occupied units and before you know it the place looks like a tenement.... This may be a good investment (reasonable price, possibility of a half decent rental income) but I'd be inclined to get in at the end as opposed to the start... That way you'll have a better idea whether it will be successful or not..

pawnacide

killers1 wrote: »

This is a rent to buy scheme, nothing more, nothing less. The developer isn't actually supplying finance to anyone. He owns the development (well, his lender does), probably mortgaged to the hilt in massive negative equity He's worked out a repayment structure with the bank and by offering the apartments on a rent to buy basis can generate an income quicker than trying to sell 47 units in the 1 development in this market. This is probably the only way he has any hope of servicing his own agreed repayment structure with the lender. If he fails to occupy the majority or all units within a certain timeframe the bank will probably foreclose on everything.

There is no developer out there who has the 'cash' to give to potential purchasers of a 47 unit development...

My concern would be that you go for it, he fails to fill the development, the bank take it off him, units remain unsold so a management co can't be put in place or the empty units deteriorate quickly bringing down the value of the occupied units and before you know it the place looks like a tenement.... This may be a good investment (reasonable price, possibility of a half decent rental income) but I'd be inclined to get in at the end as opposed to the start... That way you'll have a better idea whether it will be successful or not..

He just bought it from NAMA and yes I found out today it is a 15 year lease with an option to buy (let to buy) . It's setup so he can't take a lean against the properties but again that will be a matter for my solicitor. The apartments are already built with just interior finishing to be completed on some.

killers1

pawnacide wrote: »

He just bought it from NAMA and yes I found out today it is a 15 year lease with an option to buy (let to buy) . It's setup so he can't take a lean against the properties but again that will be a matter for my solicitor. The apartments are already built with just interior finishing to be completed on some.

It's a rent to buy. Again my concerns would be about him not being able to fill the development and the vacant properties deteriorating and you've already agreed a purchase price at today's valuation. You be amazed how quickly a 47 unit development can deteriorate with 20 vacant units. I'm not saying it's a bad investment but I'd still get in close to the end if at all...What's the typical rent for the area?

killers1

Also, there is a Management Fee of €800 per annum (AT THE MOMENT)... There is absolutely nothing to prevent this being increased at any time in the future and most likely if or when all units are occupied...

pawnacide

for decent 2 bed apts its about 550, I presume this is how he's pricing the apartments. The fact that he's retaining some is a plus as regards the upkeep of the place.

StillWaters

You haven't said what the going rent is, and the rent allowance limit for the area. Without that, its impossible to work out the yield.

killers1

pawnacide wrote: »

for decent 2 bed apts its about 550, I presume this is how he's pricing the apartments. The fact that he's retaining some is a plus as regards the upkeep of the place.

I would imagine he's 'retaining' 15 properties for a couple of reasons;

1. It gives confidence to potential investors like you who think that if he's keeping that many properties it must be a good deal & have good potential. This is merely a way of attracting buyers

2. He know's he probably has no chance of finding 47 potential buyers

Another thing worth considering is the yield on the property. As there is no 'mortgage' on the property you have no avenue to offset the rental income against tax and if your current employment has you on the higher tax band you will be giving nearly half the yearly rental income to Revenue. It's going to generate a net yield of less than 3% and this is assuming full rental occupancy at all times (which any landlord will tell you is not realistic) and also no drop in the value of the property which is probably not realistic either. In my view there are better investments out there..

Senna

If no bank is involved, who holds the deeds.
Just too many possible problems, it would be madness to even consider this over a normal mortgage.

StillWaters

Killer's point about interest offset is really important, all the hassle of being a LL for a poor yield.

Unless you are very bullish and think there is capital appreciation here, I'd walk away.

pawnacide

But what gives a better yield ?

pawnacide

killers1 wrote: »

I would imagine he's 'retaining' 15 properties for a couple of reasons;

1. It gives confidence to potential investors like you who think that if he's keeping that many properties it must be a good deal & have good potential. This is merely a way of attracting buyers

2. He know's he probably has no chance of finding 47 potential buyers

Another thing worth considering is the yield on the property. As there is no 'mortgage' on the property you have no avenue to offset the rental income against tax and if your current employment has you on the higher tax band you will be giving nearly half the yearly rental income to Revenue. It's going to generate a net yield of less than 3% and this is assuming full rental occupancy at all times (which any landlord will tell you is not realistic) and also no drop in the value of the property which is probably not realistic either. In my view there are better investments out there..

He has another development in the town where he's building the houses in 3's and renting them as they complete, in yet another development he retained all the commercial units (roughly 10 and a supermarket, plus 10 odd apartments). He bought the current development in november and just completed the apartments end of january, about 20 odd left. Tax bands are not an issue .. wish they were.

What are the better investments ? thats why I started this thread.

pawnacide

Senna wrote: »

If no bank is involved, who holds the deeds.
Just too many possible problems, it would be madness to even consider this over a normal mortgage.

But i won't get a normal mortgage, buy to let isn't that uncommon ..is it?

It's done in the commercial market all the time .. lease with an option to buy .. same thing

pawnacide

Typical rent is about 550/month .. I assume thats where he's getting his price from.

killers1

pawnacide wrote: »

But what gives a better yield ?

EBS 5 yr fixed term account 5.35% per annum

killers1

But i won't get a normal mortgage, buy to let isn't that uncommon ..is it?

It's done in the commercial market all the time .. lease with an option to buy .. same thing[/Quote]

It's not the same thing, it's the complete opposite. A buy to let is where you purchase a property with a view to renting it out. You own the property from the start. You control the terms of the rental agreement with your tenant.

Lease to buy ( rent to buy) is where you are the tenant with an option to buy the property in the future. You are controlled by the terms of the owners lease. In this case if your income levels are low and you have a sustained period where the property is vacant how will you make the repayments to the developer? If you fall into arrears with him he'll be a lot quicker to cancel your agreement than a bank would be as you would be treated as a tenant who didn't pay their rent. What you are proposing is simply sub-letting a property. You are paying rent to the developer and hoping to rent it out to someone else to cover the cost. If he's charging 550pm to you and you think a decent property in the area will only achieve the same figure where's the profit? There's certainly none before 15 yrs are up if you last that long.... I would think at least 50% who get into this won't end up owning the property because they'll either fall behind on the rent as they cant find a tenant or they'll walk away during the term when the management feed are hugely increased. At the end of the day this O's just a clever way of a Developer trying to get a tenant for 15 years & who signs a 15 yr lease on a residential property?! He knows a % won't complete the purchase and he's had as little hassle as possible from his tenants as they are there for the long haul and signed up to a long lease

pawnacide

killers1 wrote: »

But i won't get a normal mortgage, buy to let isn't that uncommon ..is it?

It's done in the commercial market all the time .. lease with an option to buy .. same thing

It's not the same thing, it's the complete opposite. A buy to let is where you purchase a property with a view to renting it out. You own the property from the start. You control the terms of the rental agreement with your tenant.
[/QUOTE]

But the legal rights and protections are the same.

pawnacide

Current Principal: $ 8800
Annual Addition: $ 1350
Years to grow: 15
Interest Rate: % 5.35
Compound interest time(s) annually
Make additions at start end of each compounding period

Future Value: $ 49,141

Assumptions
- 5000 deposit
- 800 management fee for year 1 gives principal of 8800 euros incl fit out
- 15 year term
- 1350 added annually (800 management +1 months rent (downtime) /yr
- EBS 5 yr fixed rate of 5.35%
- Not including upkeep but also not including rent increases over 15 yr period or allowing for inflation with regard purchasing power of the 49,141 which at 2.5% knocks about 10k off.

Question now becomes which would I prefer to have or which would be worth more in 15 years, a 2 bed apartment or 49,141 in the bank.

killers1

pawnacide wrote: »

Current Principal: $ 8800
Annual Addition: $ 1350
Years to grow: 15
Interest Rate: % 5.35
Compound interest time(s) annually
Make additions at start end of each compounding period

Future Value: $ 49,

Question now becomes which would I prefer to have or which would be worth more in 15 years, a 2 bed apartment or 49,141 in the bank.

Only you can answer the first part ofthat question and the second part who knows?? I'd be looking for guarantees in relation to the management fees for the full term and I also think basing it on 1 vacant month per annum is a bit optimistic, factor around 70% max cos 15 yrs is a long time. Also the development will be full of 'owners' looking for tenants and it only takes 1 to advertise at €450pm to have your tenant at your door looking for a reduction!