Help me decide about buying an apartment in Europe?

[Tannhauser]

Hi everybody:

Thanks in advance for helping me think through this. Here’s the situation: I live in Prague, CZ, and am considering buying an apartment. Real estate costs (both buying and renting) are the least affordable in Europe when compared to the average salary, according to a recent study. So I’m trying to figure out whether it would make more financial sense to buy, or just continue renting.

I’ve played with various rent vs. buy calculators; the best of them are all pegged to US assumptions, but when I try to account as much as possible for the situation in CZ, the calculators give me more or less a wash, i.e. no financial slam dunk for either renting or owning.

Basic facts for context:
I’m FI but not RE because I like what I do for work. I might wind down work to a trickle in the next 5-10 years though. Right now my stash is at about 2.2 million USD. I live very comfortably on an annual spend of about 45k USD all-in, including taxes.

To get the kind of apartment I want in a neighborhood I like might cost me up to 500k USD.

I’m not sure I could get a mortgage, since I’m a freelancer and a foreigner, but I might be able to. Regardless, I’m prepared to pay the 500k USD in cash. Looking at what I’d pay for a mortgage over 15 years vs. what I’d pay in capital gains taxes to get that 500k, it seems to be also roughly a wash, no clear advantage for one over the other.

If I bought an apartment, I’d be living in it (not renting it out), and I’m not planning on leaving Prague anytime soon, so this is for a long(ish) haul.

Other assorted numbers: property tax in the Czech Republic is negligible, don’t even need to factor it in. My rent is about 10k USD a year. Both property prices and rents have been rising on average at more than 5% a year in recent years. If I owned, I might expect to pay 300-400 USD a month in HOA dues. Closing costs on a purchase might be 6-8%.

Specific questions:
Since I don’t “need” that 500k right now (i.e. I’m not living off my stash), and will continue accumulating for a few years, I feel like it’s maybe not stupid to buy some real estate, partly to diversify my assets (which otherwise are all in Vanguard index funds). This is especially appealing to me to diversify away from being so dependent on the USD and US stock prices. Does this reasoning seem… reasonable?

What do you think about paying in cash vs. trying to get a mortgage? I haven’t looked into mortgage possibilities in any detail, partly because of an (irrational) debt aversion, but also because I might not even need one since I have the cash. However, I recognize that there might be some advantages to getting a loan, depending on what assumptions one makes about stock market performance in the medium term.

I’m facing some analysis paralysis over this decision, so any thoughts/advice/insights are very welcome! Thanks so much for thinking about it!

[dandarc]

So you want to spend $500,000 to save $5-7K per year on rent. Those numbers don't look good to me - rent has to go up a lot for me to make this move. However, so long as you don't inflate other parts of your lifestyle, you are certainly wealthy enough that you could afford the luxury of this paid-off apartment if you want it.

ETA: another way to look at it, if you get even a 5% return on your investments, you're losing $25,000 annually if you pay cash for this apartment. To save $5,000 per year on rent net of HOA. But you have enough money from the figures presented that you can afford to spend an additional $20K+ per you if you really want to.

[theninthwall]

As dandarc notes, why not just use the returns on the $500k to pay for rent (and then some)? I understand diversifying but putting a quarter of your stash into the Czech condo market doesn’t seem ideal for that. That said, I don’t know the market.

[reeshau]

What are your long-term plans?  You mention winding down in 5-10 years.  Will you stay in Prague, then? Or will you look to travel, or experience some other place?  If you bought the apartment, what would you do with it then? Sell?  Get a management company?

Owning can give you reassurance that your circumstances won't be forcibly changed; if you like the neighborhood, and your neighbors, you won't be at the whim of the landlord looking to sell.  However, if the neighborhood gentrifies or goes downhill, you can also be stuck in a place you don't like.

What would the transaction look like?  What would the capital gains tax be?

I can't speak to Prague, but I can say that in Dublin, owning real estate has been, and likely will be, a good bet.  It will remain this way until they somehow ramp up the rate of building to match population growth.  However, the process is cumbersome (With a solicitor involved) and typically takes 3 months, both buying and selling.  Also, capital gains taxes are quite high, which would impact that positive note.  There are many property management companies, but Ireland also starts to impose other tax issues.  In our case, we knew we would not want to stay longer than 5 years, so it was not worth the hassle, even at the cost of more money on paper.

[Freedomin5]

If it’s a wash financially, and there are no non-financial factors influencing the decision one way or the other, like rental laws that favor landlords over tenants, for example, then there’s no reason to buy. As mentioned by another poster, you are actually reducing your diversification if you take 500k from an index fund and put it into one apartment.

[Tannhauser]

I really appreciate everybody who took the time to reply!

It does seem like the financial case for buying an apartment isn't strong. The real estate market in Prague is generally robust, and it's highly unlikely it would crash. Home prices and rents will probably just keep increasing at fairly high rates. That's painful, but best guess is that costs of owning vs. renting aren't dramatically different.

I'm also wrestling a bit with the non-financial case. On the one hand, I'm not planning to leave Prague in the next 10+ years. Owning your own place gives the impression (admittedly probably illusory) of having more control than being subject to a landlord's whims. And there's also a sense of security, when I'm old-old, of owning my home and not having to rent. On the other hand, some of those impulses are informed by the general cultural Kool-Aid that as an adult you're "supposed to" own your own home.

Anyway, I'll keep stewing on this... and ultimately probably won't buy anything. But thanks again for your perspectives!

[Metalcat]

Owning is NOT fundamentally superior to renting. There are major trade offs for both.

Owning gives you a few advantages, but comes with enormous drawbacks. It's up to you if the trade offs are beneficial or not to you.

I own a few properties almost exclusively for the financial benefits. Owning is a pain in the ass, IMO, but that's because I don't get a lot from the benefits of owning.

I *like* to move semi-regularly, I am not obsessed with customizing my home finishes I don't really care what my countertops are made of, I despise gardening and lawn maintenance, so none of that matters to me, and I have zero "price of ownership" and never even wanted to be a homeowner.

What I do have are A LOT of bills for repairs. Which is fine because I'm coming out so far ahead with owning over renting in my locations that it's just the cost of doing business.

But if I wasn't coming out substantially far ahead financially as an owner, this shit would 1000% NOT be worth it for the other benefits.

Moving is nowhere near as much of a hassle as putting up with 3 summers of jackhammering, or finding extensive rot under the house to the point that the mud room almost collapsed, or losing my parking spot for over a year because of garage repairs.

That said, I own multiple homes, so I just kind of fuck off to the other one when there's something I don't like at the first. In fact, the jackhammering and major repairs on my apartment building are a big part of *why* I have a second home.

I've been able to live in the rural home during the summer when the apartment is inhospitable and live in the apartment during the winter when there's no construction while the rural home has its repairs done.

If I was stuck in either spot, unable to just pick up and move, I would be miserable.

Now, it's unusual to buy an apartment in a highrise and then have that building need 3-8 years of extensive repairs, it happens once every 50 years because that's the lifespan of concrete and my building recently turned 50. But I'm making the point that sometimes owning saddles you with much bigger hassles than just having to move.

Last time I was renting the building next to us was being demolished and replaced, it was HORRIBLE, so I just moved. Before that, the street I was living on got torn up for major rehab projected to last 2+ years, so I just moved. Before that, I was renting a duplex with thin walks and neighbours moved in who were unbearably loud, so I just moved, and at another time I was the neighbour who was too loud, my dog had been attacked and developed anxiety and started barking too much, so I just moved.

Now, because I have multiple properties, I *can* just move, but I'm extremely limited by locations, unless I choose to rent them out and go back to renting myself, which I'm very open to. All of my properties are good rentals. I personally would never own anything I couldn't easily rent out for a profit, because I despise having my housing options so limited.

So yes, owning gives you the advantage that you can't be forced to move. But how much is that *actually* worth to you compared to not being able to move??

[Minion]

Based on your stash and what you pay in rent, would be utter madness to buy.

[iris lily]

Based on your stash and what you pay in rent, would be utter madness to buy.

It’s Praha, tho. :)

[Minion]

Based on your stash and what you pay in rent, would be utter madness to buy.

It’s Praha, tho. :)

Have visited there multiple times, love it, but my comment still stands.

[former player]

This is a long term lifestyle choice.  The financials mentioned are all about the short term.

Although the short term financials are against you, less is known about the long term financials.  It can't for sure be said either way whether it will work out for you.  But in case some of the advice you are getting is coming from knowledge of the US market, it may be worth pointing out that in Europe populations are growing, land for building is more limited and town and country planning tends to be more restrictive.  If you are looking for a liveable apartment in a walkable part of an attractive city with high quality of life and high levels of tourism the chances of demand lessening and the money to chase that demand also lessening are small.

So, acknowledging that the future is uncertain, the question is: is buying now going to make you happy in the long term?  At some point you have to take a punt and then live with it.

As someone who is financially secure in part from having bought decades ago in a city with somewhat similar characteristics (capital city in Europe with high demand from people moving to the city plus tourism, and limited new land for building in walkable areas) I would be a lot poorer now if I hadn't stretched myself to buy then, and there is a big financial divide between people my age who could and did buy and those who for whatever reason didn't.

[sonofsven]

I don't see this as strictly a financial decision but more of a lifestyle issue. As a renter you are not in control of your living situation to the same exent as an owner, and this luxury is attainable to you. I have noticed that, for many of us, as we age we desire to have more control over our personal living situation.
Others have pointed out the negatives of the financials, but have ignored the positives of ownership and the fact that he property is likely to appreciate considerably. I don't know anything about your RE market, but it's likely a good bet that the forces that have led to the high appreciation of property values will continue, barring WWIII. I imagine this type of Black Swan event might also negatively affect the stock market.
What is the purpose of attaining such a large stash, after all? In my mind it's to give you the ability to live as you see fit.