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

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:

Why? Because you can depreciate the property in Germany and deduct this from your taxes. Here, we assume an existing property was built after 1925 and before 2023 with a depreciation rate of 2 %. Note: it is 2,5 % for older properties and 3 % for younger properties. 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 home and thereby save money. Also, a rental property is harder to sell, especially with a tenant.

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.  

Your results in 10 years:

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 will 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

To make a fair comparison, we assume that the ETF investor gets an amount equivalent to the cash flow of the homeowner in which 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, buying a house has become more attractive. First, you don't pay capital gains tax if you hold it long enough. If you buy a home as an investment, you will get quite an uplift in your net wealth after 10 years, as you no longer have to pay capital gains tax if you sell your house. Note: If you live in the home yourself, this will happen 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 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 decreases. And on the money that you repay, you only earn the mortgage interest. This is nearly always lower than the rate on ETFs.

Eventually, 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 my 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

A summary of the detailed results for Own home

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?

Our calculator generally 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 several 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 using the homeowner as the baseline.

2. Your initial savings are assumed to be enough for a down payment 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) save and receive respectively more rent over time, as we calculate with an annual rent increase of 3 %, improving 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 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 10 % of the worst cases 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 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 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 an attractive tax-saving 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, 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, Rürup, 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 than holding ETFs through a broker if you hold for the long term or rebalance your portfolio by more than 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, 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 its 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.

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 summarized 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

Remember that from the perspective of buying your own home, it does look different.

When you live in your own home, adjusting to your tastes and wishes – unlike a rental property – is a key consideration. There is more choice on the market and no risk of being 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 understand whether buying a home makes more sense or whether ETFs are the better option. If a home is a more worthwhile investment for you, the best way to start your journey is to find out how much house you can afford. 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. 

Discover Pensionfriend, the smart way to invest for a safe and sound retirement.