Buying or Renting Real Estate: The Best Tips for Your Decision
Should you buy or rent a property? This question is crucial for your financial future and depends on many factors. In this article, we compare both options and provide you with the key tips for your decision.
The most important points at a glance
The decision between renting and buying requires careful consideration of individual life circumstances and several factors.
Ongoing and one-time costs, as well as the potential for wealth accumulation, play a crucial role in the decision.
A favorable purchase price-to-rent ratio of about 20 can indicate that buying is more advantageous than renting, while a higher factor points to less favorable buying conditions.
Flexibility through renting allows for quick relocation and lower financial responsibility, while property ownership offers stability and wealth accumulation.
Buying or renting a property: A fundamental decision
The decision between renting or buying a property is fundamental and requires careful consideration of numerous factors.
Here are some important points you should consider:
Current rents
Purchase prices
Interest rates
Future developments of these factors
While the total costs of buying are always higher than the initial rental costs, they amortize over the years.
However, rising interest rates and high property prices present current challenges in property purchasing.
Rising rents in urban areas and various regions can lead to a situation where, in the long term, renting becomes more expensive than purchasing a property. A purchase agreement potentially offers long-term financial protection against inflation.
Individual circumstances, such as the condition of the property and future maintenance and modernization costs, influence the cost advantage of purchasing. Before buying a property, one should consider the costs and the possibility that renting may be cheaper.
Financial aspects: Purchase price-rent ratio
The purchase price-rent ratio is a crucial indicator for better understanding the financial aspects of real estate purchases. It is calculated by dividing the purchase price by the potential annual cold rent. A purchase price-rent factor should not exceed 20 times the annual cold rent to signal a favorable purchase. Numerous factors around 20 indicate that buying may be more advantageous than renting. These indicators support the assumption that buying could be the better option.
A purchase price-rent ratio of around 20 is considered favorable, while a ratio above 20 to 25 indicates less advantageous buying. A ratio starting from a factor of 25 is relatively expensive.
Calculating the purchase price-rent ratio helps to better understand the relative costs of buying versus renting and to make informed decisions.
Flexibility vs. Stability
Renting or buying – this question arises particularly when it comes to flexibility versus stability. Renting is especially suitable for people who want to remain professionally flexible or do not yet have fixed plans. Tenants are not tied to a specific property and can move more quickly if needed. Additionally, tenants are less affected by fluctuations in the real estate market, providing them with financial stability in uncertain times.
On the other hand, owners enjoy the security that comes with property ownership, which is seen as a stabilizing factor. However, owning a property can restrict flexibility, as selling can be time-consuming and potentially costly.
Renting allows for less responsibility for maintenance work, as this is typically handled by the landlord.
Cost comparison: Renting vs. Buying
A detailed cost comparison between renting and buying is essential for making an informed decision. The loan rates for purchasing the property are usually higher than the rent. The monthly financing costs should be compared with the monthly rental costs.
The monthly burden of financing is often 20 to 30 percent higher than renting.
When deciding between buying and renting, various costs must be considered, such as:
Rent
Additional costs
Notary fees
Property transfer tax
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Ongoing costs when renting
Renters have lower ongoing costs compared to homeowners, particularly regarding additional costs and maintenance costs. The care and maintenance of a rental apartment is the responsibility of the landlord, who also covers the costs for repairs.
Renters can hope that rents do not increase if they invest their money in savings accounts. This lower financial burden and the absence of maintenance cost risks make renting attractive for many.
Ongoing costs when buying
Homeowners must consider monthly loan payments consisting of interest and principal repayment. The monthly loan payment is composed of mortgage interest and principal repayment.
Maintenance costs occur irregularly for homeowners. It is recommended to save at least €1/m² per month for maintenance reserves as a homeowner. Buyers should budget approximately 1.5 percent of the property value annually for maintenance costs.
One-time costs when purchasing real estate
When purchasing a property, one-time costs arise, such as notary fees, property transfer tax, and broker fees. The most common one-time costs are notary fees, property transfer tax, and broker fees.
The acquisition ancillary costs typically range between 5 and 15 percent of the purchase price. For example, with a purchase price of €300,000, additional costs of approximately €45,000 (15%) for acquisition ancillary costs may arise, bringing the total costs to around €345,000.
Wealth building: Renting or buying?
Purchasing a property is advantageous for wealth building, as real estate generally experiences long-term value appreciation. Buyers can convert their equity into real estate assets, which is crucial for wealth accumulation.
The long-term value development of real estate is an important aspect for many buyers looking to build wealth. Renters can save their money and invest in the capital market, providing them with flexible financing options. If renters have higher expenses, they can draw on their saved funds, which offers greater financial security.
Long-term value appreciation of real estate
A property can serve not only as living space but also as an apartment and investment, promising long-term value growth. Demand for real estate increases as interest rates decline.
After the children move out or in old age, a property can be rented out or sold. In old age, the buyer has the advantage of living rent-free, while the tenant remains asset-less.
Alternative investments for tenants
Tenants do not need to take out loans, which provides them with greater financial flexibility during times of crisis. This flexibility allows tenants to make adjustments to their expenses without being burdened by fixed costs associated with property ownership.
Tenants should diversify and not invest all their assets in a single investment to minimize the risk of value fluctuations. Through smart diversification into various investment forms such as stocks or funds, tenants can effectively build wealth while also preparing for retirement.
Regional differences in property prices
Rental prices in Germany are continuously rising, while property prices fell significantly in 2023. In 2024, the average rental prices in Germany ranged between €8.54/m² and €13.37/m².
In the top 7 metropolitan areas of Germany, property prices vary significantly:
Munich has the highest price per square meter at €8,600/m².
In cities like Potsdam and Dortmund, property prices are rising.
Chemnitz and Wiesbaden are experiencing a decline.
Personal life circumstances and future plans
The decision between renting and buying should be made considering personal life situations and long-term plans. The choice between renting and buying heavily depends on individual life circumstances and financial capabilities.
Purchasing a home is particularly sensible for people who plan to settle down long-term and seek financial stability. Families looking for a stable residence often find that buying real estate is the better option for their home and houses.
Renting can be a beneficial choice for individuals who need flexibility or are not ready to commit to a location long-term.
Tips for the decision: Rent or Buy?
When making a decision, consider not only obvious costs but also hidden expenses and long-term commitments. The ancillary costs of purchasing real estate can quickly amount to 10-15% of the purchase price, increasing the financial burden.
A detailed analysis of all costs and personal priorities is important to make the right decision. Life situations such as separation, unemployment, or illness may necessitate the sale of a property. In such cases, a forced sale process is often unavoidable. Renters should be careful not to hold the majority of their wealth in a single investment to avoid value fluctuations.
What we recommend: The Optimal Mix
The best mix of flexibility and return is achieved when one rents a home and purchases a property for investment purposes, which is then rented out. This is precisely why many real estate millionaires choose to rent themselves.
The prerequisites for this are a sufficient financing framework and the right property. The investment property should, at least in the medium term, be cash flow positive, so that no additional ongoing costs arise from renting.
Often, this endeavor fails because a suitable property cannot be found. But don't worry, we can help you with your search. With our developer network, we will find the right investment property for you.