Real Estate – Home ownership or capital investment?

Have you ever thought about your current living situation and especially how it should be in the future? Maybe you are currently renting and would like to own your own home later on? Or you live in a house, but would like to have a condominium? Or maybe you are “flirting” with real estate as an investment, but don’t know exactly how it works?

Today we want to take a closer look at both types of real estate and compile the most important facts for you.

Most people in Germany live for rent. Many of them (57%) would like to live in their own property, but do not have the knowledge or the possibilities to do so. Around 42% of Germans are apartment or home owners. That makes Germany almost the tail in the European area. In Norway and Poland, around 80% of the population own their own home.

Graph showing how Germans think about real estate

Germans would love to own real estate, but don’t know how

Graph showing how many Europeans own real estate per country

Most Germans want to own their own home, but only 45 % actually do so

What about you? What might be your reasons in favour of or against ownership? The main reasons for acquisition of residential property for most people are:

    Save rent
    Retirement provision
    Quality of life

The rents here in Germany are the main argument. I’m sure you know it, too … rents just keep going up and up and up. The former guideline that rent should be about 30% of the income has long been exceeded. Nowadays, often enough rent is 50-60% of the income.

Let’s take a quick look at the rental price trend here in Germany:

Graph showing development of rents in Germany

Rents in Germany have continously increased

Over the years, the rent has always and steadilyincreased. The main reasons for this are the inflation and the shortage ofliving space – more and more people need apartments. Due to the inflation, thevalue of the property increases and so does the rent. On average, there is a 3% rent increase per year, which means that the rent has doubled after 23 years!For example, 400€ rent became about 800€ rent after 23 years. And this phenomenon will not stop, but will continue to increase our rent also in the future.

A good reason to buy, isn’t it?

However, this results in another problem. At retirement age, we usually no longer have the same income as when we were working (you can find detailed information about pensions in our previous blog articles).

The rent, however, continues to rise. So, at some point the rent literally eats up our pension!

Graph showing how the rent eats up the pension

Rents increase, pension decreases due to inflation – at some point, both lines meet

And that brings us directly to the next main reason for home ownership: The idea that owning your own home is the best retirement provision is widespread. 88% of Germans consider real estate to be the best retirement provision: “No more rent, less costs, more money for me….”

But attention! Great care is required! Because home ownership is ALWAYS associated with further costs!!! And very few owners put aside the savings they achieve – or at least part of it – to provide for future expenses. And houses grow old, too. First the roof leaks, then the heating needs a visit by the repair guy …

Without a doubt, it is very advantageous not to pay rent anymore. However, you must not forget that costs will still occur, and usually at the time when you least expect (or can afford) it.

Independence and quality of life are the last two factors in favour of owning property. They pretty much stand for themselves and probably need no great explanations. You can simply have everything exactly the way you want it! Be it your own terrace, your own garden … 🙂

How to afford real estate?

There are various types of paying off a mortgage, which we will discuss at some other time. Basically, however, you should bring along a certain amount of equity or have it as a reserve, because in case of doubt, especially with your own home, something unforeseen always comes up. Of course, you could also pay for it in cash, but that is almost impossible for most employees. So, you have to borrow the money somewhere, e.g. take out a loan at a bank. Without a certain amount of equity, however, it is difficult to get a loan. As a rule of thumb, you should have about 15% of the purchase price already saved up to get a decent loan. Better is 20-25% of the total cost, because there are always additional costs such as tax, the broker and the notary. And of course, the unforeseen incidents, or the yet larger extension/kitchen. 😉

So, now we’ve taken a basic look at the homeownership side of things. Do you already know whether you would like to own your own home one day? 🙂

Real estate as an investment

Now let’s think one step further. Imagine you not only don’t pay rent anymore, but you get an additional income – rental income from a property you don’t live in yourself, but rent out! How does that sound?

And what impact do you think this scenario will have on your rent payment or retirement savings? Now you can really talk about real estate as a retirement provision!

Real estate as an investment is part of long-term asset accumulation and can be a part of your retirement provision. The following graph shows the path to real estate as an investment schematically.

Graph showing how to afford real estate as an investment

Real estate as an investment actually is an investment

In simple terms, it’s like a savings plan where you invest money monthly, but instead of saving it in an account or in a retirement policy, you invest it in a property and receive the rental income as a “payout” at the end.

Behind this is the purchase of a property, where the bank provides the investment sum (there are interest-, repayment- and management costs), the tenant pays the rent and the tax office refunds taxes every month. This means that you do not have to pay off the loan alone, but you can pay off a large part of it with the help of “third parties” (the tenants) and the tax office, thus only a small monthly burden remains. There is an additional advantage because of the long term nature of this investment. Earlier we looked at the issue of inflation. This makes the property worth more over time, but the money itself – in this case the debt – loses value. So you can “inflationize the debt away“ over time. 😉

As with the property as an owner-occupied home, a certain amount of equity and a certain credit rating are an advantage/prerequisite here. After all, the property has to be paid for out of something. As a guideline, you can orientate yourself at an annual income of about 40.000 € gross. It’s more about your income than about the equity you bring along, because the rates are usually not as high, but they last longer. However, the following also applies here: the more equity, the better.

To get a suitable property now, we don’t necessarily recommend just running out and looking for a nice property. There are a few important things you should consider. But even then, don’t just go ahead without an appropriate specialist!

What to look for in real estate

First and foremost, it’s all about location! The best property is useless, if it is located in a place where no one wants to move. Here, for example, you should pay attention to the infrastructure, the value and demand in the corresponding region. Then, of course, it is about the building itself. What condition is it in and what equipment does it have? Management is also of great relevance. If you don’t want to check up on things constantly and take care of everything yourself, good property management and condominium management is indispensable. Last but not least, you need tenants for your property and the right ones at that. Thus, the selection of tenants should be professionally supervised and the development of existing rents should also be taken into account.

Sounds like a lot, doesn’t it? However, if you get the right support, you don’t have to worry about all this, but are expertly supported in the process. 🙂

Let’s draw a little conclusion

Both real estate as a home and real estate as a capital investment definitely have their advantages! Home ownership is very popular and offers individual as well as creative freedom. Most see the biggest advantage in saving the rent payments in future. This is very, very beneficial; however, many also associate it with their retirement savings. This, in turn, can be very dangerous, as there will always be more costs coming your way.

Note: Home ownership is NOT a retirement plan!

On the other hand, real estate as a capital investment can be another source of financial income and can be very attractive, especially with regards to your income in retirement.

And now we want to let you in on a little secret: One does not exclude the other! Why not own a home and a property as a capital investment and enjoy both advantages? In this case, the investment property is recommended first, then the own home. Because with an investment property you increase your credit rating and can make the leap to owning your own home much faster!

Are you ready for your own property?

Since the topic is very extensive, we have only summarized the basic features here. If you are interested in more details and information, feel free to contact us personally. 🙂

Until then, all love

Your FrauFuture Team


Immobilien Statistik: Haus, Wohnung, Kapitalanlage, Demografie und Quadratmeterpreis

Main pic: Luke Stackpoole on Unsplash

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