Funding a good retirement is not easy, nor is buying a large investment property particularly accessible for most people. However, both problems have been tackled by an ingenious deal one retired German couple made when they sold their home to an English investor. The property is now on the market again at a higher price.
Although the property is in Germany, most aspects of the deal could be replicated here, so it's an alternative worth considering if your circumstances are right. It might also inspire you to think up another creative way to invest in property or fund your retirement.
There's a lot to consider here, so please read the whole article before commenting below.
Sell up, and make your landlord pay you rent!
The couple (78 and 85) live in a luxury home in south Berlin. The property is worth around €1m (the agents say €1.1m), but they sold it to an English investor for just €400,000.
The catch is they're allowed to live in the property until they both die. The second catch is their new landlord has to pay them rent. Or, rather, the landlord pays them a non-rising retirement income of €500pm.
So they've got a lump sum of hundreds of thousands of euros plus a modest income. That should be enough to see them comfortable for the rest of their lives in their large home with an indoor swimming pool.
It's both an alternative way to invest in a luxury property for the buyer – one that he otherwise couldn't afford – and a self-made equity-release scheme for the occupants.
The English investor is now selling the property for €425,000 through the estate agents Investment City Berlin Ltd, apparently to free up money for investing in Chinese property. If he manages to sell it successfully, despite the next owner having to take on the monthly retirement payments, it will demonstrate that this sort of investment doesn't have to be a long-term deal for the buyer.
How the deal looks for the buyer
Let's say you were to devise a similar deal in the UK. We'll use the same numbers but in our currency, the pound, so the property is being sold for £425,000, plus a £500pm income.
Firstly, we'll see how it would work from the investor's perspective and then from the occupiers'.
Let's say the couple both live to 90-years-old. After paying hundreds of thousands in mortgage costs and income to the couple, you could still expect to make a profit of perhaps one-quarter of a million pounds – or even a lot more – before taxes and maintenance costs.
I've got to that figure by being conservative with my assumptions. You could get more depending on the type of mortgage you get, the interest rates you pay and how fast the property price rises.
If the couple live longer, you could probably expect that any further costs are offset by the rise in the price of the property.
Compare this to doing an ordinary buy-to-let
If you invest the same amount of money in an ordinary buy-to-let (that is, the amount you were paying in mortgage costs and the monthly pension combined) you might only be able to afford a property for closer to half a million.
Although you'll be receiving rental income rather than paying it out, after 12 years you might have made between one-fifth and half of what you could expect to make with the German idea. That's before taxes, and maintenance and other costs.
Big issues for the buyer
Tenants in Germany take on lots of maintenance costs. Here in the UK, the landlord generally covers most of the maintenance. If you were an investor doing the same deal here, you might want to negotiate that the tenants pay more of these bills.
You'd need a lawyer to approve the structure of the deal. The biggest problem could be getting a mortgage. In my real-world example, the English buyer will have had the same problems in Germany, but he clearly managed to overcome them. An open-minded, flexible lender should see that the numbers are favourable for investment.
How it looks for the occupants
To re-cap, if the occupants were selling today they'd get £425,000 and a monthly income of £500pm.
The alternative – and normal – way to get value out of your home without moving out is equity release.
Equity release has been mis-sold a lot in the past, but while you should consider all your other options, it's still valid and potentially very useful if your circumstances are right.
That said, looking around at a few of the top equity-release prices – and bearing in mind costs vary depending on your precise situation – it seems that the couple might expect to get less overall with equity release during their lifetimes, perhaps by tens of thousands of pounds. Equity release can be useful – but it's not particularly cheap.
However, there's a good chance, even after years of paying interest to the equity-release provider, that there'll be tens or even hundreds of thousands of profit remaining from a house sale after both occupants die. This would make a nice inheritance for your heirs. You don't get that with the German deal.
You shouldn't realistically expect to be able to back out of either an equity-release deal (it's very expensive to do so) or the alternative I've written about today. Anyone trying to get cash out of their own homes should bear in mind there's probably no reversal, so in that regard you should treat it like any ordinary property sale.
It's up to you to be creative
From the sales literature and some simple figures, it seems to me that whoever buys the German property will be getting a good deal – although I haven't factored in the astounding sales commission of more than 7%, because that doesn't apply in the UK. German estate agents are at least as well-loved as our own.
If you're thinking of replicating the deal, you might be able to get more out of it than the German sellers did, who possibly under-priced their offer. However, you 'll probably still have to grant a large discount to attract buyers to this strange deal, because you'll have to give the buyer a strong prospect of large gains in the future, and because the buyer will be aware that it could be hard to sell the property early with these deal hanging over it.
I haven't yet explained that the property in Germany I mentioned has a very large attic that is available for the new owner straight away. This is ready to be converted into flats immediately, if the landlord wants, with planning permission already granted. If your property is convertible into flats, that is a fantastic temptation for a prospective investor.
More on equity release and retirement:
Equity release: The worst way to fund your retirement
Social care: thousands of pensioners lose home due to poor procedures
Workplace pensions: your salary will fall by £300 per year from October
How much you need to save for retirement