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Buying ETFs or a Home: What Makes More Sense in Germany?

This calculator helps you to determine if it makes more sense to invest in a home or buy ETFs – or how to use ETFs when you want to buy a home.
Dr. Chris Mulder

Dr. Chris is a former Senior Economist and Manager at the IMF and The World Bank. He is a Hypofriend Co-founder.

Published on Mar 2, 2023 Published on Mar 2, 2023 . Updated 4 months ago

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Dr. Chris is a former Senior Economist and Manager at the IMF and The World Bank. He is a Hypofriend Co-founder.

This calculator helps you determine whether you should invest in ETFs or buy a home instead.

Using the calculator you can put a realistic number on the financial effect of these options and help you understand the outcome.

Let's see whether buying a property or investing in ETFs is better for you:

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The Results

First, we compare the two options you have for property, using it yourself and renting it out, as the result is not the same.

Renting out, typically, earns you more . Your results in 10 years:

Your wealth as a landlord would grow to

168.161 €

Owning your home would grow your wealth to

149.043 €

Why? Because you can depreciate the property in Germany and deduct this from your taxes. We assume here an existing property that was built after 1925 and before 2023 with a depreciation rate of 2 %. Note: it is 2,5 % for properties that are older and 3 % for properties that are younger. You can get even higher depreciation rates for very climate friendly rental housing.

Figure 1. Rental property earns you more after 10 years as you then don't pay capital gains tax

The result assumes that maintenance cost is the same for an investment and an own home, while in practice you often do work yourself on your own home, and thereby save money. Also, a rental property is harder  to sell, especially with a tenant.

Calculate your mortgage options

Use Hypofriend’s mortgage calculator to calculate your mortgage options in Germany.

The key points to take away are that being a landlord in Germany is much more attractive than in most other countries and financially more or less as attractive as living in it yourself.

ETFs vs buying a home?

Now let's turn to the choice between investing in ETFs and buying a home either for yourself or as an investment.  

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Your results in 10 years:

Your ETF portfolio (after tax) grows to

93.618 €

Owning your home would grow your wealth to

149.043 €

In your case with modest ETF investment returns and expected rental yield, buying property makes the most sense financially. If you are the typical investor with a return of 3-6 %, for example, because you do not hold all your savings in ETFs but partly in a bank account, or you have the average returns of an individual investor, then buying a home makes more sense. Also if you like living in your own home, as many people do, owning a home can be more attractive. Therefore for most people, the typical path is to first buy your own home, and then build up an ETF portfolio.

Do note that your choice depends on the risk. ETFs are typically more risky, and a minimum holding period of 10-15 years is strongly recommended. House price dips tend to be shorter-lived.

Let's recap and explain this result!

You purchase a property for 300.000 €, expecting an annual appreciation rate of 3 % per year and a rental yield of 4 %. Upon the purchase, you need to pay 8 % of the purchase price, which amounts to 24.000 €.

In your first year as a homeowner, you would save 1000 € in rental expenses per month but pay 1188 € per month in mortgage and 128 € in maintenance, leading to a negative cash flow of 316 €.

As a homebuyer you normally start with a negative cash flow that improves over time. As a landlord you will see your rental income increase, and as a self-user you see your rental savings increase, while in both cases your mortgage payments  remain the same. Eventually, the rental savings is greater than the mortgage and maintenance expenses, and you will get a positive cash flow.

Homebuyer's cash flow

Year

Mortgage + maintenance payment

Rental savings

Homeowner cash flow

1

1.316 €

1.000 €

-316 €

2

1.320 €

1.030 €

-290 €

3

1.324 €

1.061 €

-263 €

10

1.355 €

1.305 €

-51 €

15

1.382 €

1.513 €

130 €

20

1.413 €

1.754 €

340 €

To make a fair comparison we assume that the ETF investor gets an amount equivalent to the cashflow of the homeowner to invest. So in the first year, if the homeowner has a negative cashflow of 316 € per month, the ETF investor gets 316 € extra to invest.

Second, it is important to realize that buying a home or ETFs is more attractive depending on the time horizon, as the graph below shows.

Figure 2. The return depends on how long you invest:

When you buy a house you have high initial transaction costs, that you first need to earn back. So if you buy a house for just a few years, investing in ETFs is much more attractive.

Over time house buying becomes more attractive. First, you don't pay capital gains tax if you hold it long enough. If you buy a house as an investment you get quite an uplift in your net wealth after 10 years as you no longer have to pay capital gains tax if you would sell your house. Note: If you live in the house yourself this already happens after 2-3 years.
Second, when buying a home you are leveraged. That means you borrow money at a low rate and that money works for you, earning you a higher rate on your invested own money.

That leverage works in your favor during the first 10-15 years. If you are the standard homeowner who pays off their mortgage, then the leverage goes down. And on the money that you repay, you only earn the mortgage interest. This is nearly always lower than the rate on ETFs.

In the long run, an ETF investment is therefore again more attractive. This happens because, when you pay off your mortgage, you have relatively more capital in your house (in other words you are less leveraged) and your return on that capital declines.

The best of two worlds is actually as follows: borrow against your home if your loan-to-value ratio has dropped to below 80 % and invest that money in ETFs. In that way, you maximize the return on your capital. That is what I have done myself throughout my life. In that case, buying a house early on gives you by far the highest return. Then over time with the certainty of your own home, and a degree of job security I felt I could also take much more risk and comfortably invest very large sums in stocks.

Let's review the assumptions in some more detail

A summary of the critical assumptions

Assumption

Inputs

Horizon (in years)

10

Interest rate

3,5 %

Loan to value

95 %

Rental growth

3 %

Mortgage repayment rate

1,5 %

Depreciation of the investment home

2 %

Land value/property  (which cannot be depreciated)

25 %

A summary of the detailed results for Own home

Horizon (in years)

10

Home Value

403.175 €

Total accumulated net profit

149.043 € 

Remaining loan balance

212.369 €

Total tax depreciation benefit

0 €

Gross rental income per month

1.305 €

Monthly mortgage payments

1.188 €

Maintenance cost in first month

168 €

Net cash flow in first month

-316 €

Annual average income tax

26 %

The most critical assumptions are the increase in house price, the rental yield, and the mortgage interest rate. To get a sense of the impact you can adjust these assumptions above.

Either way, saving in ETFs and investing in a home will grow your wealth and help you gain financial freedom and safety in old age.

How does this calculator work?

In general, our calculator allows you to compare returns for three different use cases.

  • Scenario 1: Buying a property for personal use

  • Scenario 2: Buying an investment property to rent out

  • Scenario 3: Pure ETF investment

In the background, we perform a number of calculations to be able to make a fair comparison between the scenarios:

  1. As shown in the table above we calculate the scenarios with the same cash flow by using the homeowner as the baseline.

  2. Your initial savings are assumed to be enough for a downpayment to buy a property or alternatively as your initial investment amount in ETFs.

  3. Based on your input, a theoretical rent for the property is calculated. The homeowner (scenario 1) and the property investor (scenario 2) saves and receives respectively more rent over time as we calculate with an annual rent increase of 3 % and this improves their cash flow. Depreciation in investment property, known in Germany as "Absetzung für Abnutzung" (AfA), is a method by which property investors can reduce their taxable income. You can read more about the AfA in this article.

  4. For the ETF investor (scenario 3), the difference between the monthly mortgage payment and the rent is considered as the monthly investment in ETFs.

The Risk

Your choice of investment is not just about expected return: you will also have to consider the risk that the outcome is not as expected. In the figure below we show the results for standard return and risk. 

For stocks, the risk of a loss is higher the shorter you keep them. Over long periods the minimum expected return for a good portfolio is quite high as stocks grow with the economy. The red line shows you the 10 % worst case in history using 150 years of S&P 500 data.

For home buying, the risk is a more modest average appreciation. 300 years of Dutch data and 100 years of German data suggest that an appreciation in line with inflation plus 1 %-2 % is the most likely. Nominal house price declines are pretty rare and usually are recouped in a few years. The gradual price increase is being driven by higher construction costs, and higher incomes and population growth are making land scarcer and more expensive.

Figure 3. The impact of risk on expected returns of home buying and ETF investing

1) Gains are after tax and selling the investment. We assume that Pensionfriend's low-cost private pension will be used to provide a tax-saving attractive solution.

2) The worst-case scenario means the statistically worst 10 % percentile performance of the S&P 500 in a correspondingly long comparison period.

The Tax-Efficient Way to Invest in ETFs

Investing well is critical. Most people do not invest well, as it is complex. So do be realistic in weighing the alternatives.

In Germany investing is also complex with most people picking options that are too costly and have low returns. This is the case for most if not nearly all of Riester, Rurup and direct company pension plans. You may already know this, but for many people, a low-cost private pension plan is a cost and tax-efficient solution for buying ETFs, as it reduces the capital gains taxation. From a cost and tax perspective a private pension plan is typically more attractive then holding ETFs through a broker if you hold for the long-term, or rebalance your portfolio more than about 10 % annually. For nearly all people these are in any case your two best options in Germany, apart from real estate.  

Note that if you have a private pension plan you can use the portfolio as collateral when you buy a house. Because it is held through a life insurance company, banks then treat your ETF investment as credible collateral. Using ETFs as collateral has two benefits:

  1. Your ETF assets continue to grow

  2. You avoid paying capital gains tax early, and so you continue to benefit from returns on that money. 

You can check out all the detailed arguments and calculate yourself in this article: 

Discover how much you can save with a private pension plan with our Investment Calculator Germany: ETFs vs. Private Pension Plan.

As default in our calculations we assumed Pensionfriend's pension plan including tis low cost and tax benefits. We expect a performance of 8,05 % for our global portfolio, or about 2 % more than the global MSCI world benchmark.

Calculate your mortgage options

Use Hypofriend’s mortgage calculator to calculate your mortgage options in Germany.

An Overview of the 10 key Arguments 

ETFs have democratized investing by making it easy to invest in large baskets of stocks with virtually no cost, and no taxation of dividends. But are they more attractive than buying a house to rent out, which is the traditional German way of creating wealth and saving up for a pension?

To help you make your decision, we have summarised all the key arguments in the table below. Take a look to see which arguments make the most sense to you!

ETF vs Investment Property 10 Key Considerations

Key considerations

ETF

Investment property

Tax

26,375 % capital gains tax

Less than half when invested via a private pension plan.

0 % after 10 years
Income tax is due on rental income but it is limited due to a depreciation tax benefit allowance

Leverage

Maximum 30 % and for most people not advisable.

Borrow up to about 100 % of your investment  at a modest cost.

Gross return

3-8 %

3-4 %

ROI

3-7 % in the long term after tax

12-18 %, declining to 4-6 % if leverage declines.

Hassle

Little

Considerable for older houses

Fickleness

Risk of buy high, sell low; poor stock picking; frequent trading with high cost.

You may fall for a charming house with problems.

Liquid

Yes

Only through cash out, if LTV <80 %. Or use the house as collateral.

Liquidity problems

None unless leveraged.

Little, if the mortgage rate is fixed long enough.

Risk

Limited over the long run.
You need to be able to stand volatility. You have to count on the possibility that your investment is underwater for a period of 10 years.

Limited over the medium run. House prices rarely decline and over time always increase.

Inflation proof

In the medium/long term stocks increase with inflation but over the short term inflation is bad for the profits and valuations of companies.

Over the medium/long term house prices increase with inflation, as wages and purchasing power go up, but when inflation leads to higher interest rates it can make houses less affordable, and dampen their price.

Keep in mind that from the perspective of buying your own home, it does look different.

When you live in your own home adjusting to your taste and wishes – unlike a rental property – is a key consideration. There is more choice on the market, and no risk to be booted out. You can keep the house in old age and don't need to worry about rent increases.
And from a tax perspective, you don't need to worry about paying taxes on rental income.

We hope this article has helped you get more insights into whether buying a home makes more sense, or whether ETFs are the better option. If a home is the more worthwhile investment for you, the best way to start your journey is to find out how much house you can afford. And if If you do decide on ETFs, be sure to review Pensionfriend and learn how we take all the effort out of investing and offer a clever, tax-efficient way to invest and retire in Germany. 

Dr. Chris Mulder

Dr. Chris Mulder

Dr. Chris is a former Senior Economist and Manager at the IMF and The World Bank. He is a Hypofriend Co-founder.