Own home, buy-to-let or ETFs?

The three paths

Three households with the same means: €100,000 of equity and the same budget for housing and saving.

1. Own home. You buy a flat for €400,000 and live in it. Instead of rent you pay interest, principal and maintenance.
2. Buy-to-let. You rent your home and buy an equivalent flat that you let. The rent you pay and the rent you receive roughly cancel out; on top come the loan, costs and tax.
3. ETF portfolio. You buy no property, rent your home and invest the equity in a broadly diversified ETF, plus every month the difference between its costs and what buying would cost.

Comparing fairly: the same budget

Many comparisons set the loan payment against the rent and stop there. That falls short: the buyer spends more every month and repays debt with it, while the renter may invest the difference, or may not. A fair comparison gives all three paths the same budget every year, namely what the most expensive path costs. Whoever lives more cheaply puts the difference into an ETF.

What counts at the end is net worth: the value of the property minus the remaining loan, plus the portfolio, each after tax, as if sold on that day.

What tips the balance

With the example values, the three paths end up close together after 25 years: the ETF portfolio at about €673,000, buy-to-let at about €650,000, own home at about €609,000. Small changes turn the order around. These assumptions matter most:

• Price-to-rent ratio. Purchase price divided by annual cold rent, 26.7 in the example. The higher the ratio, the more expensive buying is compared with renting. If the same flat rented for €1,600 instead of €1,250 (ratio 20.8), the own home would lead after 25 years at about €666,000, and the ETF portfolio would fall back to about €478,000.
• ETF return versus value growth. The ETF path lives on the portfolio’s return, the property paths on value growth, leveraged by the loan. At a 7 % instead of 6 % ETF return, the ETF portfolio grows to about €812,000; at 3 % instead of 2 % value growth, both property paths lead with about €783,000 and €835,000.
• Interest rate. At 2.5 % instead of 3.6 %, the own home leads (about €586,000 against €501,000 for the ETF portfolio). At 4.5 %, buying costs so much more that the renter invests correspondingly more and leads clearly at about €820,000.
• Time frame. Purchase costs are gone on day one; in the example the own home starts with €60,000 of net worth, the renter with €100,000. Whether and when buying catches up only shows over many years. The jump of the rental property after ten years has a tax reason: from then on, a gain on sale is tax-free in Germany.
• Discipline. The model assumes every difference really gets invested. A loan forces saving through repayment; when renting, it is up to you.

Own home: security, concentrated

The own home is the simplest of the three: no tenant, no rental tax return, no notice for the landlord’s own use. With the last payment at the latest you live cheaply, which lowers spending in retirement markedly. A gain on sale is tax-free if you lived in it in the year of sale and the two years before.

In return, a large part of your wealth sits in a single property in a single place, and neither interest nor maintenance is tax-deductible. For retirement planning, your home counts differently from other assets: it saves rent but brings in no money you can withdraw (Does my own home count as wealth?).

Buy-to-let: leverage with a tax advantage

If you rent your home and let a flat, you use the loan’s leverage just as with your own home, but with a tax advantage: interest, running costs and depreciation on the building lower your tax. In the example, the monthly outlay is therefore lower than for the own home. Whether the flat carries itself shows in the cash flow after debt service.

In return you are a landlord, with everything that comes with it: finding tenants, service charge statements, repairs, the risk of vacancy and lost rent. Renting yourself also leaves the risk of rent increases or notice for the landlord’s own use. A gain on sale is only tax-free after ten years.

ETF portfolio: flexible and diversified

The ETF path is the most flexible: wealth spread over thousands of companies, saleable at any time, and moving costs no purchase costs. In return the portfolio swings more than a property value in a valuation report, and capital gains tax is due on sale, for equity ETFs with the partial exemption effectively about 18.5 % of the gain.

This path only works if the difference between renting and the cost of buying really gets invested every month. Without the push of a loan payment, that is a question of habit, not of arithmetic.

What no calculation shows

The numbers answer only part of the question. How much security from notice matters to you, whether you want to live in the same city in ten years, whether you want to be a landlord at all, and how calm you stay when your portfolio drops 30 %: all of that decides too, and no calculator can weigh it for you.

Many households end up not on one path but a mix: a home, a portfolio and perhaps a rental flat. That is when it gets hard to keep track, and that is what Wertavo is built for: all assets, all loans and all cash flows in one net worth, and the question whether it is enough for retirement.