Buy or Rent? An Honest Calculation

Few financial questions are debated as emotionally as this one. Some see owning their home as security, retirement provision and a slice of freedom. Others calculate that renting keeps you flexible and that the capital tied up elsewhere earns more. The problem with both camps is that they offer an opinion where a calculation is needed. The honest answer is that there is no universally valid one. Whether buying or renting makes more sense for you depends on a handful of assumptions that vary considerably from case to case.

Why gut-feeling answers fall short

"Rent is money down the drain" sounds convincing, but overlooks the fact that money permanently disappears when you buy too: interest to the bank, additional purchase costs, maintenance. None of that goes into your wealth. Conversely, "buying is no longer worth it" ignores the fact that repayment genuinely builds wealth and a fully paid-off property reduces housing costs in retirement. Both statements cherry-pick part of the truth and declare it the whole. Anyone who wants to calculate honestly must set up both sides in full.

The full buying calculation

When buying, the purchase price is only the starting point. On top come items many people underestimate:

• Additional purchase costs – property transfer tax (roughly 3.5 to 6.5 per cent depending on the German state), notary and land registry (around 1.5 to 2 per cent), and possibly agent commission. This money is gone immediately and is not embedded in the value of the property.
• Interest – the portion of the mortgage payment that goes to the bank and builds nothing. It is highest in the early years.
• Repayment – the portion of the payment that reduces your debt. This is the actual wealth building, not a "loss".
• Maintenance – roof, heating, windows: a rough rule of thumb sets aside about 1 to 1.5 per cent of the building value per year as a reserve.
• Service charge – for owner-occupied flats covering management and shared costs; some of this is unavoidable even as a tenant, some is not.

Example calculation (assumptions stated): Purchase price 400,000 €. Additional costs of 6% property transfer tax (24,000 €), 2% notary and land registry (8,000 €) and 3.57% agent commission (14,280 €) add up to 46,280 € — roughly 11.6% of the purchase price as pure start-up costs. Finance with 80,000 € equity, borrowing 320,000 € at an assumed borrowing rate of 3.5% and 2% initial repayment: annual payment 17,600 € (around 1,467 € per month). Of that, in year one, 11,200 € is interest and 6,400 € is repayment — only the second portion builds wealth. All figures are freely chosen example values, not a market forecast.

The full renting calculation

On the renting side, the cold rent is the starting figure. But an honest comparison does not end there, because renting frees up capital that buyers tie up. This is where a term comes in that most gut-feel calculations omit: opportunity cost.

Opportunity cost simply means: what would that money have earned elsewhere? A buyer locks their equity and the additional costs into the property. A renter could invest that sum. The foregone return is a real cost of the buying decision — and a real advantage of the renting decision, provided you actually invest the difference rather than spend it.

Example calculation (assumptions stated): The 80,000 € equity from the buying example stays free when renting and is invested. At an assumed return of 5% per year over 10 years it grows to around 130,000 € — an increase of roughly 50,000 €. These 50,000 € are missing from the buyer's comparison figure. Whether the 5% assumption is realistic depends on the investment vehicle and market performance that nobody can guarantee; this is deliberately an example assumption, not a promise.

The price-to-rent ratio as a rough guide

A simple rule of thumb helps with a first sort: the price-to-rent ratio. Divide the purchase price of a property by the annual cold rent of a comparable flat. If a property costs 400,000 € and a comparable flat rents for 1,000 € cold per month (12,000 € per year), the multiple is around 33.

As a rough category: the lower the multiple, the more the pure number favours buying; the higher it is, the more expensive buying is relative to renting. This is explicitly only a first orientation and does not replace a full calculation — interest rate, holding period and maintenance stay out of it. I am deliberately not inventing specific thresholds or current market figures; they vary significantly by location and time.

The soft factors — named honestly

No table captures what often actually tips the scales. These points belong on the table openly, even if they are hard to express in euros:

• Security and freedom to modify: Nobody can terminate your tenancy citing their own need, and you can renovate as you wish. For many people this carries real weight.
• Flexibility: Renting can be ended in weeks. Selling takes time, costs additional fees again, and at the wrong moment can be a loss-making transaction. Anyone who wants to remain mobile professionally or personally pays a hidden price for buying.
• Concentration risk: An owner-occupied property typically ties up the bulk of a person's wealth in a single asset in a single location. If the regional economy suffers, it hits both job and property value at the same time.
• Behaviour factor: Repayment is forced saving. A renter who does not invest the difference disciplinarily but spends it instead loses the theoretical advantage of renting in practice.

Conclusion: calculate, don't believe

There is no answer that holds for everyone. Whether buying or renting comes out ahead is decided by the interplay of price-to-rent ratio, planned holding period, interest rate level, assumed value development, the opportunity cost of your equity, as well as maintenance and additional costs. Change any one of these assumptions and the result can quickly tip the other way. Precisely for this reason, the most honest advice is not to adopt someone else's belief but to run your own numbers. That is exactly what the Investment Calculator for ETFs and property is for: it places the buying and the investing scenario side by side with your own assumptions, rather than selling you a point of view. More articles on property and financing are in the Real Estate & Mortgages rubric.

This article is not investment, tax or financial advice.