The common perception is that buying a Home is better than renting. But is that true? 🤔
People tell us often in consultation that paying rent feels like throwing money out of the window. That paying rent does absolutely nothing for them except giving them the right to live in their landlord’s place for another 30 days. If they would buy a flat or house on their own, at least they would be Saving towards some form of ownership.
Comparing just your rent payment with your mortgage payment is like comparing apples with oranges. The world is much more complicated than that. To get some clarity on why this comparison is wrong, and how to compare the right way, let us have a look at the #1 Real Estate Myth.
“In personal finance, we have to compare apples with apples. Not apples with oranges.”
#1 Real Estate Myth
“Rent is insanely high here in Germany. So high that I can buy a home instead of wasting money for rent.”
We hear this over and over again. And it makes complete sense, right? When you pay 100€ to your landlord, the money is gone. When you pay 100€ to the bank, eventually you will own your Home.
The argument here is that the rent payment to a landlord is wasted money because you get no (financial) assets at the end of the month in exchange for it. If one would take a mortgage and pay the Bank each month, you would exchange the money for your Home. Because after 20, 30, or more years you would own your Property free and clear.
Many people believe in this Real Estate Myth that rent is “wasted” money. And if you believe in this myth as well, you are buying a Home under the completely wrong assumptions. Let us talk about the basic concept before you make a big money mistake and rationalize buying a home when you actually shouldn’t given your financial situation.
Comparing Rent Payment & Bank Payment
Your rent payment is a payment for a service like any other service you use (e.g. cinema, public transport, etc). It is a very easy concept.
The Bank Payment is not that easy as it consists for 2 different payments:
Principal: The capital-building part of your mortgage payment. Meaning with every payment you make, you will own more and more of your Property.
Interest: As no Bank is giving out money for free (up to now at least 😉) you have to pay interest on your mortgage as well.
If you think that rent is a waste of money, then interest is also a waste of money. The German name “Mietzins” (=rental interest) describes this perfectly. Interest for homeowners is gone like a rent payment because in Germany only interest for Real Estate investors is Tax-deductible (unlike in the U.S.).
On top of the mortgage payment to the Bank, homeowners also need to build up Savings for maintenance and renovations. As a tenant, your landlord will pay for maintenance and renovations of the Property you are living in because it is his or her property.
So if we want to compare the rent payment with the Bank payment, we really have to compare the interest payment to the bank with the rent payment to the landlord in order to have an apple with apple comparison.
The principal part of the mortgage payment to the Bank is really savings for future renovations and maintenance of the Property. As a tenant doesn’t have to save for renovations and maintenance, he is much more flexible and has a lot more options in the way he wants to Save and Invest his money.
Tenants are not forced by the Bank to invest in their home, so they can use our “Investing in Germany” series to find the best investment option for them. With Mutual Funds, ETFs, and Pensions you certainly have a lot of exciting investment options aside from Real Estate in Germany.
Is Renting or Buying Better for You?
Let's Find Out Together.
As you can see, the world is much more complicated than just comparing two payments with each other (rent payment to the landlord with the mortgage payment to the Bank). So let us look at 3 benefits of renting Real Estate in Germany, followed by 3 benefits of buying Real Estate in Germany, before drawing a conclusion.
Real Estate in German means “Immobilie”. And “immobile” is certainly the name of the game when buying a home in Germany. Tenants are way more flexible compared to homeowners. Tenants can cancel their rental contract and move out of the Property. Homeowners need to find a new buyer who is willing to pay the price they want and then go through a lengthy process to sell their home.
Renting is also significantly less work, stress, and effort. As a tenant, you just reach out to your landlord if something goes wrong with the Property. It is the landlord’s responsibility to pay for all kinds of maintenance and renovations. Tenants just pay their rent to their landlord and can Invest the money a homeowner would need to spend on his Home.
Rent payments are very plannable costs going forward. Most tenants know exactly how much they have to pay to their landlord in the years to come. With no extra costs aside from their rent payment. There cannot be unforeseen costs that will make you struggle to pay your own mortgage.
Do these benefits of renting a Home in Germany mean that buying a home in Germany a bad idea? Of course not! We will never make generalized statements saying that everybody should do one thing over the other. So let us also have a look at 3 benefits of buying a home so you have the complete picture.
3 Benefits of Buying Real Estate in Germany
Buying a Property in Germany can offer many benefits if you buy the right property for your financial situation (e.g. right price, right location, etc). The biggest benefits of buying a Home in Germany include:
The most obvious benefit is that when you own a Property, you can do whatever you want with your Home: You can paint the walls in any color you want, you can get a pet without asking anyone else for permission. Nobody will force you to vacate either (just the Bank if you do not pay your mortgage).
Real Estate in Germany has been a pretty great Investment when looking at the historical return. The Postbank Wohnatlas calculated that Real Estate prices in Germany rose by 9,6% in 2020 (after Inflation). So when a homeowner puts 10% down and gets 90% from the bank as a mortgage, the real return of your own capital was an incredible 96% in 2020.
The last big benefit of homeownership is that your Bank will force you to Save money over the long term. Even though it might not sound as beneficial for you as a potential Homeowner, from a financial advisor perspective the bank is at least helping you to beat Investing Fail #7: Procrastination.
Even though there are many more benefits of buying Real Estate in Germany or renting Real Estate in Germany, the conclusion can be drawn already with the same result we have ever so often when asked which result is better: It depends.
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There is no general right or wrong in this buying vs. renting a Home debate. There are just some wrong assumptions like the thought that rent is a waste of money, but that doesn’t make renting a bad idea. From a strictly financial perspective, it would be best to rent yourself and buy properties as an Investment.
Both buying a Home and renting a home offer benefits and that is probably the reason why people are debating about this topic for many years now. It certainly might be the biggest financial decision of your entire life, so you should plan carefully which option is better for you. If we can help you with this step in your life, you can secure a free 30-minute meeting with us right Here.
What do you think is better: Buying a Home or renting a home? Let us know in the comments below.