Forward-looking planning and timing of house construction

Hello everyone,

for me, this is primarily about life planning, wealth accumulation, and home financing.
All very rough considerations, details on financing are not yet necessary.

First of all: I approach this quite naively and probably somewhat unexperienced. I have no experience, am just starting my career, and am just juggling some numbers here to gain an understanding. From you, I hope to get hints on things I might have overlooked or misunderstood.

About our plans: we are in our late 20s, want 1-3 children soon (1-5 years), plan to build a house in the medium term (3-10 years) and save for retirement long term (30 years).

Whether and how we can afford this, I try to roughly estimate.

Starting Point:
Equity (Eigenkapital): 0.0€

My better half and I currently earn 2400 + 2200 net.
My position is collectively agreed at about ~3.8k€ net, which I hope to reach in the next ~5 years. For my girlfriend, there is also room for improvement, so ~3k long term is not unrealistic.

If I roughly interpolate that now (allowing for parental leave and unforeseen income losses – for that I deduct 6 years of her salary), I arrive for both of us over the next 30 years at an average monthly income of roughly 5800€ / month, net.

Of that, I would take 2000€ per month to finance the house + retirement savings. (Possibly more? We’ll have to see next year how our living costs settle.)

Based on my (quite limited) research on investment options, I would currently tend to put everything into a few diversified, passive index funds (ETFs), since these promise relatively safe 5-7% returns long term, at least that's what you read. For the following calculation, I therefore assume 6%.

For the house, I’m putting up a round figure of 500,000€.

(Current) realistic loan interest rates I took from relevant websites:

[*]2.8% for full financing
[*]2.4% for <85% financing
[*]1.9% for <60% financing

I know these rates are currently particularly low and probably won't stay that way, but anyway...

Now the actual calculation/consideration. I see the following variants referring to a period of 30 years:

[*]Save equity for 4 years, then build the house, repay over 20 years, and save capital for retirement in the "remaining" 6 years

[*]Save equity for 10 years, then
a) Invest all equity (<80% financing)
b) Invest 100k equity (80% financing)
c) Invest 0k equity (full financing)
into the house, repay the rest over 20 years, and simultaneously save for retirement

I wrote myself a small Python script for this (I verified the basic compound interest calculation with common online calculators, rounding up 28% capital gains tax is considered). This gives me the following numbers:

[*]Start capital: 0€
[*]Savings rate: 2000€ / month
[*]Interest: 6% p.a.

Equity after 4 years: ~105k €
Equity after 10 years: ~300k €

[*]With 100k equity, 400k remains to be financed (80%), at 2.4% p.a. over 20 years that corresponds approximately to a payment of 2090 € p.m.
With a budget of 2000 €, there would then be less than nothing left to invest for that duration.
In the remaining 6 years of the given period, 2000€ p.m. could then be invested again.
Under the conditions above, that would result in an asset of ~165k €.
Minus 20*12*90≈21000€ (to roughly offset the difference to the 2k€ budget), resulting in 144k €.

Conclusion after 30 years: house 500k, capital 144k, total value 644k


[*]a) 300k are invested directly into the house and the rest (200k, 40%) is repaid over 20 years at 1.9% p.a. interest, corresponding to a monthly payment of 1000 €.
We could therefore additionally invest 2000€-1000€= 1000€ p.m. for 20 years. Result: ~378k

Conclusion after 30 years: house 500k + capital 378k = 878k €

b) 100k equity into the house, 400k (80%) financed over 20 years at 2.4% → 2,090€ p.m.
But: 200k are still invested → interest + compound interest! We withdraw 90€ monthly to stay within budget; the capital still grows within 20 years to ~432k €

Conclusion after 30 years: house 500k + capital 432k = 932k

c) 0€ equity into the house, 500k fully financed over 20 years at 2.8% → 2710€ p.m.
300k remain invested, 710 € per month withdrawn there to stay within budget
Growth within 20 years to: 447k €

Conclusion after 30 years: house 500k + capital 447k = 947k

Conclusion:
From a financial point of view, it would actually be foolish to build in 4 years. According to the rough estimates made here, the difference in our net worth in 30 years would be between 230k and 300k euros (!!!)
Also: less equity invested in the house = more total wealth long term?!
(Yes, I know, this statement is somehow logical when 6% stands against 2.8%, still...)
Patience definitely seems to pay off here. You just can’t lose heart during those 10 years, even if the desire for a home is so strong :)

I think we will proceed by saving as planned for the next 4 years. Then it will also be foreseeable what kind of return is realistic, how building loan interest rates and property prices develop, and we can make a fact-based decision.
Now I just have to convince my lady, she often tends towards rather emotional decisions... :rolleyes::D

Now it’s your turn! Does this make sense, what have I forgotten, what other options are there? Thanks already for any feedback. If I am totally off, please teach me gently :p

Regards,
Rumpelstiltskin

PS: As additional info: I completely ignored rent because we currently live at cost price in an apartment in her parents' house. I don’t know if we can or want to stay there for another 10 years; for 2 people it is comfortably sized, with one child it should still work, with two it will get tight at some point, especially once they get older and want their own room ;)
PPS: Sorry for the novel!

[emoji15]
Now I am stunned.

Good planning, nothing to add.

With ETFs, don’t you also have to pay some fees? Taxes are due on them as well. And then really a 6% return? You’ll have to show me that.

First of all: respect for the effort and also that you think so intensively about saving. Far too few people do that. I have also saved for almost 15 years.. although I didn't think about it as much as you :)

I think ETFs are a good idea. We primarily invest in them as well. But forget about 5..6%. Medium-term, of course, it's associated with risks. Expect 2%.

Otherwise, I have to tell you unfortunately: all your numbers are useless. Interest rates, construction costs, etc. are completely uncertain. Just like your earnings over the next 30 years.

There is actually only one important insight (and even without a script): save save save.. preferably from the "perspective" and really "forget" the money. I wouldn't worry about the topic of house building/loans/land etc. right now. Save until you have 50..100k together. Then you'll be a few years older and much wiser. The market could look completely different then. When I registered here in 2012, we also had a completely different situation than today (equity, income, construction costs, land costs, interest rates). All my nice calculations from back then were completely worthless. A waste of time :)

Addendum: "Conclusion after 30 years: House 500k + capital 447k = 947k" Inflation!!! This 1 million is at least 50% less valuable than today.. but probably significantly more since there will certainly be more inflation in the future..

Steffen80 is mostly right, better to calculate with only 2 - 3% p.a. If it turns out to be more - all the better ;) Personally, if I were you, I would look for a cheap online bank and invest a fixed amount per month directly for 10 years or more in a selection of 10 - 20 quality stocks. Especially important for long-term investment: Even with falling prices - they will come back eventually - stick to it stubbornly. That creates the famous cost-average effect. In the very long term, the best method, I did it this way for many years as well. Eventually, when you can see the time horizon for the start of construction/purchase more clearly, you have to get out again consistently... good luck with your sensible plan!

Great calculations! But you write that your partner tends to make more emotional decisions. Does she really want it that way? To consider a house only from the aspect of wealth accumulation? For many, a home is not just an investment, but also happiness in life. And in my opinion, that is just as important as accumulating money. I think that should also be taken into account. The husband of a very dear friend planned it just as well as you. Save, save, and accumulate capital. Now they are getting divorced after 2 children and 10 years of marriage because she finally wants to enjoy life and not just save for retirement. So don’t get me wrong: I like your way of thinking, but the wishes and plans of your partner, who you say is more emotional, might look different. And then it’s about finding a middle ground. Because it’s not only the one who makes the most profit who is right. It’s also about quality of life. And that can’t be easily put into numbers.