Buy property with own funds or with a mortgage (loan)?

Hello,

quick question: it is about whether one should (from a tax perspective) rather take out a loan for buying a house or apartment or pay cash (if one has it).

Assumptions:

Purchase price of the apartment €100,000
One has €100,000 in the bank
On which one assumes to get 2% interest/dividends = €2,000 (minus 26.375% withholding tax (without church tax)) = €1,472.5 yield after tax.

The property is to be rented out. So one could deduct the loan interest.

Assuming:
Taking out a €100,000 loan
Interest rate e.g. 2.2% = €2,200 interest per year
(Repayment and thus lower interest are left out for now)

If one/I have an income of a bit more than €50,000, one pays about 45% marginal tax rate.
So with an interest rate of 2.2%, one would actually only pay (2.2% - 45%) = 1.21% interest

Do I see this correctly that in this case a loan is better because one effectively only has to pay 1.21% for the loan but gets 1.4725% on the bank (both after tax) – and so is about 0.2625% better off?

Is that calculated correctly?
So the loan interest rate minus 45% compared with the alternative interest rate minus 26.375%.

So it would basically be the case that it would only be more profitable to use one's own funds from about 2.7% (loan interest rate) onward. Since up to about 2.7% it would always be more advantageous to take out the loan than to use one's own capital.
Calculation:
2.7% minus 45% = 1.485%, which is approximately equal to the 1.4725% return from one’s portfolio.

Is that correct? Or do I have a thinking error somewhere?

Excluded is the fact that one naturally gets a better mortgage interest rate by using own funds. That is clear to me. I just want to know if I am not making a thinking error and from which percentages it is cheaper to use own funds and from when it is cheaper to take out a loan.

Thanks for your help.

It should be disregarded that one naturally gets a better mortgage rate through equity. That is clear to me. I just want to know if I am not making a thinking error and from which percentages it is more advantageous to use equity and from which it is better to take out a loan.

Basically, you can calculate it like that. But a purely tax-related consideration is too simplistic. Without taking into account equity, loan-to-value ratio, the resulting changed interest rates, ancillary costs of financing, and also inflation, the entire calculation is incomplete. The result will not be correct as such.

The question also arises whether one buys the property as a capital investor or an investor. As a capital investor, I am happy with a 3-5% gross rental yield (passive behavior). As an investor, I consider how I can further develop the property (active behavior) with the goal of achieving a double-digit net yield. And then the criteria mentioned earlier come into play.

Thank you for the answers,

as said, issues like security for the bank etc. should be set aside for now. I am only concerned with the calculation and the tax effect. Inflation might still be a point to consider. but it should actually cancel itself out, right? also, good point about the savings allowance. however, that has long been used up.

I just wanted to look at the tax aspect. as mentioned, I understand that if I contribute equity, the interest rate will drop. but you could calculate further now. assuming we stick to the €100,000 loan, but assume the apartment now costs €110,000. and one uses €10,000 equity. so the loan remains at €100,000 but the interest rate would go down from 2.2% to only 2%. this way you would save 0.2 percentage points on the entire €100,000 compared to full financing. now the calculation gets a bit more complicated. now I would no longer have a 1.4725% return on the invested €10,000, but I would pay 0.11% less on the entire €100,000 (after deducting/adding the deductible taxes). oh oh... is there maybe a calculator for this somewhere? that would be great

I don’t quite understand your second paragraph. first, I’m not quite sure what you mean by active, and secondly, what would that have to do with financing, the interest, and the tax side of the financing?

Thanks for your help

Of course there are such programs, but they are not exactly cheap. It is industry-specific software.

The capital investor buys a property, rents it out, and enjoys the return on the invested money. Through financing, he can leverage his equity, so that the return on his equity investment increases.

An investor views the whole thing as an investment. There are extensive plans on how the property should develop in the future. In short: low purchase price, make investments (modernizations, ...), take advantage of tax benefits, realize rental increase potential, possibly sell after 10 to 15 years with corresponding capital gains (tax-free).

The property is seen like a company that must be led and managed. This means significantly more effort than the capital investor, who basically only wants to park his money and earn interest. The investor’s reward is hopefully a rental yield well into double digits. Based on the equity invested, several hundred or thousand percent.

In your case, it would also be conceivable to split your equity into fifths, buying five properties each with 80% financing. Very roughly speaking: assuming all properties yield a positive return, your return in relation to equity would be five times as much.

In your case, it would also be conceivable to divide your equity into fifths and buy five properties, each financed at 80%. Very roughly: assuming that all properties generate a positive return, your yield in relation to the equity would be five times as much.

Of course, this interest rate leverage effect increases the risk and is no longer comparable to fixed-term deposits at 2%, but should yield significantly more.

@ GeorgPuetz:

industry software for a calculation formula? you should be able to build something like that with some effort and mathematical understanding in Excel. such a thing ought to already exist, right?

however, that is not the question at all and really has nothing to do with financing. whether I renovate afterwards to rent/sell better, whether there are rent increases or not, how the location is, etc., is a completely different matter. which is not up for discussion here. once again. I’m concerned with whether I’d rather buy the apartment outright with my 1 million in the bank or finance it – and in this case taking into account the tax perspective.

with my capital gains, I get the earnings minus 26.375% (tax)
and now the question is whether I should leave the money in the bank or not. or rather, whether I should take out a loan that costs me the loan interest minus about 45% (income tax rate).

and whether I see it correctly or have a logical error.

@ Musketier:
as said, that is not up for discussion. whether I prefer to invest my money in highly speculative stocks or buy 20 apartments. it’s purely about whether I’m calculating correctly or if I have a logical error.

then I can calculate myself whether I can generate 10% with riskier investments minus 26.375% and weigh the risk, etc. (but that’s not the point)
and apply my loan interest. and compare the two variables.