"Concrete gold" - better buy or rent real estate?


Concrete Gold sounds wonderful. However, is every real estate worth gold? In times of low interest rates, returns between 4-6% - commonly promised when buying real estate - sound good at first. A real estate purchase should be well considered. Therefore, the focus of this article is on the associated advantages and disadvantages.


Real estate purchase costs and returns

At the first glance, the investment in a real estate looks like a very good alternative to a savings account or money market account. Apparently, you can generate a higher return from this investment. However, some costs do exist - and they are not very low. 


Costs: you need 15% more than anticipated

When you’re buying a house or an apartment, you need more money than the purchase price states. Let's start with the brokerage fees: depending on the state and city, they average 6% plus 19% VAT.  Another cost factor is the land transfer tax, which is between 3.5-6.5% of the purchase price depending on the state. In addition, you must register the property in the land register: this makes up about 2% of the purchase price. So overall, you have to add another 15% to the purchase price. 

Our Finelles Ms. Eva is a good example. She buys a house for 500.000€. Above-mentioned 15% make up 75.000€. If renovation costs are added, Eva will have to spend 600.000€ in the end.  

A positive aspect is that Eva can claim these costs on her tax return. She may specifically deduct interest from the tax on the property loan. In addition, broker's commission, notary and court costs, property tax, repair and renovation costs can be deducted.  


Real estate price

In addition to ancillary costs, the largest portion of costs is the actual real estate price. In the end, the investment in the real estate must be worthwhile or profitable for you:

  1. Gross Rental Multiplier: Some experts say that a purchaser should not pay more than 20 annual cold rents for a property. In cities like Munich this is not easy. It is more likely that 25 to 30 annual cold rents will be charged there: Purchase price / Annual cold rent. Example: Eva buys an apartment with a monthly rent of 1.500€. That is 18.000€ per year and thus 450.000 Euro in 25 resp. 540.000€ in 30 years. If the property already costs €600,000 now, this investment would no longer be attractive.

  2. Return: The return represents the profit or gain on an investment. It becomes of interest to you when you rent the property. It is usually expressed in % and calculated annually.

 There are always opportunity costs when investing: if you put your money into an investment, you can no longer use this capital for other investments. The comparison of the returns will help you to make a decision. Important: You should consider all costs. 

Example: If you buy a house worth €1 million and rent it out for €25,000 a year, you will have the purchase price returned after 40 years, according to the rent multiplier. However, this does not include operating costs of €2,500 per year, i.e. you will basically receive net rent of €22,500 per year (€25,000 minus €2500). Additionally, the ancillary purchase costs of e.g. 8% (80.000€ of one million) are charged: you have to pay approx. 1, 08€ million as the total purchase price. If you want to calculate your return, then you have to calculate 22.500€ / 1.080.000€. The result: an annual net return of approx. 2.1%. And not of 4-6%. - which are often advertised.  


●     In order to calculate your gross return, you will need the purchase price plus purchase costs and ancillary purchase costs. You divide your annual rental income by the property value. Example above: 25.000€ / 1.08€ Mio = 2.3%

●     In order to calculate a net return you need to calculate the purchase price plus purchase costs and ancillary purchase costs. You divide your annual rental income minus your annual costs by the property value. Example above (25.000€-2.500€)/1.08 Mio = 2.1%

When considering opportunity costs, you should also be aware that real estate is less liquid than other investments. You cannot sell a house or apartment as fast as shares or funds.


What influences returns, price and cost?

The price of property is determined by:

  1. The location: if the real estate is located in a city, the prices are typically higher compared to those in the rural area. If you are selling the property, you are more likely to make a profit. Example: In Munich, prices for condominiums have risen by 10%. This is due to supply and demand: more people want to live in cities, and sometimes there are not enough apartments. Plus: there is an increasing number of singles who live in their own apartment. There are contrary trends in many rural areas. Due to the ageing population and rural exodus, the demand for housing is declining. The rental prices and the rental returns for property owners are also correspondingly lower.

  2. Students: Also, student cities are often an indicator of rising prices, as graduates tend to look for a job near the city where they are studying. Since graduates usually have a higher income, they also have better chances to afford housing that is more expensive. In one research study, Deutsche Bank particularly quoted Marburg, Heidelberg, Trier, Würzburg and Münster, as these cities have a very high proportion of students compared to the total population of the city. The real estate value development in typical German student cities (over 15% of students) is better than in cities without a significant proportion of students. Over the last ten years, the average increase in value of new condominiums in such cities has been more than 1.5 percentage points higher per year than the increase in value in cities with very few or no students.  

  3. The condition of the property and, accordingly, the cost of renovation. Below are some questions that may need to be asked when purchasing:

a)    Buildings up to 10 years old / within the last 10 years completely modernized: Were there any mold problems, moisture damage, plaster spalling or cracks in the masonry?

b)    Buildings up to 20 years old: Have facade, staircase or railings coatings been renewed in the meantime? Have the door leafs and window frames been painted? Have the floor coverings and heating been renewed?

c)   Buildings up to 30 years old:Have the sanitary facilities and / or the roof been renewed? Has the balcony been renovated?

d)    Buildings over 40 years old:When was the roof, the cables, the heating system and the electrical system replaced? What is the condition of the wiring, the staircase, the front door, the garage entrance access?

4.  Equipment and Floor Plan


Your costs are determined by

●     Real estate price and ancillary costs

●     Equity and financing:It is said that you need at least 20% equity, but you may find better terms with more equity. From 40% equity,you get the best terms if you finance the property. In the case of full financing, one pays between 0.4-1.2% more interest. Experts say one should have at least 15 years of planning security, i.e. a fixed interest period of 15-20 years. At the same time, the redemption rate (i.e. the rate that one pays min. 2%, but preferably 3-4%).


Focus on interest and redemption

Interest: The interest represents the interest paid to the bank for the loan. In this sense, interest only represents the payment of a service, namely for providing the credit.

Redemption: Redemption is simply the repayment of the loan. In the case of full financing, the value of the real estate is offset by the loan or redemption.

With most types of financing, one pays a monthly rate to the bank, the so-called annuity, which is made up of the interest and redemption composition. Over the term of the loan, the share of interest usually decreases with the rate and the redemption portion increases. The higher the redemption rate, the shorter the term.

Advantages of a house or apartment purchase

●     Capital gain: Either from letting out properties orfrom 

●     Rental income from lettingout properties   

●     Tax advantages: Landlords can offset the financing interest paid against the rental income. Owners may deduct depreciation on buildings, maintenance costs and repair and administration costs from income tax

●     Supplementary pension when renting the property

●     Saved rent (owner-occupier). According to expert estimates, homeowners have around 30% more financial leeway in retirement than senior citizens living on rent.



●     Tenant-friendly legislation: Legislation and jurisdiction make it difficult for landlords to quickly get rid of nomad tenants.

●     Repair costs: Whoever buys an apartment in an apartment building has little influence on repairs and their extent, which is decided by a majority at the owners' meeting

●     Social environment: If the social environment of the property changes, this may lead to declining rents.

●    Interest: Those who do not secure the loans for a very long time when purchasing the property, i.e. at least for 15 years, run the risk that the investment will no longer pay off after expiry of the fixed interest period due to higher interest rates.

●    Illiquid: The money is tied up to a property. If you have to sell the house or apartment before ten years have elapsed, as you urgently need money, there is a risk of speculation tax and prepayment penalty for the premature termination of a financing loan.

●    Small risk diversification: When you buy a house or an apartment, there is often little money left for other investments. This leads to low diversification.

●    Administrative expenses: As a landlord, you have additional expenses such as finding a tenant, repairs, complaints and the annual rental charges invoice.


Summary: Buying real estate can be a good idea

Real estate can be a great investment if you find one that pays off or where the price is moderate and the cost is not too high. A realistic calculation shows that the net return is often less than 5%, more likely about 3%.

In the second article, we focus on financing real estate.

Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson). 



(5 min read)