Calculated: Own a home or remain a tenant?

Part 1

There are many reasons to decide for or against a property for owner-occupancy. Owning a property is often also a question of preferred lifestyle. This series of articles, however, is all about the financial aspect of the decision. You will learn how to make a financially sensible decision to rent or buy in your individual situation and how to calculate it yourself. This 1st part is about the basics. It shows you what should be considered in your decision:

• The alternative investment to owning a home (spoiler: you're on GetQuin and should know them).
• What costs are involved in buying a property or renting and are relevant for a comparison
• Which parameters and variables need to be considered and estimated if necessary
• How to make reasonable assumptions for these parameters and variables
• How to calculate the assets of the buyer, the renter and their difference
• What should be considered when comparing the assets generated

In the 2nd part ( https://app.getquin.com/activity/evjQvBldso ) I will illustrate what I have learned with a real example. This part will help you to apply the considerations from the 1st part correctly in practice for your individual buy or rent decision:

• Detailed calculation of a real-life example.
• Step-by-step adjustment of this example to make it gradually more realistic

Since many parameters can only be estimated and the housing situation differs greatly from region to region, we take a look at these aspects in the 3rd and last part of this series ( https://app.getquin.com/activity/GEBmMewkKS ):

• Effects of changed parameters on the result
• Sketching of realistic scenarios that tilt the example from part 2 in the other direction
• Calculating further examples, which are welcome to come from the community.
• Conclusion

Rent vs. buy - the basic idea

You often hear arguments like "Everyone pays off a house in the course of their life - either their own or the landlord's" or "Buying is always worthwhile, I then pay the rent into my own pocket and live rent-free for the rest of my life once the financing is complete". At first, of course, this sounds logical. However, it is worth taking a second look. Financing a property for owner-occupancy usually requires a high level of equity, which cannot be invested in the capital markets, as well as a loan, the repayment of which incurs not inconsiderable interest. In addition, property owners must expect costs for modernization and maintenance, which a landlord may not pass on to the tenant. The tenant therefore has a high initial capital compared to the owner, which generates corresponding returns and does not have to be used to avoid debts. In addition, the monthly rent is often - at least in the first few years of financing - lower than the amount a buyer must pay for repayment, interest and maintenance. This difference can also be invested profitably in the capital markets. Is this head start enough for the tenant to build up assets that will later cover the monthly rent and perhaps even more? That's what we'll look at in this series of articles.

Costs, parameters and variables

For the tenant primarily the following expenses are to be considered:

• Cold rent
• Security deposit (this cannot be used to generate capital income)
• If renting an apartment in an apartment building, additional operating costs such as elevator maintenance may be incurred
• Moving expenses, if applicable

The tenant also depends on the following variables to be estimated:

• Yield on the capital market
• Development of the rent

A buyer has to reckon with these costs:

• Opportunity costs for the equity
• Purchase costs of the property
• Incidental purchase costs (land transfer tax, notary fees, land register entry, broker commission)
• Surveyor
• Interest on a loan
• If applicable, additional operating costs if an apartment is purchased in an apartment building. For example, costs for property management or maintenance of an elevator.

The buyer must also estimate these variables:

• Maintenance costs (carrying out necessary repairs, e.g. new roof to maintain the value of the property).
• Costs for modernization (e.g. conversion of the heating system or conversion of the attic to increase the value of the property)
• Conditions of follow-up financing

If the property is sold in the course of the years, sales costs may still be incurred:

• Small things like energy certificate, extract from the land register, ...
• Costs for valuation
• Broker commission
• Cancellation of the land charge
• Early repayment fee, if an existing loan is terminated
• Relocation costs

If a sale is planned, the value of the purchased property must of course also be estimated.

For both tenants and buyers relevant are

• Inflation
• Legal changes, e.g. with regard to taxation

Especially the latter cannot really be estimated and will therefore be ignored in this article.

What about costs like garbage fees or insurances?

Costs that are apportioned by a landlord to the tenant via the ancillary costs (e.g. garbage charges, insurance, property tax, heating costs, ...), or costs that the tenant bears directly in most cases anyway (e.g. electricity and Internet costs), do not play a role. These are incurred when a property is used by the tenant or are passed on to the tenant by the landlord, which is why they can be ignored.

Are there any other financial aspects?

Yes, but these are very individual, difficult to quantify and are accordingly not taken into account in the calculations. However, they can certainly be relevant in individual cases. The following should be mentioned here, among others

• Buyers often afford more living space than tenants. In this case, not only the purchase and rental costs of two identical properties would have to be compared, but also the purchase costs of a somewhat larger property with the rental costs of a somewhat smaller property.
• Buyers often invest in higher quality, and therefore more expensive, equipment than renters.
• Buyers often accept a longer commute to work, which results in higher transportation costs.
• Consequential costs of insurance claims that are not covered. For example, accommodation costs in the event of water damage.
• Relocation is not as easy for a buyer, which is why lucrative job offers that are not accessible from the buyer's own property may not be taken up.
• Repair costs can be low or high, depending on the buyer's craftsmanship and how much the buyer can do themselves.
• Financial contributions from the family, which only occur in the event of the purchase of a property, represent a possible advantage for buyers. For example, the granting of an interest-free loan or cash gifts.
• As a real estate buyer, one is subject to a positive forced savings contract. One must pay the monthly installment to the bank. Even in the case of unplanned unemployment, illness or other increased costs / reduced income. If it is no longer enough to go to the cinema, then it is no longer enough. If you save monthly in a world portfolio, you may be tempted to reduce the savings rate in such cases and go to the cinema after all.
• ...

How can plausible values for the variables be determined?

Many values can be easily determined, e.g. the amount of rent or the purchase price, the expected incidental costs per state, credit conditions, ... However, some aspects are not yet fixed today, which is why assumptions have to be made for them.

About the developments on the capital market there are valid historical data. Even if future performance may deviate from this, they still give an indication of how much return could be achieved with capital market investments. If we take the MSCI World, [1] suggests that an increase in value of around 5 - 7% per year is realistic. In [2], the annual, inflation-adjusted (!) increase in value of a global stock portfolio is put at 5.2% over the last 120 years and at 7.6% from 2010 to 2019. You can, of course, simply select the index of your choice on the website of your choice and have the performance displayed there.

The development of the rents, as well as the purchase or sales prices of real estate, is unfortunately very difficult to substantiate with historical data. This is partly due to the fact that real estate is more subject to local conditions and you can't simply live in the global average - unlike stocks in the MSCI World. Complicating matters is the lack of independent statistics going back more than a few years. Unfortunately, this is particularly dangerous. Because of the recency bias phenomenon, we attach more importance to events in the recent past than to events that happened longer ago. This means that we instinctively assume that rents and real estate prices will continue to rise at the same pace due to the high increase in recent years. This is where the regression to the mean catches us cold, stating that value developments converge in the medium and long term. Years with above-average returns are therefore followed by years with below-average returns, and vice versa. [2] assumes inflation-adjusted (!) annual increases in the value of real estate in Germany of 0.6% between 1970 and 2020 and 5.3% between 2011 and 2020. So, especially in the environment of now rising interest rates, a few lean years could now follow.

Let's take a look at the rental prices [3] assumes increases of between 2.1% (first-time occupancy) and 2.7% (reletting) per year over the past 31 years. Only new leases are considered. Existing rents generally increase much less [2]. In [2], the inflation-adjusted (!) rent increases of new and existing rents in Germany from 1998 to 2018, excluding modernizations, are put at less than 0.3% per year. According to [4], inflation averaged 1.37% per year during this period.

Let's stay directly with Inflation. Here, too, it is helpful to look at the past, which according to [4] has been 2.5% for Germany over the last 62 years. If we look only at the last 20 years, we get a value of about 1.5%. In parallel, the ECB's target of 2% inflation in the medium term should also be taken into account when determining a sensible value [5].

Let's move on to Maintenance. Opinions differ about the amount. There is often talk of a flat rate per square meter, which - depending on the age of the property and whom you ask - ranges between 0.60 and 1.50 euros per square meter and month. Many practitioners criticize here however the much too scarce calculation and refer instead to the Peters formula. This assumes the 1.5-fold production costs of the real estate within 80 years. Attention, production costs are something else than the purchase price of a real estate + property. Assuming the production costs are 2,000 euros per square meter, this results in monthly maintenance costs of 2,000 euros * 1.5 / 80 / 12 = 3.125 euros per square meter. What seems unrealistic in both approaches is the constant value, which does not grow over time with inflation / the current value of the property. Gerd Kommer in [2] considers an annual reserve of 1.5% - 2.5% on the current value of the building part as reasonable. A high age of the property, a poor structural condition, high quality equipment or a detached building rather provide for higher maintenance costs closer to the 2.5%. If we continue to assume 2,000 euros in construction costs per square meter, Kommer considers reserves for maintenance between 2,000 euros * 0.015 / 12 = 2.50 euros and 2,000 euros * 0.025 / 12 = 4.17 euros per square meter and month to be appropriate. These should be adjusted for inflation and explicitly do not include the costs of modernizations.

The conditions of a follow-up financing are unfortunately impossible to predict today. In principle, every buyer should calculate how high interest rates can rise so that the budget is still sufficient. If the personal risk of a sharp rise in interest rates is considered critical, it is possible to buy lower interest rates by fixing the interest rate for a long time. Alternatively, there is also the possibility of a building savings contract as a hedge.

How can the two investments be compared?

The calculation of whether renting or buying is worthwhile is made in several steps / parts.

Purchase of a property:

• Full purchase cost of the property = purchase cost object + ancillary purchase costs + appraiser.
• Amount of the loan = full purchase cost of the property - equity capital
• Initial monthly interest = amount of loan * interest rate / 12
• Initial monthly repayment = Amount of loan * Repayment rate / 12
• Monthly installment = Initial monthly amortization + Initial monthly interest

The loan is reduced with each installment, which is why the absolute interest payable must also be recalculated over and over again and falls in absolute terms over time. Since the monthly installment remains unchanged at the same time, the monthly repayment increases.

• Monthly repayment = Monthly installment - Remaining loan amount * Interest rate / 12
• Residual debt = Amount of the loan - Total repayment over the term of the loan

To calculate the remaining debt, I recommend using an appropriate calculator on the Internet such as https://www.zinsen-berechnen.de/kreditrechner.php or Excel. If follow-up financing is needed to pay off the remaining debt, we start again at "Amount of loan", select the remaining debt for this and repeat the calculations from there.

• Monthly accruals = Maintenance costs according to Peters' formula or Gerd Kommer (annual adjustment of accruals to estimated inflation) + accruals for modernization
• Monthly charge = monthly installment + monthly accruals

Once the loan has been fully paid off and no follow-on financing is required, the monthly charge equals the monthly accruals. In case you want to sell your property in the meantime, you still have to calculate the selling price.

• Selling price = purchase costs of the property + value development since purchase + value increase due to modernization - selling costs (if applicable, broker's fee, cancellation of the land charge, moving costs, prepayment penalty, ...)

After a sale you will have to buy another property for your own use or decide for a tenancy with world portfolio.

Rent of a property:

• Available initial capital = Equity - Deposit
• Monthly savings rate = Monthly load buyer - cold rent

The available start-up capital is paid into the world portfolio, as is the monthly savings rate - provided it is positive. If the cold rent exceeds the monthly burden of the buyer over time, the corresponding amount must be withdrawn from the world portfolio instead.

• Monthly withdrawal = cold rent - monthly burden buyer + taxes payable on profit

What is actually important here is the correct consideration of the tax, which is currently 26.375% on capital gains in Germany, provided there is no church tax liability. This calculation can be implemented in Excel with a little effort and will be made clearer again in the second part of this series of articles with an example calculation.

Since the value of our world portfolio increases over time, it must be recalculated annually.

• Value world portfolio = (Old value world portfolio + Monthly savings rate * 12) * Annual increase in value in percent

or in the withdrawal phase:

• Value World Portfolio = (Old Value World Portfolio - Monthly Withdrawal * 12) * Annual Value Growth in Percent

Strictly speaking, of course, the world portfolio does not suddenly generate the assumed return at the end of a year, as it does here. However, this is only a minimal inaccuracy, since only a relatively small portion flows into or is withdrawn from the portfolio each year. This circumstance is ignored - in order not to complicate the calculations even further.

Of course, the calculation must also adjust the rent at regular intervals to the assumed rent increase. More on this in the 2nd part of the series of articles.

Comparison of buying vs. renting:

At the end of the period under consideration (e.g., until the tenant/owner passes away), three primary factors play a role in analyzing which makes more sense

1) Value of the buyer's property

2) Value of the tenant's deposit

3) Is the value of the tenant's deposit rising or falling?

The easiest way now is to compare 1) with 2). If 1) is higher, buying is the better financial decision. If 2) is higher, renting is the better financial decision.

In my opinion, however, it is not that simple. I buy / rent a property to live. If I would stay in my property until the end of my days in case of a purchase, I am more interested in whether I would have more financial possibilities as a tenant. And that brings 3) into focus. If my deposit value, after deducting rent, nevertheless continues to rise unceasingly, I can use the surplus for other consumer expenditures that I would not be able to afford as a buyer. Of course, in this case the buyer could sell his property, buy / rent a smaller apartment and use the surplus for himself. The question is, however, does the buyer want to do that? Selling a property always involves cost, effort and stress, just like moving to a new property. A sale can drag on for months or years, depending on the state of the market, and there may be personal memories attached to the property being sold that you don't want to "sell." And all this at an advanced age. The portfolio is simply much more flexible here than real estate and avoids a high cluster risk. If the goal is not asset preservation but asset depletion, a rental relationship may even make more sense if the value of the portfolio has fallen in recent years but is high overall.

I think it is more likely that I will treat myself to more in my old age if my portfolio grows steadily - even if a property would have a higher value than a portfolio. But that is an individual decision and can / must be made by everyone. For me, however, only in the following constellations does the buyer "won":

• The value of the property at the end of the period under consideration is significantly (!) above the value of the deposit or
• The value of the property is at least as high as the value of the deposit and the deposit loses value

In all other cases the tenant the settlement.

End part 1

That should be enough theory now. In the next part we will transfer this into practice and calculate a real example!

Are you still missing something in the consideration? I am also only a layman in the field and am happy about suggestions for improvement => send them into the comments!

You have an exciting scenario that you want me to calculate? I am also happy about it in the comments. I will gladly calculate it for you in the 3rd part ( https://app.getquin.com/activity/GEBmMewkKS ) of this series of posts.

Are you facing a decision yourself about whether or not to buy a property for owner-occupancy, or have you already made that decision? Feel free to share your thoughts or reasons why you made that decision in the comments.

You can find the 2nd part here: https://app.getquin.com/activity/evjQvBldso

Kudos also go to @Koenigmidas who reviewed the article as a real estate owner and provided valuable input.

Sources

[1] https://www.msci-world.de/kurs/

[2] Buy or rent? Gerd Kommer, 08/2021, 978-3593514765

[3] https://de.statista.com/statistik/daten/studie/326031/umfrage/miet-und-preisentwicklung-deutscher-wohn-und-gewerbeimmobilien

[4] https://www.laenderdaten.info/Europa/Deutschland/inflationsraten.php

[5] https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.de.html

#immobilien
#learn
#mieten
#alternative
#esel

Calculated: Own a home or stay a tenant?

Part 2

In Part 1, we looked at the theory behind the financial aspects of buying and owning vs. renting. If you haven't read that part yet, bookmark this post here and read Part 1 first, you can find Part 1 here: https://app.getquin.com/activity/FoLdCxttXY

In the 2nd part, we will use these basics and theoretical principles to go through a practical example. It will help you to better apply the calculations in your individual situation. In addition, it shows impressively what gigantic sums are involved in the end:

• Detailed calculation of an example (scenario 1)
• Step-by-step adjustment of this example to make it gradually more realistic (Scenario 2 to 6)

tl;dr

I compare the financial burden of a tenant and a buyer in Regensburg over a period of 60 years. For this purpose, two similar houses - one for rent and one for purchase - were selected on immoscout and used as a basis. The variables (increase in rents, development of a world portfolio, maintenance reserves, ...) were chosen as they can be assumed as probable based on the explanations in the 1st part (in the 3rd part we look at what effects the adjustments of these variables have: https://app.getquin.com/activity/GEBmMewkKS). This scenario will be adjusted in the course of the paper so that it corresponds more closely to reality. This includes, for example, an optimization of the follow-up financing and the assumption that a tenant lives more in line with demand than a buyer, i.e. moves more often into a property that suits the respective life situation.

In the most likely scenarios 5 and 6, the tenant's assets are several million euros higher than the buyer's assets at the end of the period under consideration. Buying such a property is thus a very expensive decision in Regensburg and comparable cities. From a financial point of view, a purchase is therefore not to be recommended - as long as the general conditions do not clearly turn in favor of the buyer. We will look at what has to happen for this recommendation to be overturned in Part 3.

Real estate selection

The search is on for a house in Regensburg with enough space for a couple with two children due to see the light of day in the next few years. An office is additionally needed. The two are not gifted craftsmen, so the cottage should be relatively new. Since the two earn well, a young building is financially viable. In addition, a gas or oil heating system should be avoided if possible. Found actually two comparable offers - once for rent and once to buy (see pictures at the end of the post). The rental house is a bit more centrally located, offers an extra room, an extra parking space for a car and a larger living space (131m² vs. 115m²). The house for sale is 4 years younger for that and brings a larger lot. Both houses are mid-terrace houses, heated with district heating and bring a fitted kitchen. Overall, the couple likes the rental house a little better and would be willing to spend more money on it. However, the two properties are similar enough for this comparison. To avoid making this detailed example too complex, we assume that the couple will live for another 60 years and stay in the same property until then (this assumption is removed in scenarios 5 and 6). Retrieved data from Immoscout on 6/15/22 - yes, I've been writing this post for a while.

Scenario 1 - a simple calculation example

The cold rent is 1,880 euros plus 80 euros for two parking spaces, for a total of 1,970 euros. The deposit amounts to 4,400 euros. The house for sale was advertised for 789,800 euros. In addition, there are costs of 30,000 euros for the garage, for a total of 819,900 euros. The couple manages to bargain the seller down to 750,000 euros. They saved 200,000 euros of their own capital.

Calculation of the purchase and loan costs

The house is located in Bavaria, which is why the following incidental purchase costs apply:

- Real estate transfer tax 3.5%

- Notary fees 1,5%

- land register entry 0,5%

- Brokerage fee 3,57%

For an appraiser 2,000 euros are due. The complete purchase costs therefore amount to 750,000 euros * (1 + 0.035 + 0.015 + 0.005 + 0.0357) + 2,000 euros = 820,025 euros. After deducting the equity, a loan of 820,025 euros - 200,000 euros = 620,025 euros must be taken out.

The couple obtains a loan with a nominal interest rate of 2.65% and can afford 2.5% for repayment. The initial monthly interest to be paid thus amounts to 620,025 euros * 0.0265 / 12 = 1,369.22 euros. The initial repayment equals 620,025 euros * 0.025 / 12 = 1,291.72 euros. In total, therefore, a monthly installment of 1,291.72 euros + 1,369.22 euros = 2,660.94 euros is due. The loan has a fixed interest rate of 15 years.

Calculation of the costs for maintenance and modernization

The simple, but in practice probably significantly underestimated calculation of provisions for maintenance, would be in this case 1 euro / sqm / month * 115 sqm = 115 euros / month. Since I do not know the actual production costs per square meter, I estimate 2,000 euros / sqm. According to Peters' formula, this results in maintenance costs of 2,000 euros * 1.5 / 80 / 12 * 115 = 359.38 euros per month. Based on Gerd Kommer's assumption, maintenance costs would range between 287.50 euros and 479.17 euros. Since the house was built in 2020 and is not detached, we orient ourselves to the lower end and calculate maintenance costs of 287.50 euros per month. Necessary modernizations are not expected in the next few years, which is why we only set aside 12.50 euros for this and thus round the amount up to 300 euros.

Monthly burden on the buyer and residual debt after 15 years

The buyers have to transfer 2,660.94 euros per month to the bank during the first 15 years. To this must be added 300 euros for provisions, which increase annually with an assumed inflation of 2%. In the first year, the total charge is therefore 2,660.94 euros + 300 euros = 2,960.94 euros. In the last year of the term of the first loan, maintenance costs amount to 300 euros * 1.02^14 = 395.84 euros. So in the last year of the loan, the buyers pay 2,660.94 euros + 395.84 euros = 3,056.78 euros. The remaining debt, as it can be calculated e.g. with https://www.zinsen-berechnen.de/kreditrechner.php or Excel, amounts to 334,902.69 euros after these 15 years.

Development of the tenant's assets in the first 15 years

At the beginning, the tenant invests his equity (200,000 euros) minus the deposit (4,400 euros) amounting to 195,600 euros in his world portfolio. We assume that a share costs 10 euros at this point and that the tenant thus acquires 19,560 shares. This is important for the subsequent determination of profits upon withdrawal. The difference between the cold rent and the purchase cost in the first year is 2,960.94 euros - 1,970 euros = 990.94 euros. This is also paid into the world portfolio every month at the rate of 10 euros. After one year, 195,600 Euro + 12 * 990.94 Euro = 207,491.28 Euro have been accumulated. We assume an average performance of 6% per year, which means that after one year the value of the portfolio increases to 207,491.28 Euro * 1.06 = 219,940.76 Euro.

The tenants calculate with annual rent increases of 2.2%. The rent in the 2nd year is thus 1,970 euros * 1.022 = 2,013.34 euros. Since the buyer at the same time adjusts his provisions in the amount of inflation by 2%, in the 2nd year per month only 2,660.94 euros + 300 euros * 1.02 - 2,013.34 euros = 953.60 euros can be invested by the tenant. At the same time, of course, the price of a share in the world portfolio has risen from 10 euros to 10.60 euros. For the 953.60 euros, the tenant thus receives 90.82 shares per month. Including the 6% performance, the tenant's assets will increase to (219,940.67 Euro + 953.60 Euro * 12) * 1.06 = 245,266.90 Euro at the end of this 2nd year.

Continuing the calculations, in the 15th year the rent amounts to 1,970 euros * 1.022^14 = 2,671.65 euros, which still allows the tenant a monthly investment of 3,056.78 euros - 2,671.65 euros = 385.13 euros. At the end of these first 15 years, the tenant's assets in the World Portfolio increase to approximately 690,435 euros. How is it possible to generate such a high level of wealth with only 195,600 euros in starting capital? The compound interest effect helps. The 195,600 euros alone have become 195,600*1.06^15 = 468,766.78 euros in the 15 years. In addition, there are the monthly deposits totaling over 125,000 euros, which of course also earned interest.

Monthly burden of the buyers and residual debt in the years 16 to 30

In order to repay the remaining debt of 334,902.69 euros, the buyer takes out another loan with a 15-year fixed interest rate after 15 years. The nominal interest rate has meanwhile risen from 2.65% to 4%. In order for the loan to be paid off after 15 years, the buyer must repay at 4.876%. Initially, 334,902.69 * 0.04 / 12 = 1,116.34 euros in interest must be paid, while 334,902.69 * 0.04876 / 12 = 1,360.82 euros are repaid. The monthly installment is therefore 2,477.16 euros. Costs for maintenance and modernization are calculated unchanged and amount to 395.84 euros * 1.02 = 403.76 euros per month in the 16th year, resulting in a total monthly burden for the buyer of 2,880.92 euros.

Over the course of the next 15 years, the provisions to be made increase to 403.76 euros * 1.02^14 = 532.75 euros, resulting in a total burden of 532.75 euros + 2,477.16 euros = 3,009.91 euros in the final year of the credit period. After these 15 years, there is a residual debt of 18.40 euros. The buyer settles this debt by drinking one less beer on his weekly pub night (inflation sends its regards).

Development of the tenant's assets in years 16 to 30

In the 16th year, the rent increases - as in the years before - by 2.2% to 2,671.65 euros * 1.022 = 2,730.43 euros. Since this is still less than the 2,880.92 euros that the buyer would have to pay in the 16th year, the tenant can continue to save. However, only 2,880.92 euros - 2,730.43 euros = 150.49 euros. In the 17th and 18th year, the tenant can still pay money into his world portfolio. After 18 years, the value amounts to approx. 826,376 euros. In the meantime, the increase in value is almost exclusively due to the return on the portfolio, while the deposits have only a minor impact. Even without further deposits, the portfolio value would have grown to 690,435 euros * 1.06^3 = 822,319.32 euros in these 3 years.

Things get interesting in the 19th year. In this year, the rental costs of 2,730.43 Euro * 1.022^3 = 2,914.63 Euro exceed the expenses of the buyer of 2,477.16 Euro + 403.76 Euro * 1.02^3 = 2,905.63 Euro for the first time by 9 Euro per month. So now money has to be taken out of the depot month after month. A share of our ETF is now worth 10 euros * 1.06^18 = 28.54 euros. In order not to make the calculation even more complicated and because tax matters can change significantly in the years until the withdrawal, we have to estimate the taxes and choose the currently valid tax rate for capital gains of 26.375% (incl. solidarity surcharge). We assume that the tenant is not subject to church tax and has already exhausted his annual exemption amount through other capital investments. We also ignore the possible partial exemption to 30% of the gain. The shares are sold according to the FiFo principle.

Since a share is now worth 28.54 euros, we have to sell a share to settle the 9 euros. In the first year, we were able to buy a lot of shares for 10 euros, which is why the profit per share is 28.54 euros - 10 euros = 18.54 euros. After taxes, 10 euros + 18.54 euros * (1 - 0.26375) = 23.65 euros are paid out. Of this amount, 9 euros are paid, leaving 23.65 euros - 9 euros = 14.65 euros. Of course, these 14.65 euros are reinvested and increase the ETF's portfolio by 14.65 euros / 28.54 euros / share = 0.513 shares. The value of the deposit has therefore decreased in the first month of the 19th year to 826,376 euros - 28.54 euros + 14.65 euros = 826,362.11 euros. The 9 Euro withdrawal has cost the tenant 13.89 Euro in real terms. Accordingly, the deposit value is reduced during the year to 826,376 euros - 13.89 euros * 12 = 826,209.32 euros. However, since returns are of course also earned this year, a significant plus is recorded at the end of the year, namely 826,209.32 euros * 1.06 = 875,781.88 euros.

The tenant must continue to withdraw a steadily increasing sum from his global portfolio in the remaining years. In the 30th year, the rent burden rises to 3,702.90 euros and is thus 692.99 euros higher than the buyer's burden. To settle this value, 17 shares must be sold each month at 54.18 euros each. The remaining good 30 euros are reinvested, of course. Nevertheless, the tenant's assets increase to approx. 1,582,372 euros by the end of the 30th year.

Interim balance sheet

Before we take a look at the next 30 years, let's take a look at the development of the two assets:

1) Value of the property

The property has always been nicely maintained, which is what the reserves were set aside for. We can therefore assume an increase in value, which we estimate at 2.6% per year: 750,000 euros * 1.026^30 = 1,619,877.18 euros. Of course, we also carried out modernizations. For this, we had saved an initial 300 euros - 287.50 euros = 12.50 euros per month. These were - just like the maintenance costs - increased by 2% every year. For simplicity's sake, we assume that the modernization reserves went directly into modernization projects and subsequently also led to an increase in value of 2.6% per year. That is, after 30 years, the value of the property has increased by 12.5 euros * 12 * 1.026^30 = 323.98 euros due to the modernizations in the first year. The modernizations in the second year resulted in an increase in value of 12.5 euros * 1.02 * 12 * 1.026^29 = 322.08 euros. In total, this results in an increase in value of 8,938.37 euros with investments of 6,085.21 euros. The value of the property after 30 years is therefore 1,619,877.18 euros + 6,085.21 euros = 1,625,962.39 euros.

If the buyer wants to sell the property, there are of course additional fees. Since the property has already been paid off in full, no early repayment penalty is due, nor does the land charge have to be cancelled. With the sales the broker commission at a value of 3,57% results, thus 1.625.962,39 euro * 0,0357 = 58.046,86 euro. In addition, a valuation report is prepared for which 0.5% of the market value is charged, i.e. 1,625,962.39 Euro * 0.005 = 8,129.81 Euro. Since the property was used by the owner throughout, no taxes are due on the sale. The "odds and ends" (energy certificate, etc.) will be a lump sum of 500 euros. The buyer can therefore achieve 1,625,962.39 euros - 58,046.86 euros - 8,129.81 euros - 500 euros = 1,559,285.72 euros through a sale.

2) Value of the deposit

As already calculated, during the same period the tenant could build up a deposit of 1,582,372 euros, the sale of which would of course still incur taxes.

3) Does the value of the deposit increase or decrease?

In fact, the value of the deposit increases continuously and in the 30th year from approximately 1,503,493 euros to 1,582,372 euros.

After 30 years and full payment of the property, the tenant and the buyer are left with similar assets, even if the buyer is slightly ahead.

Comparison after 60 years

In the 31st year, the buyer's costs drop significantly. The loan is paid off, only reserves for maintenance and modernization have to be set aside. Initially, these costs amount to 543.41 euros / month and rise to 965.01 euros / month by the 60th year of consideration. The rent to be paid increases in the same period up to 7,133.27 euros and is thus 6,148.26 euros above the monthly costs of the buyer.

1) Value of the property

The value of the property increases to 3,534,165 euros within 60 years, including modernizations carried out. At this point, the property will probably no longer be sold, but only inherited. Therefore, selling costs are not taken into account at this point.

2) Value of the deposit

The value of the securities account in the 60th year is 3,609,298 euros. Here, too, a sale is probably no longer on the cards. Only an inheritance seems to make sense.

3rd) Is the value of the portfolio rising or falling?

Even if the monthly costs of the tenant are more than 7 times as high as those of the purchaser, the value of the securities account actually increases even in the 60th year by a good 100,000 euros from 3,504,517 euros to 3,609,298 euros.

Although the tenant is slightly ahead after 60 years, the difference is nevertheless negligible. By slightly different parameters, the property owner could also take the lead. So in this respect, it's actually a draw. However, by buying a property, the buyer takes on a considerable cluster risk and can only use his assets in a very inflexible way. In addition, the high value of the tenant's portfolio stands out, which continues to develop positively and thus flexibly enables additional consumption. Accordingly, things are better for the tenant in this scenario.

Incidentally, the 3.5 million euros in 60 years correspond to a present-day purchasing power of just over a million euros, assuming inflation.

Scenario 2: Longer fixed interest rate, but higher interest rate

What happens if we assume a 30-year fixed interest rate and full repayment instead of a fixed interest rate with only 15 years and follow-up financing? In this case, we would probably be offered a loan with an interest rate of 3.5% today. The repayment would be approx. 1.889% and amount to approx. 2,784.43 euros per month - significantly higher than the monthly rate in scenario 1.

The value of the property remains unchanged in this scenario, of course. However, the tenant's deposit value increases to approximately 4.7 million euros. In scenario 2, therefore, the tenant again comes out the winner.

Since this scenario makes less economic sense (at least if we assume a loan interest rate above about 4% for follow-up financing), the idea of a longer fixed interest rate is again discarded in the subsequent scenarios.

Scenario 3: Faster repayment of follow-up financing

Since income is also very likely to increase over time, it may be possible for the buyer to repay the loan in as little as 10 years instead of 15. For a repayment in 10 years, at an interest rate of unchanged 4%, 8.149% must be repaid, which corresponds to a monthly installment of 3,390.61 euros.

In this scenario, the closing value of the deposit would decrease to a good 3.5 million euros, but would grow until the 60th year. Since the value of the property and that of the deposit do not differ significantly, but the deposit value continues to grow and offers the greater flexibility with less risk, the tenant also wins the comparison in scenario 3.

Since scenario 3 is more likely than scenario 1, it will serve as the basis for the subsequent scenarios.

Scenario 4: No annual rent increases, reduction of provisions in old age.

Many tenants do not receive annual rent increases. In this scenario, we therefore assume that the rent is only increased every 4 years, but then directly by 1.022^4 ~ 9.09% - i.e. the value that would have resulted after 4 years if the rent had been increased annually by the assumed 2.2%. So the rent in the 4th year is 1,970 Euro * 1.022^4=2,149.17 Euro - the same value as in the previous scenarios. Only in the years before only 1,970 Euro are calculated.

At the same time, some buyers will certainly not extensively renovate their property in the last years, but only repair the most necessary. Accordingly, we reduce the reserves for maintenance and modernization 10 years before the end of the period under consideration to 50 euros / month. This 50 euros / month will of course continue to be adjusted for inflation. Since the property loses value due to insufficient maintenance, I assume an annual increase in value of 0.5% for the last 10 years instead of the 2.6% in the first 50 years.

After 60 years, the value of the property amounts to approx. 2.9 million euros, that of the deposit to approx. 4 million euros with a continuous increase in value. Scenario 4 thus also goes - very clearly - to the tenant. In the following scenarios, we continue to assume that the purchaser reduces his provisions in recent years and that rent increases are only enforced every 4 years or upon relocation.

Scenario 5: The tenants occupy a property that is suitable for them

A tenant will continue to increase or decrease the size of the rental property over the course of his or her lifetime, adapting it to life circumstances. The buyer, on the other hand, will tend to stay in the property once purchased and choose a size at the time of purchase that suits the maximum number of people who will live in the property. So, in this scenario, nothing changes for the buyer. The tenants, on the other hand, stay in their old rental apartment with 4 rooms and 100sqm for the first 5 years before renting the big house. After the children - 20 years later - leave the house in their early 20s and move to another city, the tenants again decide to move into a perfectly adequate 3 room apartment with 90sqm.

I recalculate, for simplicity, the price per square meter of the rental house to the 4- and 3-room apartments. Moving from the 4-room apartment to the house will cost 2,000 euros and from the house to the 3-room apartment 3,000 euros. In addition, the rental apartments incur apportionable costs of 25 euros / month initially for the maintenance of an elevator and the like. These 25 euros are of course adjusted upwards over time with the rest of the rent.

So the rent for the first 4-room apartment is 1,970 euros / 131 sqm * 100 sqm + 25 euros = 1,528.82 euros and after 4 years it will increase to 1,528.82 euros * 1.022^4 = 1,667.86 euros. The deposit is 4,000 euros. After 5 years the move into the house takes place, the rent of which has meanwhile increased to 1,970 Euro * 1.022^5 = 2,196.45 Euro. In addition, there are one-time moving costs of 2,000 euros. The deposit for the house now amounts to 5,500 euros, which means that an additional 1,500 euros must be withdrawn from the tenant's deposit. Again, the rent is increased by 9.09% every 4 years. After the house has been occupied for 20 years, the tenant moves into the 3-room apartment at a rent of (1,970 Euro / 131 sqm * 90 sqm + 25 Euro) * 1.022^25 = 2,374.97 Euro plus one-time moving costs of 3,000 Euro. The deposit for this 3-room apartment amounts to 5,500 euros and is financed entirely from the previously recovered deposit.

The value of the purchased property remains unchanged at approximately 2.9 million euros. The value of the deposit amounts to approx. 7 million euros and is of course growing inexorably. A clear victory for the tenant.

Scenario 5 is - in my view - the most realistic scenario so far and therefore serves as the basis for scenario 6.

Scenario 6: The buyer also moves

If the buyer is able to part with his beloved property, he will also look for a property better suited to his life situation in the course of time. The buyer therefore also sells his house after 25 years and buys a better fitting 3 room apartment with 90 sqm. Again, for the sake of simplicity, we calculate the price per square meter of the house down to the 3-room apartment and multiply by the expected increase in value to determine the price of the apartment. 750,000 euros / 115 square meters * 90 square meters * 1.026^25 = 1,115,038.73 euros. Due to the buyer's negotiating skills, the apartment changes hands for 1 million euros. There are still 3.57% brokerage fee, 1.5% notary costs, 0.5% for the land register entry, 3.5% land transfer tax and 2,000 euros for an appraiser. In total 1.092.700 Euro

On the other hand, the value of the house for sale is 750,000 euros * 1.026^25 = 1,424,771.71 euros. Since the buyer has regularly invested money in modernizations, the sales price increases by another 6,891.74 euros to 1,431,663.45 euros. From this, brokerage fees of 3.57%, costs for an appraisal of 0.5% and "odds and ends" of 500 euros are to be deducted. 1.431.663,45 Euro * (1-0,0357-0,005) - 500 Euro = 1.372.894,75 Euro.

The buyer, after buying his new apartment and moving costs of 3,000 euros, still has a plus of 277,194.75 euros, which he invests in a world portfolio at the same conditions as the tenant. The monthly maintenance costs for the buyer decrease of course, but have to be paid to the WEG until the end of the considered period. In addition, there is an initial 20 euros for non-apportionable costs such as property management. Instead of 482 euros that the buyer last set aside for the house, the costs drop to 300 euros + 20 euros = 320 euros.

Since both the tenant and the buyer live in an apartment after 25 years, we can simplify the calculation somewhat and dispense with the consideration of apportionable incidental costs that are only incurred for apartments (e.g., the operating costs for an elevator). The relevant incidental rental costs for the 3-room apartment are therefore reduced accordingly.

In this scenario, the tenant has access to a good 6.9 million euros in the deposit at the end of the period under consideration, which of course grows significantly into the final year. The buyer's deposit has grown to a good 2.1 million euros over the same period. His apartment is now worth around 2.5 million euros. However, even in this scenario, the buyer's total assets of around 4.6 million euros are significantly lower than those of the tenant.

End of Part 2

From my point of view, scenarios 5 and 6 are the most likely. At least that's how I would behave as a buyer or tenant. Accordingly, the tenant wins more than clearly. Under the current conditions and the assumptions made, it makes no sense to buy a property in Regensburg or comparable regions from a financial point of view. In the next part, we will look at how these general conditions and assumptions would have to change so that the buyer would still make the better decision financially.

Are the assumptions unrealistic for you? Is the housing situation different in your region? That is quite likely. Feel free to share more realistic assumptions and conditions in the comments. I will then calculate this for you in part 3. You can find the 3rd part here: https://app.getquin.com/activity/GEBmMewkKS

You think scenarios 5 and 6 are unlikely? Feel free to let me know in the comments what seems more realistic to you!

Even if I have checked my calculations several times, there can always be a mistake. If you have found one, can't understand a calculation step or simply have a question about the calculation => Post it in the comments!

#mieten
#eigenheim
#esel
#alternative
#learn

Calculated: Own a home or stay a tenant?

Part 3

In Part 1, we covered the basics and theory to make a financially sound buy or rent decision. You can find it here: https://app.getquin.com/activity/FoLdCxttXY

In the 2nd part, we transferred this theory into practice with a detailed calculation example. In the process, the tenant emerged as the clear winner. You can find part 2 here: https://app.getquin.com/activity/evjQvBldso

In this 3rd and last part, we will look at what influence changed parameters and variables have on the result. We will outline a possible scenario in which the buyer beats the tenant. We will also take a look at other properties and calculate the buy vs. rent decision for them.

tl;dr & Conclusion

Unsurprisingly, the cost of buying relative to the cost of renting has a very large impact on whether the renter or the buyer ends up better off. This ratio can differ significantly even in the same region for similar properties, which is why an individual comparison should be made for each property under consideration using the scheme presented in this series of articles. As mentioned in Part 1, we cannot live in the global average. An ETF allows us to save the global average for the stock market, but unfortunately this is not possible for the home. General statements of any "studies", in which regions buying or renting would allegedly be worthwhile, are to be seen accordingly critically. In addition, the assumptions made in such publications are not always transparent (e.g. how much return was calculated for the alternative investment). In addition, they are usually produced on behalf of an interest group (e.g. building societies) - do not trust any statistics that you have not falsified yourself. Speaking of the return of the alternative investment: for renting to be worthwhile, it must be decent and at the level of a world portfolio. An even combination of stocks, bonds, and overnight deposit accounts is unlikely to yield enough to beat the buyer.

Interestingly, with a purchase and the general conditions assumed, equity should be as low as possible - it simply works more effectively in the stock market than in a home. Of course, higher loan interest rates due to lower equity must be avoided. Because just the interest rate of the 1st loan has a noticeable influence on the final result - clearly stronger than with a follow-up financing. In addition, the costs of maintenance and modernization depress the buyer's return and should not be underestimated. After all, you want to live in a beautiful house for several decades and not in a ramshackle hovel. On the other hand, the effects of different rent increases and property value developments on the result should be self-explanatory.

To make the house purchase from the example in the 2nd part of the series of contributions financially attractive, the variables would have to be adjusted quite strongly in favor of the buyer. On the other hand, small adjustments in favor of the tenant are already sufficient to increase his capital by 1-2 million euros. The recommendation from Part 2 thus remains valid: Under the described or similar conditions, the purchase of a property should be refrained from from a purely financial point of view. The further examples show however that there are quite regions with offers, in which the fortune of the buyer is at the end higher or at least not completely so far under that of the tenant. In particular, it has a positive effect for the buyer if the tenant does not move over time to a property that suits his circumstances, but always lives in a similar property to the buyer. For example, because there is no desire to have children and the number of people living in the property always remains the same. As a tenant, on the other hand, you should take advantage of the simple option of moving in order to always live in a property that meets your needs - this can give you a clear economic advantage over the buyer, who will probably rarely if ever move.

What has happened so far

In this part, we'll focus on realistic scenarios 5 and 6 from Part 2. Ideally, you'll read through Part 2 again (https://app.getquin.com/activity/evjQvBldso) before you start with this last part. Otherwise, the short version is also available in this section.

General

• Property for sale: mid-terrace house for 750,000 euros
• Service charges: 9,07
• Surveyor: 2.000 Euro
• Provisions for maintenance and modernization: 300 Euro / month
• Loan 1: 2.65% interest, 2.5% repayment, 15 years term
• Loan 2: 4% interest, 8.149% repayment, 10 years term
• Property appreciation per year: 2.6%
• Inflation / Annual adjustment of provisions: 2%.

• Property for rent: Mid-terrace house for 1,970 euros cold rent
• Deposit: 4.400 Euro
• Rent increase every 4 years: 9.09% (2.2% per year)
• Performance world portfolio per year: 6%

• Equity capital: 200,000 euros
• Period considered: 60 years

Scenario 5

The tenant does not occupy the mid-terrace house continuously, but in an apartment adapted to his living circumstances. The buyer reduces the provisions in the last 10 years, otherwise the assumptions under General apply.

• Apartment for rent year 1-5: 1,528.82 euros, deposit 4,000 euros
• House for rent year 6-25: 2,196.45 euros, deposit 5,500 euros, moving costs 2,000 euros
• Apartment for rent year 26-60: 2.374,97 Euro, deposit 5.500 Euro, moving costs 3.000 Euro
• Rent increase every 4 years: 9.09% (2.2% per year)

• Assets buyer after 60 years: 2.9 million euros
• Assets tenant after 60 years: 7 million euros, growing deposit

Scenario 6

The buyer sells his house after 25 years, buys a smaller apartment (comparable with tenant) and invests the profit in a world portfolio. The general conditions for the mid-terrace house remain unchanged.

• Apartment for sale year 26-60: 1.000.000 Euro + service charges
• World portfolio buyer year 26-60: 277,194.75 euros + increase in value
• Provisions + non-apportionable operating costs Year 26-60: 320 euros + adjustment for inflation

Since tenant and buyer occupy one apartment from year 26 onwards, both have to bear apportionable ancillary costs such as elevator maintenance, and not just the tenant, as in scenario 5. The rent relevant for the comparison is reduced accordingly during this period, while all other parameters remain unchanged.

• Apartment for rent Year 26-60: 2,331.90 euros (rent increase unchanged every 4 years)

• Assets buyer after 60 years: 2.5 million euros apartment + 2.1 million euros deposit = 4.6 million euros
• Tenant's assets after 60 years: 6.9 million euros, growing depot

How much return does maintenance cost?

The maintenance of 287.50 euros per month initially ensures that the value of the property is maintained. In other words, it ensures that the value of the property grows every year by the assumed 2.6%. Thus, the provisions for maintenance reduce the return on the property. Of course, no one wants to live in a run-down property, so we can't avoid maintenance. But it is certainly interesting to look at how much return maintenance costs us.

In the 1st year, the value of the mid-terrace house increases by 2.6% to 750,000 euros * 1.026 = 769,500 euros. For maintenance, the buyer puts aside 287.50 euros * 12 = 3,450 euros. So we have invested an additional 3,450 euros, which drops the return to 769,500 euros / (750,000 euros + 3,450 euros) ~ 2.13%. In the 59th year, the value of the property without modernizations has grown to 3,410,009.19 euros, and reaches the sum of 3,498,669.43 euros in the 60th year - provided that maintenance measures have been carried out throughout. The provisions for maintenance in the 60th year amount to 11,097.60 euros. The return on investment is thus approx. 2.27% in the last year.

Provisions for maintenance are necessary, but they noticeably reduce the return until the end. That the return adjusted for maintenance costs grows over time is also logical, since the assumed increase in the value of the property per year is higher than the annual adjustments to the provisions. Why? For example, because the price of the property also grows over time and significantly lower maintenance costs are necessary for this.

What influence do purchase price and rent have?

Purchase price and rent are of course two very important parameters, but they also depend on each other. If the purchase price increases, it is very likely that the rent will also increase. So we can't adjust these parameters independently of each other at will. Nevertheless, there are areas where the purchase price/rent ratio is different. First, however, let's look at the impact of lower purchase and rental costs if the purchase price-rent ratio remains the same.

The ratio between purchase price and annual cold rent is 750,000 euros / (1,970 euros * 12) = 31.7. If we keep this ratio, but assume lower prices - for example, a cold rent of 1,400 euros and a purchase price of 1,400 euros * 12 * 31.7 = 532,560 euros - we must of course also adjust the maintenance costs accordingly. Instead of 287.50 euros + 12.50 euros, we assume 217.50 euros for maintenance at this purchase price and retain the 12.50 euros for modernizations. In scenario 5, the deposit value at the end of the 60 years is only about 5.6 million euros (instead of 7 million), while the value of the property falls to about 2.1 million euros (instead of 2.9 million). The deposit value thus grows from 2.4 times the value of the real estate to 2.7 times. Also, the increase in the value of the deposit increases from 4.7% to 4.9% in the last year.

In scenario 6, a similar picture emerges. The house is worth 532,560 euros * 1.026^25 = 1,011,701.89 euros when it is sold after 25 years. To this must be added the modernizations in the unchanged amount of 6,891.74 euros, for a total sales value of 1,018,593.63 euros, which, after deducting the sales costs, yields proceeds of 976,636.87 euros. The new apartment has a value of 791,776.70 euros, which can be pushed to 750,000 euros. In addition, the ancillary purchase costs are added, resulting in a total price of 820,025 euros. After deducting the relocation costs of 3,000 euros, the buyer now has a more suitable apartment and a stock portfolio of 153,611.87 euros. The maintenance costs for the new apartment initially amount to 240 euros. The final value of the buyer's deposit is approximately 1.2 million euros. The value of the apartment is approximately 1.8 million euros. In total, therefore, the buyer has built up assets amounting to 3 million euros. In contrast, the tenant's assets amount to 5.5 million euros. The tenant thus increases his assets from 1.5 times those of the buyer to 1.8 times. The increase in the value of the portfolio also increases from 4.9% to 5% in the past year.

So it is of no use to the buyer to simply buy a cheaper property if it is located in a region where rents are also lower. On the contrary. This is due, among other things, to the higher (since unchanged) equity ratio. Equity works much better at the assumed rate of return on the stock market than in one's own property. This can be easily confirmed by increasing or decreasing the equity with all other parameters unchanged. The lower the equity, the better off the buyer is. However, since a lack of equity again has a negative effect on the interest on the loan or on the credit rating in general, the equity ratio cannot be reduced at will in the case of owner-occupation. In addition, this increases the monthly installment, which a buyer may no longer be able to afford.

If the purchase price-to-rent ratio is reduced to 25, the house can be purchased for 591,000 euros instead of 750,000 euros. If the remaining parameters remain unchanged, the tenant in scenario 5 ends up with a deposit value of about 2.75 million euros, which is still well above the value of the property of about 2.25 million euros. The tenant's deposit grows by approx. 3% until the final year.

The tenant in scenario 6 generates a deposit value of approx. 2.6 million euros with a purchase price/rent ratio of 25 and corresponding adjustment of the prices of the properties, which still increases by approx. 3.2% in the 60th year. After 60 years, the buyer owns a deposit of approx. 1.2 million euros and a property worth approx. 2 million euros. In other words, a total of 3.2 million euros. The buyer's assets are thus just under 25% higher than those of the tenant.

Not surprisingly, the purchase price/rent ratio has a very high influence on the overall result. This ratio fluctuates extremely within Germany alone. It can thus be stated that a statement as to whether buying or renting makes more sense is extremely dependent on regional conditions and the properties in question.

What influence does the yield of the portfolio have?

A very big influence! Even small changes to the average yield can have a significant impact on the result. If the average yield in scenario 6 is reduced from 6% to 5.8%, the tenant will only have 5.9 million euros available after 60 years instead of 6.9 million euros. With a 5.3% return, there would even be only about 4 million euros, which, however, would grow until the last year. Of course, in this case, the buyer's total assets also decrease to 2.5 million euros + 1.7 million euros = 4.2 million euros. However, if we assume a slightly higher return of 6.1%, the tenant's assets grow to around 7.5 million euros.

Of course, a similar picture emerges in scenario 5, where a return of 5.8% instead of 6% also ends up costing the tenant around 1 million euros. However, in order to generate lower total assets than the buyer, the average annual return must already fall to 4.9% - and even in this case, the tenant's assets grow into the final year.

We always calculate with average values - average rent increase, average value increase, average return on the stock market. But we all know that these average values can fluctuate extremely in the short term. What happens if the first few years on the stock market don't go as planned? What happens, for example, if the performance in the first 4 years on the stock market is negative, amounts to -3% per year and the assumed 6% is only generated from year 5 onwards? In scenario 5, this means that the tenant's portfolio shrinks from 7 million euros to almost 4.75 million euros after 60 years. However, this also means that we are saying goodbye to our estimated return of 6% per year, since the first few years deliver significantly lower returns. Strictly speaking, the average return is then only 0.97^4*1.06^56=x^60 => 5.375%. Due to the regression to the mean, these lean years should be followed by years with higher returns again to achieve the 6% on average. If the negative return of the first years can be compensated by a higher return in the following years, the tenant's wealth is even higher in the 60th year, because the tenant was able to buy shares cheaply in the first years. If, on the other hand, the world portfolio falls in the later years, this has a negative impact on the tenant's assets. However, this is nothing more than a matter of crystal ball reading, which is why we continue to calculate with the average value. But since a crash on the stock market in the later years can be painful, it is important to have a sufficiently large portfolio to be able to withstand these fluctuations. Incidentally, of course, the housing market or specifically the local situation of the buyer can also deteriorate drastically in recent years. So the risk is borne not only by the tenant, but also by the buyer.

Consequently, in order to beat the buyer as a tenant, we need a decent return. It must be clear to everyone that a tenant with a balanced combination of fixed deposits / overnight money, bonds and shares will very likely achieve too little return to beat a buyer.

What influence do appreciation and rent increases have?

If the purchase prices for real estate increase more or less in the future, this has no influence on the assets of the tenant. Only the value of the property changes. If, for example, property prices rise by an average of 3% instead of 2.6% per year, the value of the house will increase from 3.5 million euros to 4.4 million euros after 60 years without modernization and with constant maintenance. With a value development of only 2.2% per year, the value of the property after 60 years is only 2.75 million euros.

It is very likely that if real estate prices rise more strongly, rents will also rise more strongly. These have a direct impact on the tenant's wealth. If we assume average rent increases of 3% instead of 2.2%, this results in a tenant's chapter growing to the last year of only 4.25 million euros in scenario 5 and 4.15 million euros in scenario 6. If, on the other hand, rents increase less than assumed, namely only at 1.5%, this results in a tenant's portfolio value of around 9 million euros in scenario 5 and 8.9 million euros in scenario 6.

What influence do the conditions of the loans have?

Realistically, we will not see falling interest rates in the near future. Even the 2.65% assumed in the example for the first loan seems almost too low. However, the conditions for the second loan may well be lower again. Since the buyer's assets considered here are not affected by changing interest rate conditions, we take a look at the change in the tenant's assets.

If we assume an interest rate of 3.5% for the first loan and otherwise unchanged conditions, the tenant's assets grow by more than €1.5 million to around €8.6 million in scenario 5. In scenario 6, a similar picture emerges with a final value of the deposit of approx. 8.45 million euros. This increase can no longer even be offset by completely interest-free follow-up financing (e.g. in the form of a loan within the family). If we calculate with 0% interest and 10% repayment for the follow-up financing, the tenant still ends up with higher assets of approx. 7.85 million euros in scenario 5 and 7.75 million euros in scenario 6.

If we stick with the original assumption of 2.65% interest on the first loan and hope for an interest rate of 1% for the follow-up financing instead of the estimated 4% from the example, the tenant's final wealth falls to 6.45 million euros in scenario 5 and 6.35 million euros in scenario 6. However, if the buyer somehow manages to push the interest rate on the first loan down to 1%, the tenant's assets fall to around 3.95 million euros in scenario 5 and to 3.85 million euros in scenario 6 - despite an interest rate of 4% for the follow-up financing.

We note: The conditions for the first loan have a far greater impact on the final result than the conditions for the follow-up financing. Realistically, however, the conditions for the first loan are more likely to rise than fall in the foreseeable future, making the purchase of a property less attractive - even if we hope for very good conditions for the follow-up financing.

What has to happen for the buyer to win?

For the buyer to win, we need to tweak a few parameters. However, we will not change the initial rent or the purchase price, as these are taken from real existing offers and their adjustment would not be realistic. Likewise, we will not adjust the cost of the initial loan, as the chance of getting better terms in the near future is very unlikely.

Assumption: housing becomes scarcer, rents rise more significantly, interest rates fall. In this scenario, the interest rate for the follow-up financing could fall from 4% to 2%, for example. In addition, rents could increase at 2.8% instead of 2.2% per year. In addition, a broker is waived, dropping the 3.57% broker fee to 0%. With these assumptions, the tenant's final wealth in Scenario 6 is 3.9 million euros. Although it also grows in the final year, it is significantly (about 15%) lower than the buyer's wealth. In scenario 6, these assumptions thus lead to a slight advantage for the buyer. In scenario 5, however, this is still not enough. For the buyer to win in scenario 5 as well, the rent would have to be increased by an average of 3% per year. The tenant will also feel these increases every 2 years instead of every 4 years. If the interest rate for the follow-up financing then falls to 1%, the buyer is also the winner in scenario 5. It should be emphasized that even under these assumptions, the tenant's deposit grows until the last year.

Assumption: Rents rise somewhat more strongly, the global economy cannot repeat the performance of recent decades. In this scenario, we assume slightly higher rent increases and that the tenant's deposit does not reach the 6% return per year. For the buyer to narrowly win the comparison in scenarios 5 and 6, rent increases would have to rise to 2.6% and the annual return on the deposit would have to fall to 5.4%.

Thus, significant adjustments to the assumptions are needed for the buyer to emerge as the winner. In particular, the estimated return on the portfolio must be adjusted downward a good bit if one does not want to change the other variables unrealistically much. However, the average return of a world portfolio is probably the one that can be predicted with the greatest certainty under all assumptions.

What if things work out better for the tenant instead?

But it can just as easily work out better for the tenant. Even small changes can significantly increase the tenant's wealth. Assume rent increases are only passed on to the tenant every 5 years instead of 4 and average 2.1% instead of 2.2% per year. If, in addition, the deposit grows by 6.1% instead of 6% per year, the tenant's final wealth in scenario 5 is already 8 million instead of 7 million euros. With a deposit growth of 6.2% and rent increases of 2%, the tenant's wealth can even be increased to 9 million euros. These adjustments do not seem so improbable to me either. Especially the better performance of the world portfolio.

A single household in Berlin

To conclude this series of articles, we take another look at other residential regions and situations. In doing so, we stick to the realistic assumptions from Part 2, but adjust the purchase costs, ancillary purchase costs, rental prices and relocations accordingly. We start with a single household in Berlin - typical of the very well-off @getquin -workers like @Eunoia or @mariechristines . Our single expects to occupy a 3-room apartment with 90sqm for the next 60 years. Since 60 years is a long time, the apartment should be as modern as possible when buying. Does buying or renting make more sense?

The challenge in Berlin is the incredibly wide range of prices for renting and buying - even for similar properties in the same neighborhood. Fortunately, I was able to find 2 apartments on immoscout in the same apartment complex with identical cut and furnishings. Once to buy and once to rent. We are talking about 95m² and 3 rooms on the first floor near Ku'damm. Year of construction is 2018, heated with district heating. The cold rent is 2,590 euros (7,770 euros deposit), the purchase price is 1,090,000 euros. The buyers bring an equity of 250,000 euros. A screenshot of the properties can be found in the attachment.

We assume that the buyer can still push the price of the apartment to 1,000,000 euros. Brokerage fee, land register entry and notary costs are identical throughout Germany, only the land transfer tax is higher in Berlin with 6% than in Bavaria. Maintenance reserves are formed in the amount of 237.50 euros + 12.50 euros for modernizations, makes initially 250 euros. Since it is an apartment, these maintenance costs must be paid until the last year. In addition, the buyer must set aside an additional 20 euros (+ inflation adjustments) for non-apportionable incidental costs of an apartment (e.g. costs for a property management).

After 60 years, the tenant's deposit value is about 5 million euros and grows until the last year. The value of the property amounts to approx. 4.7 million euros. The result here is therefore much tighter, but this scenario also clearly goes to the tenant due to the higher flexibility, the constant portfolio growth and the non-existent cluster risk.

A childless couple with a desire for a garden and space in the countryside

So far, we've tended to take a look at modern and expensive properties. For the last example, we take a look at Rhineland-Palatinate, in the area around Pirmasens (many thanks @Der_Leeh for the inspiration). A childless couple longs for a quiet life in the countryside and also has no problem with doing their own hands on the dream house. So it may be a little older. But please with enough space.

In contrast to Berlin, there are only a few offers around Pirmasens, which does not make the comparison any easier. Nevertheless, I found 2 halfway comparable objects on Immoscout (screenshots attached to the article). They are detached single-family houses with about 113m² (rent) and 115m² (purchase) living space, 5 (rent) and 6 (purchase) rooms and 235m² (rent) and 431m² (purchase) plots. The apartment house was built in 1957 and last modernized in 2021 - among other things, the bathroom including underfloor heating was renewed. The house for sale was built in 1948 and is partly in need of renovation. For example, the large bathroom must be renewed.

The cost of the house for sale is 178,000 euros. Even if the purchase price can still be pushed, modernizations and renovations are imminent, which is why total costs of 185,000 euros are calculated. The buyers bring along 20,000 euro own capital funds, the land acquisition tax amounts to 5% in Rhineland-Palatinate. For maintenance, lower production costs but a higher percentage are expected. These amount initially to 1,300 euros * 0.025 / 12 * 115 = 311.46 euros. The reserves for modernizations should be set correspondingly higher due to the age of the property. In total, reserves of 375 euros are initially formed, which are reduced to 150 euros / month after 50 years. For the rental house, 850 euros per month and a one-time deposit of 2,550 euros are due. The remaining general conditions are taken from the example in Part 2.

In this scenario, the tenant's deposit actually falls to 0 euros in the 60th year. The tenant's savings are (just) not sufficient to pay the rent in the period under consideration. Accordingly, the buyer is probably better off in this case. Why presumably? Because the house is already 74 years old. In 60 years, the house would be 134 years old, which is a very old age for a house, even with good and correspondingly costly maintenance. It is very likely that the house could still be occupied by the buyers in the last few years, but would have to be demolished afterwards. The demolition costs would have to be offset against the rural land prices.

End part 3

Thank you for reading my three really really long posts and commenting diligently ( @InvestmentPapa I never rant about the length of your posts again). Personally, I am also facing the decision whether I should not rather put my saved equity for a property for own use into a world portfolio. So this series of posts has not been entirely altruistic. The exchange with you has brought me a bit further here and also calculating through the various examples and adjusting the parameters has made it clear to me that this is a very individual decision per property.

Should you have any tips for / questions to me or have found errors: Drop them in the comments. Also, feel free to just leave me a carrot🥕 if you liked the series of posts. Otherwise: Don't worry, I promise you that there will be lighter fare from me again in the near future 😉.

#immobilien
#mieten
#alternative
#learn
#esel

Topic Buy or Rent!

It is always discussed hotly 🔥 and with emotion. There is probably no one right way. It is also a bit of a personal lifestyle decision.

Here are the latest insights from Gerd Kommer on this topic. Unfortunately, we cannot predict how it will develop in the future🔮.

Gerd Kommer has determined by comparing the average annual returns of residential real estate between 1970 and 2020 with those of stocks and bonds. Anyone who bought their own home in the 1980s or 1990s is on average worse off financially today than if they had continued to live in rented accommodation and invested on the side.

With the new millennials, the wind has changed, his calculations show. The average home buyer would have made a better deal than a renter both between 2000 and 2020 and between 2010 and 2020.

Source: Gerd Kommer: Buy or Rent. 2021, S77

Own opinion:

Nowadays, investing in the stock market is a lot easier and more accessible than it was in the 1980s and 1990s. Therefore, I think that for many people it was almost without alternative to invest their money in real estate at that time. Also, financial education was not as good as it is today.

Who has bought from the 2000s, has certainly made a good investment.

And in own thing still. It is simply good to know that no one can terminate the apartment/house because of own need. This security is worth a lot. Especially in big cities where there is a massive housing shortage.

Kind regards

Stock market bear 🐻

#immobilie
#immobilien
#kaufen
#mieten