With regard to the question "rent or buy", there is a lot of contradictory information circulating out there. If you are faced with this decision and honestly can not assess which information is now true, this can of course have very unpleasant consequences – primarily with regard to the dear money, but also on the life design.
So that you can make the right decision and not regret anything later, we explain in this blog article how you can check for yourself whether you should rather rent or buy.
Our sacred cow – The home of our own
We both remember the many commercials we saw when we were kids: You should buy real estate, you have something of your own. It’s safe, a great investment and just a good thing to do. Especially building societies and banks have always been promoting the idea of owning a house.
For families, this is often a clear case – once the offspring is here, a home is needed! The children should be able to play in the garden and not disturb the neighbors when they trample through the area. The fact that one can also rent a house, is thereby rarely considered. Why actually?
First of all, many people earn a lot of money with the fact that Karsten and Stefanie want to buy a house. From financing to furnishing and maintenance – that’s where the dough is! And of course all industry representatives have recognized this and do appropriate marketing.
Partly the whole thing goes so far that people without a home of their own feel inferior. Only with own small house one belongs to it. Some of you may smile about this, but even in less traditional parts of society, real estate is still considered THE status symbol.
In addition, there is the feeling of security that such a little house can give you. In the age one has then also the last rate for its financing paid off and does not need to pay any more rent. Nothing can happen to you – no one can take such a house away from you. And if it should become nevertheless times lamm, one can sell the house at least profitably. Does this calculation always work out?
"I’d rather pay off my loan every month than throw all the money down the throat of my landlord"
The assumption of many people that buying a house is always a good idea is not due to the from Gerd Kommer so aptly called "traditional disinformation" by financiers and building trade industry to lead back. To get a reasonable comparison calculation at the bank, whether I should rather buy or rent, is of course an illusion.
So we have to do it ourselves as always.
In order to be able to make a clean comparison, one must first look at the complete costs for a house purchase and add the running costs. That adds up to something:
- Purchase price
- Soft costs (rd. 5-12% incl. broker, land transfer tax, notary)
- Maintenance costs (rd. 1,5% p.a. of the property value or. 1.4% of the purchase price, if you assume a building part of 90% of the land)
- Financing costs
In the case of the tenant, only the basic rent is on the expenditure side (in both cases, let’s ignore ancillary costs for the sake of simplicity), but of course there is no prospect of rent-free living either.
Let us now add the income side. It’s easier to do that with a renter for the time being: while a buyer has to put part of his income into the repayment and interest payments of the loan, a renter can invest this part and thus build up wealth in the long run. There are – with view of historical data – easily rd. 4% after taxes and inflation in (for the nerds: the calculated rd. 4% has nothing to do with the – with caution to be enjoyed – 4% rule according to the Trinity Study. It’s a coincidence that the numbers are similar).
Then we want to. In the following example we compare the purchase and the rent of two apartments in Hamburg (if you want to buy a whole house instead of an apartment in a central location in Hamburg, you will probably never read this blog). In the supposedly up-and-coming district of Hamburg Billstedt, the square meter currently costs (June 2021) 4.301,06 Euro.
The rent for a comparable apartment is 12.19 euros per square meter. Furthermore, for simplicity’s sake, we do not take into account any cost increases over time, as it can be assumed that the salaries of our sample people will also increase and can compensate for this.
The purchase price for a 100 sqm apartment would be according to the above assumptions at 430.106 Euro. For the purchase costs for the broker, the notary and the land transfer tax come in addition. In Hamburg, it’s a super favorable 9.63% compared to the rest of Germany v. purchase price, so then we are at 471.525 Euro.
Let’s assume that our example buyer Katharina has a fair amount of equity on the side – namely 20%. We make this assumption in favor of the purchase scenario, because in times of low interest rates, people like to borrow more.
However, Catherine would have 94.305 euros equity, 377.220 Euro would have to be financed. Furthermore, we assume a bombastically low interest rate of 1% effective with a 20-year commitment, since Katharina is a civil servant secondary school teacher (this interest rate is currently only available for a 10-year commitment, so it would probably be closer to at least 1.5%).
If the loan is to be paid off in the 20 years, the monthly repayment rate is 1.734 euros. In addition, there are reserves for the maintenance of the property, which we calculate at 1.4% p.a. use. This results in 502 Euro per month; so in total we have a total monthly burden of 2.236 Euro.
Who swallows at the maintenance costs: This is not a wild assumption, but realistic values, like Gerd Kommer detailed in "Buy or rent?: How you make the right decision for you "* and this Blogpost here explains and proves.
Maintenance costs are underestimated by most buyers unfortunately strongly. Broker or. Sellers and other stakeholders from the real estate industry contribute to this by proposing much too low benchmarks. Of course, they want to sell the place and don’t want to scare off potential buyers with high maintenance costs.
Back to the calculation: Our example tenant Max pays 1.219 Euro per month for his comparable 100 sqm apartment. Thus he has compared to Katharina in the month 1.017 euros more at his disposal, which he does not have to spend on housing costs.
Does he put the remaining money now monthly together with the initial assets of 94.305 Euro (Max has of course saved as much as Katharina before), so he has a net worth of 574 Euro after taxes and inflation.783 Euro at the end of 20 years.
The property, on the other hand, has a value of 430.106 euros, because after inflation there has been no real increase in the value of real estate since the 1970s (more on this below). If you see it differently: In order to have the same asset value as Max, Katharina’s property would have had to have increased in value by 34%. This is much more than zero.
In addition, Katharina has paid her bank 38.952 euro given. While the property stagnates in value, Max continues to get over 4% p.a. real return on his assets. From this he can pay his rent forever and ever.
So he could get a so called perpetual annuity of 1 Euro per month for his lifetime.997 euros net over 40 years – from the current yield of his investment alone – without scratching his assets. This he could then still bequeath completely for example.
Max could also pay off over 40 years 2.581 Euro to pay off if he would use up his assets. Thus, after his rental costs, he could have 1.362 euro on top raushauen.
Still questions?
All these aspects (and perhaps more, which we do not have at hand), should first be included in a comparative calculation to weigh between renting and buying. In case you want to do some math too: Use our calculator at the end of the article!
"With a home of my own I am safely positioned and the house of friends has also already had a decent increase in value."
Perhaps you think: Now the two come here again with dubious capital investments, but such a small house is nevertheless much safer!
Unfortunately, in our opinion, this is not really the case. Many risks are simply swept under the carpet when buying a house.
At first, one sits with such a real estate on a quite beautiful lump risk. Because while you’re super diversified with a broad, globally diversified securities portfolio, for example, with a house you have.. a House. And the value of the house depends on many factors, which are often not in the own sphere of influence.
In general, many assume strong increases in the value of real estate. Sure – every seller will tell you why exactly his property will increase in value in the next few years. Statistically, however, such grandiose increases do not exist in the long term! On the contrary: Between 1971 and 2015, the value increases in Germany were on average -0.2%, adjusted for inflation. We repeat: minus 0.2%.
What everyone is looking at, however, are the increases in value in recent years. Between 2016 and 2020, in fact, there were exorbitant real increases of over 7% per year. However, there is hardly anything more crazy than to conclude from five years of data that the returns will remain this high in the future. Returns always revert to their long-term average (this is called regression to the mean). No firm belief in sustained excess returns will change this.
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Even if you keep hearing that Aunt Jaqueline’s or Cousin Michael’s properties have increased in value – don’t forget: For every house that is now worth more, there is one that is worth less. Simple statistics at a 0% increase on average. And those whose properties have lost value usually don’t talk so loudly about it.
Short fun fact: Real estate fluctuates strongly in value in the meantime! However, this is not (regularly) noticed by the owner, because he does not evaluate his property annually. In addition, the fluctuations in the value of owner-occupied homes are not reported all day long in the media, and so the fluctuations of stocks and other securities seem much wilder. But also in the real estate market it goes sometimes strongly in the two-digit percentage range up and down.
What is really interesting, however, is that over the long term, the increases in value are clearly on the side of the stock market. There has never been a period in the history of the MSCI World stock index when there was no positive return after 15 years. As I said, on average, real rd. 5-6%, after taxes still over 4% in it.
The thought suggests itself that the missing increases in value should only apply to economically less attractive regions. You might think: "Yeah, maybe it’s like that in Mecklenburg-Vorpommern, but not in Hamburg!".
But there is no evidence for generally higher value increases in the big cities than in the countryside with regard to historical data.* Fundamentally higher price levels in cities should not be confused with higher returns.
A real, significant increase in value is generally seen more in up-and-coming regions, such as most recently Berlin, but not in the already popular residential locations. Because if a location is already considered good, i.e. that is generally known, this will already be priced in – and thus no additional return is "exploitable".
But which is the next rising region and – very important – how long will this last?? No idea. What impact will technological advances (cue self-driving cars) and the home office trend since Corona have on real estate prices in big cities as more and more people move out? No one can predict that. Also, the general population trend will probably influence the price trend.
But honestly – even if you could estimate the value development better: Do you want to move somewhere just because you speculate on an increase in value?? Do you not choose your place of residence according to other criteria??
Ok, so while we shouldn’t speculate on an increase in value for houses, at least we don’t have to pay cold rent at the end of the loan term anymore. But you should keep in mind: If we don’t manage to pay off the loan and have to sell prematurely, it will be gloomy. Why? That’s why:
Equity risk
A silly word – we’ll take it apart for a moment. Suppose you buy a house. But now you have to sell it before the loan is paid off, because you have separated from your husband and you can’t afford the cottage alone. The house cost 400.000 euros. You had put some money aside and 120.000 Euro equity invested. The rest you have borrowed from the bank.
Now the value of your home has not developed so well, but has fallen by 10%. However, the 10% loss in value results in a 33% loss in equity! Why is that?
The total loss of value (40.000) you have to deduct from your equity, because the house does not belong to you yet. Then you still have 80.000 Euro. Before you had 120.000 Euro. Of course, you still have to service the loan or. pass on to the new buyer. And you can only get your equity back at ⅔ of the time.
Besides such a moderate example, there are enough cases where an early sale leads to total bankruptcy because the sale price does not cover the remaining debt, not to mention the lost equity.
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"Interest rates are super low right now – we have to buy now"
By the way, the topic of equity risk is very topical right now: Interest rates are still in the cellar. But the real estate prices are pretty high. Now people borrow large amounts of capital (because interest rates are so low, yay!!) and get into too much debt.
Many properties in good locations are grossly overvalued based on current prices, such as.B. in Munich. If there is a small downward slide in value, you can reduce your equity pretty quickly due to the credit leverage effect described above – all the way to a complete loss.
Exactly this scenario we know from somewhere… Hm… What was there again? Oh yes, this real estate crisis in the U.S., so around 2008/2009 rum. You know. So, in the next financial crisis, the over-indebted home builders who thought they were completely uninvolved because they didn’t buy evil shares can take it on the chin.
However – one sentence is valid in any case: The higher the share of outside capital, the lower is your expected return and the higher is the risk you are sitting on. The higher your equity, the more likely it is that a purchase is worthwhile, because you have to pay less rent. Rent? Yes! Capital rent! To your bank.
Do I buy a house or not?
Phew, pretty tough stuff, we think. For us it would be much too risky to buy a house. And such an investment in your own home may represent a part of your retirement provision, but it often performs significantly worse compared to an alternative form of investment, as we have seen in the example calculation above.
Not only that – a house is also difficult to "un-save" in old age, i.e. to consume in order to close the monthly income gap. Unfavorably it becomes in particular if one z.B. needs care and actually needs cash instead of real estate. Then, having a home (often much too large) makes one quite inflexible.
However, if you don’t buy a house and invest in your wealth accumulation for your old age, you will unfortunately have a real problem in the future:
If you as a tenant every month your whole income raushaust, that is in the long run by far the worst scenario. Because house buyers are at least forced to save, because they have to repay their loan and otherwise threaten foreclosure. And they live rent-free in old age (though not free of charge: please don’t forget the ancillary and maintenance costs).)
You will be much better off financially in many cases if you don’t buy a house but invest, but then you have to do that too! The calculation only works if you regularly put aside after rent payment what others put into their loan payments – i.e. you raise the same savings rate without being forced to by your lending bank.
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Do you doubt your self-discipline? Set up a standing order and invest regularly on the capital market according to a simple scheme . A boring, global securities portfolio is much lower risk and much easier to maintain than buying real estate.
Real estate = cemented lifestyle decision
Again, to get the hang of it at the end: Of course it is perfectly legitimate to buy a house! If this is your huge desire and you have enough equity – go for it! Just be prepared that it’s not the best investment, but a lifestyle decision. And you should urgently consider a few other aspects as well:
You would like to live in a really idyllic place, so that your children can move around and develop freely? It is unclear whether your children, when they reach a double-digit age, will also like the romantic idea of living in the country as much as you do. Anna, for example, grew up four kilometers from the village center and has not-so-good memories of waiting at the bus stop at age 17 for her mother to pick her up in the car.
Regardless of all the resentment that your children might show you, you will have to spend a lot of time as a cab driver if the bus only passes twice a day.
Ok, so it doesn’t have to be the detached house in the countryside – a semi-detached house in the suburbs or a condo in the city would be nice too! But it is unclear whether your neighbors will be super nice or possibly really annoying.
And whether any changes in the infrastructure around your own place noise pollution and Co. can have as a consequence. These are all external factors that you are at the mercy of, while renters can simply squeeze in a few hours to get a picture of where you want to live.
It is also unclear – if you believe the statistics – whether you two lovebirds will not separate at some point. And then you will not only have to deal with the divorce but also with a real estate. Such thoughts may be uncomfortable and frightening at first, but honestly, chances are that you will not stay with the same partner all your life. Every third marriage is divorced.
It is generally very difficult to predict from the current life situation what you will like in the future and what will make you happy . According to studies, we cannot reliably judge what will satisfy us in the near future. Our desires and preferences change much more often than you might think.
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Should all this scare you off? No, please don’t! As always, however, it’s important to weigh all the factors in their entirety and make a conscious decision to buy or rent. Take charge, don’t be told by real estate sharks or fortune bloggers and consider the many points. And then decide for yourself what you will do.
In summary: What can help you make a rental or purchase decision
- Calculate times
Use our Rent-or-buy calculator, To get an idea of what financial advantages or disadvantages you can expect when buying a house. Don’t let the advertising and the masses unsettle you. A lot of people make money from buying a house, which means that real estate is marketed in a very positive way. - Test it
You’re unsure if you want to live where you’re currently planning to buy a house forever? Then rent first and see if you like it! Think about other (planned) family members, too, and leave romance out of the equation: Small children may love the country life at the A**** of the heath, but with the onset of puberty, the whole thing can degenerate into big problems. - Don’t fool yourself
You have calculated everything ten times and the house purchase is not worth it? You want to move to the countryside, although you can imagine that your children will not like it? You still want it all? Ok! But be aware that you make your decision despite the negative points and do not bend the facts to your advantage.
But just because "everyone" is buying houses doesn’t mean you have to or that it’s generally a good thing. So think carefully about why you want a house and whether it will make you happy in the long run or whether living in rent is not a better option for you.
The best at the end: This article reflects our personal opinion as private investors – we have nothing to do with investment advice. Please read the disclaimer, question everything critically and look at as many different sources as possible!
Rent-or-buy calculator
Use the rent-or-buy calculator to compare two scenarios and find out which is the more advantageous: buying or renting a property and investing the equity plus the difference between loan repayment and maintenance costs minus rental costs.
Should be a mystery to you how to invest and what is reasonable to do there – come to our free webinar!
This is how you feed the calculator:
- Equity: How much money do you have for the planned real estate purchase already on the side? Enter the amount you can finance yourself here.
- Purchase price of the property: Enter here how expensive the object is.
- Incidental purchase costs: Enter here the notary fees, real estate transfer tax and broker commission. Select whether the purchase costs are variable as a percentage (usually 12.5%) or you know the amount in euros. Make sure that you have selected the correct field with the button.
- Effective interest p.a.: For the loan interest rate you should use the effective interest rate – not the debit interest rate! – specify. Because here are almost all costs of the loan taken into account. The effective interest rate must always be provided by the lender.
- Repayment period: Enter the period in years in which you will have repaid your loan.
- Maintenance costs per month (1. year): If you do not know these costs, a valid assumption is 0.125% of the purchase price per month, or. at least 0.08% if it is a new building that has just been completed.
- rent per month (1. Year): Here you enter the cold rent to be compared (ancillary costs are omitted for both scenarios for the sake of simplicity).
Since the difference between monthly loan repayment plus. maintenance reserves and rent payment is to be invested in the capital market, you still need to specify your assumptions for the value increase. We have already pre-entered our assumptions; you can of course adjust them.
- Investment return p.a.: The assumption for the investment return is based on the long-term appreciation of an ETF on the MSCI World.
- Inflation p.a. (optional): For inflation we take the generously rounded up average value of the last 20 years.
- Tax rate (optional): The taxes on investment income include the final withholding tax and soli, you may also have to add the Church tax add.
For a detailed comparison click on "Enter increase rates" and add the assumed annual increase in value of the property as well as cost increases for rent and maintenance.
Last but not least, press CALCULATE NOW. Then you will find out the respective values of both scenarios at the end of the redemption period. Both amounts are inflation-adjusted values; the capital assets are also the net assets (i.e., after taxes). Furthermore, you can see what net monthly pension you could pay yourself for life from your saved capital without using up your assets (this is called a "perpetuity" in the jargon).
Please note that the calculation system includes some fuzziness: As a result, the values for the tenant (capital assets and pension) are somewhat too low!
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