Use of Credit vs. Equity

  • Erstellt am 2022-06-06 10:21:34

WilderSueden

2022-06-07 21:31:24
  • #1
Well, on the one hand because prices have risen somewhat extremely fast in recent years (partly fueled by even lower interest rates than before). And on the other hand because the previous purchase prices at current and probably future interest rates thin out the field quite a bit. However, for a return to 1% repayment, interest rates are still significantly too low at present and the terms correspondingly long. And yes, the rental market is not exactly fun either, but money for interest is just as gone as money to the landlord. And with 400k debt capital and 3% interest, you end up paying a measly thousand a month in interest. For many, due to higher prices, it's actually significantly more. Then you add maintenance, and a rental apartment for 1500€ cold rent is no worse for wealth building than a condominium for 500-600k. Ultimately, though, it is not so much the individual decision anyway; many will simply have the plug pulled by the bank because the necessary creditworthiness for an annuity of 5% upwards at the current prices is no longer given. Fewer potential buyers, lower prices. And sure, that is hard to predict, but the tendency is quite clear. Betting now with leverage on a quick increase in value is definitely not exactly risk-free.
 

Hyponex

2022-06-07 21:36:29
  • #2
well, we also didn’t talk about speculation about [WERTSTEIGERUNG], but that prices for real estate are collapsing.

The fact is that due to increased interest rates, there are now only 30 inquiries instead of 50. Because people with hardly any equity are out, as they can't afford the installments. People who bring 40-60% equity don’t care whether interest rates are at 1% or 3%. And there are still many of those on the market... and as I said, currently they are more afraid of money devaluation due to inflation.

PS. one should not look at the price curve of real estate from the last 10-15 years, but rather the last 30-40 years... and there you will see that despite 4-6% inflation, we had almost no price increase in real estate for about 20 years... then it was just caught up more extremely in recent years.
 

WilderSueden

2022-06-07 21:57:18
  • #3
Buying and selling is only worthwhile if prices continue to rise significantly, otherwise you have sunk 6% in incidental costs (and in most other cases a good 10%). Otherwise it would be better to bury the money in the garden. This alone shows that the business is risky in such a short term. Along with every purchase based on value increase, it also includes that you can get the opposite. There are plenty of studies trying to calculate an overvaluation, I do not want to judge who is more right than others. But it is clear that we are dealing with a generally high valuation (and not only in real estate but e.g. in stocks) while fundamental factors do not look so good.
 

AnNaHF79

2022-06-08 07:29:13
  • #4
First of all, thank you very much for the many responses.

The question, of course, would also be what the alternative to buying is if one takes the following aspects into account:

Investment options:
- There are still hardly any/no interest rates at the bank
- The stock market is volatile and certainly highly risky in such a short time - and also overvalued given the fundamental data
- Inflation devalues money if you just let it lie there

Buy/Sell:
- Not buying carries the risk of having to move due to owner’s own use termination; after that, the rent would likely become significantly more expensive (apart from the moving stress)
- Assuming rent of 1500 EUR, one saves about 50k EUR in rent alone over 2-3 years, which at least balances out the incidental purchase costs again

Market development:
- The situation in metropolitan areas like Stuttgart remains tense, especially in these locations here; not without reason do analysts (Wohnatlas 2022) expect prices to continue to rise
- Influxes of refugees, etc., will further tighten supply
- The aforementioned inflation will push more people into tangible assets
- Rising construction costs will lead to fewer new builds
- Rising interest rates speak against a further increase, at least to the level of inflation; but this does not seem to be too much of a problem in Stuttgart yet, at least not yet, as there is too much capital available

So what would be the alternative?
If the property were to develop even approximately in line with inflation and one also takes into account the rent saved (as well as moving costs etc. etc.) over the next 2-3 years, I see no significantly better option – do you?
 

Tassimat

2022-06-08 08:41:17
  • #5
I see it this way: If you want to buy the property, then you should want to be a landlord in the long term. If you only want to buy the property for 2-3 years, then this investment is just as risky as stocks, with the risk of loss. If you depend on the money from the property for your new construction project: Don’t buy, only if you absolutely have the money to spare.

So which number is correct? I see 1250€ minus service charges, minus non-allocable additional costs like property tax, minus financing costs (plus tax savings). I see the incidental purchase costs more likely recovered in 4 years or more. And always remember that the owners’ meeting can impose expensive renovation measures on you.

The good thing is that your income and equity are so high that you can probably decide intuitively, and a small financial failure won’t hurt too much. It only gets problematic if your new construction project is jeopardized because of it. So calculate carefully and don’t mix your own numbers (see above).
 

AnNaHF79

2022-06-08 08:44:17
  • #6


I do not mix up numbers; maybe it was not written clearly enough... :) 1250 EUR is the current rent. 1750 EUR would be a market rent.

If terminated due to personal use, we would have to move; then the rent would definitely increase; 1250 EUR is then unrealistic. Therefore the assumption of 1500 EUR (rather optimistic). But I also wrote: "Not buying carries the risk of having to move due to termination for personal use; after that, the rent is likely to be significantly more expensive (apart from the moving stress). Assuming a rent of 1500 EUR, you save about 50k EUR on rent alone in 2-3 years, which at least compensates the incidental purchase costs again."

The question of what the (better) alternative against depreciation due to inflation alone is remains open...
 

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