WHAT ROLE DOES EQUITY PLAY IN REAL ESTATE FINANCING AND PURCHASE?
Equity is basically your financial reserves, which you as a borrower can contribute to real estate financing in order to purchase a property. The more equity capital can be raised, the more favorable the interest rates and conditions for real estate financing. Therefore, the use of equity capital to buy a property can definitely be useful. Nevertheless, there is a chance to buy a property – without or with little equity capital.
Construction financing uses three types of equity capital:
- Classic equity: money that is directly available, for example cash, money in bank accounts or overnight money accounts, funds, shares, allocation-ready building savings contract
- Additional collateral: Further real estate, works of art or the assignment of your life insurance can positively influence the conditions of your financing
- Own contributions: Work that you carry out yourself when buying a house is recognized by banks as a substitute for equity.
Debt capital is needed if your equity can only cover portion of the building financing. This is usually provided by banks in the form of a real estate loan.
IS IT POSSIBLE TO BUY A PROPERTY WITHOUT MONEY?
The purchase of a property without the use of equity capital is basically possible. Under certain conditions, such as income and creditworthiness, some banks offer 100% financing to buy a property. However, construction financing without own financial resources is generally more expensive.
Banks recommend 20–30% down.
This decreases bank risk and partially compensates the acquisition price.
Customers with good credit and a secure, above-average wage can buy a property without equity.
Credit earners have many different options for this:
FULL FINANCING OF THE PROPERTY
When it comes to full financing or 110 percent financing of a property, construction financing without equity is usually meant. In this case, the bank assumes full financing of the entire purchase price, plus the additional purchase costs. Real estate ancillary buying fees make around 10–15% of the purchasing price. . These additional costs include:
- Brokerage commission
- Notary fee
- Fees for land register entry
- Real estate transfer tax
Since full financing for banks is generally associated with a high risk, borrowers are usually required to pay an interest premium. 100 percent finance is slower, riskier, and more expensive than construction financing with equity.
PURCHASE OF REAL ESTATE BY PRIVATE DONORS
Financing with the help of private donors is now considered one of the most common ways to buy real estate without equity. Private individuals provide you with financial resources that you can use as a borrower to finance or buy the property. Even if no equity capital has to be contributed in this variant, it still carries a certain risk: Unlike a bank, this type of loan is less secured and usually provided with high interest rates and conditions. In addition, a suitable person must first be found who has sufficient financial resources to finance a property.
BUY AND RENT REAL ESTATE WITHOUT EQUITY CAPITAL
Furthermore, there is the possibility to buy and rent a property without equity.Debt capital and rental revenue finance this property. However, this variant also carries certain risks: banks usually charge a certain proportion of the rent as a default, for example due to rent arrears or renovation costs. Since not the entire gross rent can be used to repay the monthly installment of the loan, banks usually charge higher interest rates for real estate financing. This not only increases the share of financing, but also the time in which you are not debt-free.
WHAT IS IMPORTANT WHEN BUYING REAL ESTATE WITHOUT EQUITY?
If you decide to buy a property without equity, you should consider some important aspects. First and foremost, the attractiveness and profitability of the property plays an important role in the selection of the right property. In particular, in the case of full financing, the rentability and location of the property should be carefully checked in order to ensure a quick repayment of the debt capital. Because an attractive location with transport connections or shopping facilities also attracts some interested tenants.
In addition, it may make sense to start with smaller construction financing for the time being. Thus, start with tiny apartments or houses rather than enormous projects.
In this instance, banks normally simply require a minimal equity capital, allowing you to finance a property without much capital.
CONCLUSION: BUY REAL ESTATE WITHOUT EQUITY – WHAT YOU SHOULD CONSIDER
Investing in real estate offers a good investment opportunity and can be worthwhile in the long term. You can buy a house without much equity if you plan to rent it or use bank financing.
FAQ – WE ANSWER FURTHER QUESTIONS ABOUT BUYING REAL ESTATE WITHOUT EQUITY
WHAT ARE THE RISKS OF BUYING REAL ESTATE WITHOUT EQUITY?
If you finance a property without equity, banks usually demand a high repayment, i.e. a high monthly installment. The faster the loan for the house or apartment is repaid, the faster the risk of a possible loss decreases. In addition, interest rates will be significantly higher due to the high risk.
WHAT ARE THE ADVANTAGES OF BUYING A PROPERTY COMPARED TO RENTING?
Buying real estate without equity gives you independence from rent hikes, tax advantages, a long-term value gain, and a secure retirement. .
In most cases, the financing of a property without equity is a profitable alternative to rent. Because: The bigger the equity capital, the fewer development loans needed.
High equity capital reduces lending costs and improves terms.
WHAT IS THE ADVANTAGE OF EQUITY IN REAL ESTATE FINANCING?
Financing a property with equity capital brings some advantages.Because: The bigger the equity capital, the fewer development loans needed.
High equity capital reduces lending costs and improves