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Which Better, Buying or Renting Apartment?

GreenPapain - Most of the people I know rent in big cities and complain about rising rents as they eat up an ever larger portion of their budget. When my friends and I used to rent a flat share as students, that was not an issue for a long time, but now many of my friends are wondering whether they should perhaps tackle the financing of their own property instead of the money every month to transfer the landlord.

A friend recently told me that he once got the first offers for real estate financing from a bank, after all, interest rates are lower than ever, so you have to strike, right?

In any case, our parents' generation loves real estate; compared to other forms of investment such as stocks, bonds or investment funds, it is considered a rock solid affair. Many people are taught from childhood: If you invest in a property, you can hardly go wrong, because it saves you rent and instead builds up assets.

But is that even true? Is it actually better to buy than to rent in the long term?

Of course, it's not that easy to say. Above all, the decision as to whether renting or buying is the better solution depends on your own life plans. Anyone who expects to move to another city more often because of various job changes is more likely to live in rent than someone with a secure job and family.

But what about the financial advantages of both types of housing? Does the buyer or the tenant perform better in the asset comparison?

The online asset manager Growney has calculated possible asset developments for tenants and buyers for the young money blog. The researchers assumed that two couples live in exactly identical apartments in a Berlin apartment building. One couple decides to buy the apartment, the other continues to rent. In addition to the apartment, the two couples have the same starting requirements: Both have saved 100,000 euros together over the past few years.

At the beginning, the buyer couple buys the property for 300,000 euros, finances it with one third from equity (100,000 euros) and two thirds from debt and takes out a loan from a bank. After 30 years, at the start of retirement, the property should be paid off. Then the two want to sell the apartment for a profit.

The other couple takes a different path: They stay in the apartment to rent and invest their savings on the capital market. So the two want to build up a fortune for old age. Annually, the couple pays capital gains tax of 25 percent on their income, while the sale of the first couple's property is tax exempt.

Who will win the race?

In the long-term comparison of assets between tenant and buyer, the buyer couple initially falls behind: When buying the apartment, property transfer tax and notary fees are due first. In many cases, there is also the broker's commission. These ancillary acquisition costs are at least 7.5 percent in Berlin. The buyers have to pay for the expenses of 33,000 euros with the money they have. With the tenant couple, however, this credit is retained.

Buyers often have to take out credit

Even after buying a home, the situation is very different: the majority of the home bought basically belongs to the bank. The buyer couple stutters the loan with repayments over 30 years. Construction loans are mostly so-called annuity loans, so real estate buyers get the sum for the purchase of a house advanced in one fell swoop, in return they have to repay the loan over many decades at constant rates. The monthly rate is determined by the loan amount (repayment), the interest rate and the term. In our example, the repayment rate is the usual 2.54 percent, the interest rate is a favorable 1.8 percent. This ensures that the loan is paid off after 30 years and that the buyer does not have to accept any fluctuations in interest rates.

But that's not all: In addition to the loan payment, the couple has to invest 1.5 percent of the current building value annually for maintenance of the apartment. In return, the couple saves the rent.

The tenant couple, on the other hand, is and will remain debt-free, but has to pay rent every month for a lifetime. The two tenants have only just moved into the apartment, so they have to pay an impressive 1,375 euros in rent - this corresponds to 5.5 percent of the apartment price over the year. If the property rises in value, the rent automatically rises.

In order to keep the comparison fair, buyers and tenants spend exactly the same amount of money every year on capital formation and accommodation. The monthly expenses for living for the 100 square meter apartment in our first example amount to 1,375 euros. If the buyers have more costs for their purchased apartment in a month, the tenants save the additional difference and invest it on the capital market.

How the comparison turns out at a certain point in time - for example at retirement age - depends above all on the development of real estate and rental prices and the development of capital market returns.

If one now assumes that real estate prices and rents will continue to rise slowly in the next few years (at 1 percent per year each), the tenant will pay 1,375 euros in rent and only a moderate return can be achieved on the investment (3.5 percent per Year), the buyer is ahead in the asset comparison after less than ten years. In the end, through his monthly payments, the buyer paid for his property, which has a value of 548,076 euros. The tenant has only amassed a fortune of 259,540 euros. In this example, the buyer couple clearly decides the race for themselves.

If, on the other hand, the tenant has been living in his apartment for a long time and pays a comparatively low starting rent (namely only 750 euros per month - this corresponds to 3 percent of the apartment price over the year), the tenant is just ahead in the end. In this case, too, the rent increases by one percent per year, but in the end the tenant is just ahead: His wealth is 30,000 euros higher than that of the buyer. And that although he only achieved a moderate return of 3.5 percent on his savings.

Tenants need to discipline themselves and invest money

So the myth - paying rent means throwing money out the window - doesn't have to be true. "Often times, home ownership leads to lower net worth than relevant capital market investments such as stocks," says Klein.

However, the tenant is only successful if he consistently invests his savings in high-yield investments. Financial experts repeatedly point out that real estate buyers are often better off in the long term because they are practically forced to save through their purchase. Because they have to pay a monthly installment to the bank, which flows into building up their own wealth. That disciplines. Many tenants do not have this constraint and instead like to spend their money on consumption. You then have no assets in old age, while the property buyer can fall back on a debt-free property through compulsive saving for 30 years.

Tenants have to be just as disciplined as homebuyers in making private provisions for old age and foregoing consumption in the long term. Only then can they benefit from returns on the capital market and build up a fortune. If they don't, they are definitely worse off than property buyers.

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