Rent versus Buy: A Structured Comparison

What you will learn

• Why comparing rent with the mortgage payment is the wrong comparison.
• How to calculate the unrecoverable costs of owning and of renting.
• How to find the yearly value growth an owner needs to break even with a renter.
• Which non-financial factors belong in the decision.

Explanation

A common argument is: "My mortgage payment is about the same as my rent, so buying is better." This compares two different things. Part of the mortgage payment is repayment, which is not a cost but a transfer from your bank account into home equity. Meanwhile, the owner faces other costs that a renter does not see directly.

The unrecoverable-cost method

Unrecoverable costs are money that is gone and does not build wealth. For a renter, this is mainly the cold rent (Kaltmiete, rent without heating and service charges). Service charges that both owners and renters pay, such as heating and water, roughly cancel out and can be left out.

For an owner, the yearly unrecoverable costs are:

• Interest on the mortgage (not the repayment).
• Maintenance: repairs and renewals. A rule of thumb used in many comparisons is about 1% of the property value per year; older buildings may need more.
• Opportunity cost of the down payment: the return you give up because your money is tied up in the property instead of, for example, a diversified fund or a deposit. Use a cautious, assumed rate.
• Purchase costs spread over the holding period: Grunderwerbsteuer, notary and broker (lesson 2) are lost money; divide them by the number of years you expect to stay.
• Owner-only costs such as non-recoverable owners' association fees, if any.

Then compare: if owning costs more per year than renting, the owner needs the property to gain value to catch up. The break-even value growth is:

Break-even growth per year = (owner's unrecoverable costs − renter's cold rent) ÷ property value

The renter's discipline

The comparison only works if the renter actually invests the down payment and any monthly difference. A renter who spends it loses the main advantage. The forced saving of a mortgage is a real behavioural benefit of buying.

Non-financial factors

• Flexibility: a renter can move for a job within the notice period; selling a home takes months and costs money.
• Security and control: an owner cannot be given notice for the landlord's own use (Eigenbedarf) and can renovate freely.
• Concentration: buying usually puts most of your wealth into one asset in one location (lesson 7).

Worked example

Hypothetical example: a flat worth €400,000. Comparable rent: €1,300 cold per month (€15,600 per year). Assumptions for the buyer: purchase costs 10% (€40,000), down payment €80,000, so own money €120,000 and a loan of €320,000 at 3.5%; maintenance 1% of value; opportunity cost 3% per year on the down payment; holding period 10 years. Excluded: taxes, value changes (for now), owners' fees, inflation, falling interest over time.

Owner's unrecoverable costs, year 1

• Interest: €320,000 × 3.5% = €11,200.
• Maintenance: €400,000 × 1% = €4,000.
• Opportunity cost: €80,000 × 3% = €2,400.
• Purchase costs: €40,000 ÷ 10 years = €4,000.
• Total: €21,600 per year, or €1,800 per month.

Renter: €15,600 per year. The owner pays €6,000 more per year in unrecoverable costs.

Break-even growth: €6,000 ÷ €400,000 = 1.5% per year. If the flat gains more than about 1.5% per year, buying wins in this model; if less, renting wins. Nobody knows future value growth, so the honest result is a threshold, not a forecast.

Note: the purchase costs were spread over 10 years, so the opportunity cost was charged only on the €80,000 down payment, to avoid counting the same money twice.

Common mistake

Practice activity

A house is worth €300,000; comparable cold rent is €1,100 per month. The buyer pays €30,000 purchase costs and a €60,000 down payment, and borrows €240,000 at 4%. Maintenance is 1% of value, the opportunity cost is 3% on the down payment and the holding period is 10 years. Calculate the owner's yearly unrecoverable costs, compare them with the rent and find the break-even value growth.

Key takeaways

• Compare unrecoverable costs, not rent versus mortgage payment.
• Owner costs include interest, maintenance, opportunity cost and spread-out purchase costs.
• The result is a break-even value growth rate, which you must judge yourself; it is not a prediction.
• Flexibility, security, concentration and saving discipline matter as much as the numbers.

Next step

The next lesson switches to the investor's view: buying a flat to rent it out, and measuring rental yield after vacancies, maintenance and management.