Equity when buying real estate: Monthly burden, rolling equity & Co!

Equity when buying real estate – Whether you are an investor or an owner-occupier, every time you buy real estate, the bank requires you to have a certain percentage of equity. How much equity do you need? That depends on your investment strategy as well as your credit rating. Let’s now take a look at both buying profiles, what factors you need to pay attention to and how you can use rolling equity for yourself.

Equity investment in the purchase of real estate

Whether for personal use or capital investment, equity capital is required for every real estate purchase. Especially when buying your first property, the amount of equity you need to contribute is important. If you are buying a property for your own use, you should contribute as much equity as possible. If you are investing in a property as a capital investment, less is more.

As a basic rule:

  • Self-interest = As much equity as possible
  • Capital investment = As little equity as possible

Why is that?

Equity as a safety mechanism

In order for the bank to give you a loan for your property, it needs a certain security to get this money back in full later. That is why your creditworthiness is checked in advance. The more liquid your finances are, the less equity is necessary. However, if your expenses outweigh your income, you will need more equity. Once you have received your loan, you pay it back monthly through repayments.

The better your credit rating, the less equity you have

Important: As an owner-occupant, you have to pay back the interest on your loan yourself. Investors, on the other hand, can deduct them from their taxes.

Self-interest: This is how much equity you need

So as an owner-occupier, you need to put in as much equity as possible. In addition, the higher the equity, the lower the interest burden. Because the more equity you bring in, the less risk there is for the financing bank and the lower the interest rates are calculated.

As a general rule: 20% equity for owner-occupiers

Monthly Costs & Income

So how much should you earn each month? Our tip: The monthly cost of your loan should not exceed 40% of your net income.

Here is a calculation example:

  • Income (net): 3,000 euros
  • 40% = 1.300 Euro

So the monthly repayment including interest should not exceed the 1,300 euros.

Capital investment: This is how little equity you need

While you need as much equity capital as possible for owner-occupation, as an investor you enjoy the advantage of having to contribute far less equity capital. In addition, you can deduct the interest from your taxes. Ideally, even the tenant indirectly pays your interest. As a buyer of a property as an investment, your equity covers only 10-15% of the costs.

These include:

  • Incidental purchase costs
  • Real estate transfer tax
  • Notary fees
  • Court costs
  • Brokerage costs

Rolling equity: Fast investments

Our pro tip: Make use of your rolling equity. But how does it work? It’s simple: You buy a property and contribute equity. Now this is paid out again through redemption and you can use it directly for your next investment.

Conclusion: This is how much equity you need!

So here is the rule of thumb once again:

  • Self-interest = As much equity as possible
  • Capital investment = As little equity as possible

In the case of personal use, your equity serves as security for the bank that it will definitely get your money back sooner or later. In principle, the equity you put in should not exceed 40% of your net salary. As an investor, on the other hand, you only need to contribute 10 to 15 percent as equity. The interest is to be borne by the tenant and with the help of rolling equity, you can invest directly in the next property.

You can find more about equity and real estate financing on my new project for real estate buyers (Immobilien-Erfahrung.de):