Hmm, one question, why don't you adjust the repayment to the rental price and invest the same amount as the tenant? It doesn't matter whether the property is paid off at a price of 1 million, as you could sell it at the end of the day or pay it back easily at the end of your calculation. So for me, buying would always win out over renting.
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@Therealfenrisofabalon That is indeed a very interesting consideration. Since the Berlin example is relatively simple, I've done the math. Even if it is theoretically feasible, the biggest challenges should lie in the following points:
- The risk becomes increasingly unpredictable as you would have a very long loan term and don't know what the terms of loans will be in 30 or 45 years.
- If you sell early, there are additional costs for deleting the land charge and redeeming the loan with the bank
- If you have to sell and are under time pressure, you will most likely have to accept a lower price or sell in a very unfavorable market situation
- You need to find a bank that will accept such a long loan term without the interest on the loan going up
Apart from that, the actual calculation of the repayment installment is not so trivial, as rents increase over time, but your installment is usually fixed for the term of the loan. So we start with a lower tenant charge and end - at the end of each loan term - with a higher tenant charge.
If we adjust the repayment for the first loan to 1% in the Berlin example, the buyer starts with a monthly payment of EUR 2,639 + EUR 250 reserves for maintenance and modernization + EUR 20 for non-recoverable ancillary costs of the apartment = EUR 2909.25. The rent remains unchanged at 2,590 euros. In the 15th year, the buyer's debt is then 2,995.51 euros and the tenant's is 3,362.87 euros. The remaining debt amounts to 708,093.10 euros.
As before, we assume a loan interest rate of 4% for the first follow-up financing. If we assume a repayment of 2.1% for a term of 15 years, the initial monthly charge for the buyer is EUR 3,962 and EUR 3,362 for the tenant. In the 30th year, the buyer's monthly charge is then EUR 4,078.95 and the tenant's EUR 4,763.48. This leaves a residual debt of 403,147.06 euros. Incidentally, the tenant's capital is now around 1.4 million euros.
For the third loan, we can assume a term of 10 years with an interest rate of 4% and a repayment of 8.149%. This means that the loan is paid off after these 10 years and the buyer's installment (31st year: 4,570.59 euros, 40th year: 4,666.01 euros) is continuously lower than the tenant's (31st year: 4763.48 euros, 40th year: 5,669.33 euros)
If the buyer only pays costs for maintenance and modernization in the last 20 years, the tenant's final capital amounts to approx. 3.8 million euros after a total of 60 years and grows until the last year. The corresponding modification of the parameters in the Berlin example would therefore ensure that the buyer is left with significantly higher final assets.
Due to the risk factors mentioned above, however, it is questionable whether this will work out. It would take a lot of balls to pull it off. Ultimately, this is just one scenario among many and does not mean that a buyer will always win in this setting. In particular, a property adapted to the respective living situation has a particularly disadvantageous effect for the buyer.
- The risk becomes increasingly unpredictable as you would have a very long loan term and don't know what the terms of loans will be in 30 or 45 years.
- If you sell early, there are additional costs for deleting the land charge and redeeming the loan with the bank
- If you have to sell and are under time pressure, you will most likely have to accept a lower price or sell in a very unfavorable market situation
- You need to find a bank that will accept such a long loan term without the interest on the loan going up
Apart from that, the actual calculation of the repayment installment is not so trivial, as rents increase over time, but your installment is usually fixed for the term of the loan. So we start with a lower tenant charge and end - at the end of each loan term - with a higher tenant charge.
If we adjust the repayment for the first loan to 1% in the Berlin example, the buyer starts with a monthly payment of EUR 2,639 + EUR 250 reserves for maintenance and modernization + EUR 20 for non-recoverable ancillary costs of the apartment = EUR 2909.25. The rent remains unchanged at 2,590 euros. In the 15th year, the buyer's debt is then 2,995.51 euros and the tenant's is 3,362.87 euros. The remaining debt amounts to 708,093.10 euros.
As before, we assume a loan interest rate of 4% for the first follow-up financing. If we assume a repayment of 2.1% for a term of 15 years, the initial monthly charge for the buyer is EUR 3,962 and EUR 3,362 for the tenant. In the 30th year, the buyer's monthly charge is then EUR 4,078.95 and the tenant's EUR 4,763.48. This leaves a residual debt of 403,147.06 euros. Incidentally, the tenant's capital is now around 1.4 million euros.
For the third loan, we can assume a term of 10 years with an interest rate of 4% and a repayment of 8.149%. This means that the loan is paid off after these 10 years and the buyer's installment (31st year: 4,570.59 euros, 40th year: 4,666.01 euros) is continuously lower than the tenant's (31st year: 4763.48 euros, 40th year: 5,669.33 euros)
If the buyer only pays costs for maintenance and modernization in the last 20 years, the tenant's final capital amounts to approx. 3.8 million euros after a total of 60 years and grows until the last year. The corresponding modification of the parameters in the Berlin example would therefore ensure that the buyer is left with significantly higher final assets.
Due to the risk factors mentioned above, however, it is questionable whether this will work out. It would take a lot of balls to pull it off. Ultimately, this is just one scenario among many and does not mean that a buyer will always win in this setting. In particular, a property adapted to the respective living situation has a particularly disadvantageous effect for the buyer.
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•@DonkeyInvestor However, if we assume that the buyer pays off the loan after the second loan, as this is possible free of charge at Zap and he has the same amount of capital as the tenant (1.4 million), then he can invest more each month and have his own property. Of course, it is difficult to estimate the conditions for the future, but selling the property would always bring more than just getting the deposit back. I'm only mentioning this so explicitly because this is my current strategy. I'm paying off my property, have secured the future with a forward loan and can pay off the remaining loan with my reserves at the Zap and will then be able to invest even more. However, this approach was only possible due to the low interest rates and, of course, the knowledge that you can finance at 110% without having to pay a large interest premium.
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@Therealfenrisofabalon Where does the buyer's 1.4 million come from? The tenant's 1.4 million is purely made up of the capital he saves compared to the buyer.
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@DonkeyInvestor the chapter comes from the assumption that loan and rent are approximately equal. In other words, a lower percentage repayment is used to achieve the desired effect. According to your calculation, rental price increase, this would theoretically lead to him having more money available as a buyer, since the burden on the loan remains the same and does not increase as a percentage.
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@Therealfenrisofabalon nope, the 1.4 million is only available to the tenant. This arises when the equity minus the deposit is invested on the stock market for 30 years. However, the buyer has the equity in the property.
In my example, the repayment was chosen so that it is higher than the rent at the beginning and lower than the rent at the end - so that the tenant and buyer spend roughly the same amount over the term of the loan.
In my example, the repayment was chosen so that it is higher than the rent at the beginning and lower than the rent at the end - so that the tenant and buyer spend roughly the same amount over the term of the loan.
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@DonkeyInvestor Wait, so you're assuming that the buyer or tenant starts with 1 million euros for a purchase price of one apartment? I thought you were only taking into account the difference between rent and loan and applying this to period x. My calculation is 110% financing and that corresponds to rent. So the buyer can invest the same as the tenant.
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@Therealfenrisofabalon I am assuming the data in the example 😅. The buyer has equity of EUR 250,000, which he would invest as a tenant - minus the deposit - in a global portfolio.
Even with 100% financing, your example no longer works. The cheapest provider I could find would charge 3.88% interest, which corresponds to a monthly installment at 1% repayment of 4400 euros - significantly higher than the rent. I don't think it should be possible for the overwhelming majority to get 110% financing for a property for their own use with a repayment so low that it is on a par with the basic rent. And even if it were, maintenance reserves would still have to be built up. In other words, the monthly installment would have to be significantly lower than the rental costs.
Even with 100% financing, your example no longer works. The cheapest provider I could find would charge 3.88% interest, which corresponds to a monthly installment at 1% repayment of 4400 euros - significantly higher than the rent. I don't think it should be possible for the overwhelming majority to get 110% financing for a property for their own use with a repayment so low that it is on a par with the basic rent. And even if it were, maintenance reserves would still have to be built up. In other words, the monthly installment would have to be significantly lower than the rental costs.
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•@DonkeyInvestor currently rather difficult, that's true.
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