Build own House or Rent?

[RandomGuy]

Hi,

I am reading here since some time and we (my wife and me) are thinking about getting a house a lot in the last couple of years. To have some background information: We are from Germany. Unlike in the US, it is not so typical that everyone is living in a house. A lot of families are living in appartments in the citites. This is more typical and a house is considered luxury and not neccesary a little bit.

We are earning 46.000 EURO after taxes and medical insurance costs as fixed income and maybe 5.000 EURO in variable income due to secondary jobs. We have one kid, one year old. We are currently living in an appartment which is too small. We are missing at least one bedroom. We, both, are 30 years old.

We have already bought a parcel of land, which costs about 125.000 EUR. This was bought with all our current net worth (including even some projected tax refund, which is for 2016, but which we will receive in 2017 = but it is already our money due to overpayment to the government), so we have 125k EUR at the moment. The land is in an area, which has high demand. We could also sell it for the same or maybe a little bit higher price (maybe 135k worth already).

Used homes are not widely available here. First, as mentioned, people here are not usually buy or build homes. And, homes build before 1990 are of very bad quality. Because of the regulations and government rules, a lot of toxic waste are build into houses of this age. In the 1990s, not much houses were build. So the used house market is pretty empty. Prices are the sames as for building a new house.

We have projected that we would need to pay another 325.000 EURO to build a new house including 3 bedrooms, one work room, no basement, 2000 sqft. It would have a very low energy usage for heating (which is a big concern in Germany; energy costs 30 USD-Cents per kWh).

Government grants some grants and gives us a mortgage with intererst rate of 0,98%. This would mean we would pay 3.200 EUR interest in the first year and declining as we settle the mortgage month by month and year by year. Since the interest rate is so low, I would settle as little as possible, but government demands 10.000 EUR settlement payment per year (and more, as the interest payment decreases). They also give us 5.000 EUR one-time-payment. So we need 320k EUR, not 325k EUR.

Other options:
- Rent a home: 14.000 EUR to 17.000 EUR
- Rent appartment without work room and only 2 bedrooms: 9.500 EUR in best case (we want to have two kids, so this is only a option for limited time)

But if we choose the other options, we would have 125k EUR to invest in the stock market. I am really confused a little bit. Of course, when we build a house, we would pay no rent and the interest payment is very low. So we would gradully own more and more of the house, which is valued at something like 500k EUR (after we build the garden, terrace and some stuff around).

Other financing options:
- 5.000 EUR interest payment (instead of 3.200 EUR)
- 3.300 EUR settlement (instead of 10.000 EUR)
- no government grant of 5.000 EUR (one time payment)
- but a lot more residual debt and a much higher interest rate (1,52%)
- Total yearly payment 8.300 EUR instead of 13,200 EUR
- 15 years fixed contract (15 years we could invest almost 5.000 EUR more money in the stock market; but a lot more debt in the mortgage at the end)

[RandomGuy]

Any suggestions? :-)

[Heroes821]

I see a lot more activity on this forum after 8pm UTC so might just need to wait for more people to log on, personally I couldn't speak to anything in Germany.

[Roland of Gilead]

2000sq ft seems fairly big for energy efficient and a first home.

Would it be possible to build a bit smaller with the possibility of an addition down the road?

Or maybe build a duplex and rent half while living in the other half?

[RandomGuy]

Outside walls are 17 inch of a special massive but also highly insulative material, so the size is not that important for heating energy efficiency.
Duplex is not allowed here and would also be very costly. I don't think the bank would finance that. 1.500 sqft and 1.500 sqft together would cost more than 500k EUR in construction costs.
Also, additions are not really possible. A 500 sqft addition costs approx. the same as a 1.500 sqft house. There is a lot of legal and architect stuff here.

What do you mean with "first home"? It is absolutely not normal to change to another house, once you have build. You get high penalties, if you sell the home before mortgage has finished. Government only grants their special conditions once for every family. You have high transaction costs and a very high transaction tax, if you buy and sell houses. To switch to another house after a couple of years is financially the worst thing to do here.

[Roland of Gilead]

Ok, totally different world than what I am used to.   

[mskyle]

What are the ongoing costs of the house once the mortgage is paid off/in addition to the mortgage? Where I live we generally have to pay property tax (a fixed percentage of the current value of the house & land), homeowners insurance (to protect in case of fire or other damage), and of course maintenance. (And how do these costs compare to the non-rent costs of renting?)

Then there is the opportunity cost of having 100,000-500,000EUR tied up in a house. Even very conservatively invested that could be earning you much more money (again, I don't know the taxes associated with investing in Germany).

Just looking at the raw numbers renting seems like a much better deal, but I admittedly don't know all the details. At a very minimum I would at least keep renting until you have the kids you're planning on having, especially since the transaction costs of moving once you've built the house are so high. You need to be very sure that building the house is the right thing to do, and financially it doesn't really look like it is.

Basically, there's a *reason* people live in apartments and consider houses to be a luxury where you live - because houses are an expensive luxury where you live! If owning a house is a luxury that you really want, sure, I guess you can go for it. But financially it does not look like a good idea.

[RandomGuy]

Ongoing Costs are the same as if we rent, except major maintenance, but this is unlikely at least the first 20-25 years. Property tax is maybe around 500 euro per year, but is also paid by a tenant in an apartment. All costs, including taxes, home owner insurance and minor repairs are passed on to the tenants. This is not included in my rent numbers in post one. Due to it comes on top for home owners as well as for renting a house or renting an apartment.

Realized capital gains after you sell a stock or dividend payments are taxed with approx 26% and you get 74%. Unrealized capital gains are not taxed. Losses are taken into account against gains (both, if realized).

Rents have risen sharply in the last couple of years and are still rising.

Monthly payment is not different between renting or buying a house, even lower for buying plus it is way better standard of cozrse. But buying, we get 10k Euro house equity per year.

But of course, 125k payment is then bound to the house.
We still want to save 20-30k per year on top of rent/mortgage and invest. Also, all pay raises, additional secondary income, etc.

[mskyle]

Monthly payment is not different between renting or buying a house, even lower for buying plus it is way better standard of cozrse. But buying, we get 10k Euro house equity per year.

OK, so you get 10k Euro house equity per year but it's tied up in an asset that is very difficult and costly to sell. You are basically buying yourself no rent increase in perpetuity (which is nice) but you're giving up a lot of flexibility (what if you want to move? what if you divorce?) and investment income to do it. Let's say you invested that 125K Euro today and got a modest 4% return on it. That's already 5K euro/year, the very first year. So you're getting 10k of house equity but you're giving up 5K in investment income - trading 5K of relatively liquid investment for 10K of extremely illiquid investment.

I get it - I rent, and my rent today is 45% more than it was three years ago. My landlords are lazy and never make repairs and I have to listen to my upstairs neighbors' kids stomping around at all hours of the day and night.

For me the numbers are just starting to tick over to the "ready to own" side, but I have much higher rent than you relative to cost of the homes I am looking at, and lower transaction costs for buying/selling, and I live in a country where homeownership is heavily incentivized in the tax code. Building the house might be the right choice for you, but not necessarily for financial reasons.