Currently, one hears again and again about old-age poverty and low pensions. Due to the uncertainty of the situation in retirement age, young people in particular need to make provisions in good time. Will the payments into the pension fund be sufficient? Or should you just take the money to the bank?
In addition to a variety of possible hedges, it is also very popular to purchase a property in order to be able to live rent-free in the already paid-off house later on. But is it really so simple?
There can be no universal answer to this question, because many criteria have to be considered. It depends above all also on the personal financial situation. To help you make the right decision for yourself, we present below the points you need to think about and try to answer the question for you whether a property is worthwhile as a retirement provision.
What to consider – The advantages
The advantages of a real estate as a retirement provision are manifold. Concrete gold is still regarded as a safe financial investment. Financial crises, economic downturns and high inflation regularly cause people to invest their money in concrete gold in order to "keep it safe. The returns from a "rent-free life" within one's own four walls are tempting and if one manages to buy a solid property that makes investments calculable and the returns predictable and if one's own life is solid enough that one can foresee over the years how one's own trajectories will run, then real estate is a good "pillar" for private security for old age and retirement. But there are some things to consider…
1. The timing
If you would like to build or buy a real estate as age precaution yourselves, then begin in time with it. You can usually get good terms on a loan from your bank. The older you get, the more difficult it becomes to finance your own home, as retirement and the time of loan repayment become closer and closer together, and the banks calculate corresponding risk premiums. It is also favorable if you can use a building savings contract. On average, you can then pay off the necessary loan in 20 to 30 years and then live rent-free in your own home.
Real estate as a retirement provision is particularly exciting if you have worked out your own life plan properly. That is, if one knows "here I want to live with my family for the next decades". Selling a property shortly after the purchase, because the private life planning has changed, is usually a big loss business for the real estate owner.
2. The situation
When building or buying, make sure you choose a good residential location. This is important for value retention. It could happen that you want to or have to sell the house again (if you change professionally or privately). Or if you want to rent out the house in the meantime, initially for a limited period, before using it yourself when you retire.
By renting out you can initially generate income again. But you will only find tenants if the location of the house is attractive. They can build naturally also the house only for the purpose of the letting and live even in a more favorable renting dwelling. In this way you can also supplement your pension and still use the rented property as a private retirement provision.
The location is particularly important in old age. In old age, mobility decreases, so you should already think when buying that it makes sense to have doctors, supermarkets and recreational facilities within walking distance to be able to live carefree in old age in the property.
Of course you pay a good location but always expensive. Accordingly one must weigh with the real estate purchase exactly between costs and use and should lose here already a thought at the time in the age.
3. Property as retirement provision for landlords
As a landlord you have tax advantages, because you can deduct your expenses (i.e. the acquisition costs, but also the loan or renovation costs). In addition, you can pass on some of the running costs that you incur with the rental property to your tenants. This includes regular modernization and renovation, such as painting the facade or a new heating system.
This circumstance should be considered with the financing. Maybe it makes sense to buy a property and finance it by renting it out? In old age, the property is then paid off and can be used by the owner.
4. Real estate for private retirement provision for owner-occupiers
If you prefer to move into your own home, you have more freedom than in a rented apartment. You can change anything you want at any time at will. Besides neither rent increases nor notices threaten. Instead of paying rent and financing the property at the same time, you only have to bear the loan installments, which can be calculated well over long periods of time.
Important: Regardless of whether you want to use the property yourself or rent it out: You should discuss your plans with experts. Use brokers or financing advisers of your house bank and bring up your project to the discussion. Here some tips will surely fall off fast and you can judge, which project fits perfectly to your life. Many experts offer their services free of charge, because you want to accompany your real estate purchase naturally subordinate (and so earn), however also a paid discussion with an expert (ask times with the local consumer center for a consulting date) can be very worthwhile and trailblazing!
Which costs are to be considered – The disadvantages
Whether you move into the property yourself or prefer to rent it out is always a personal decision. However, in both cases it is important that you also take into account all possible cost traps.
Above all, the calculation and the financing must be very well thought out.
This is what you have to pay attention to when buying real estate for private retirement provision:
- You need a secure financing concept.
- Check whether you are entitled to subsidies (Wohn-Riester, Baukindergeld or similar).
- When calculating, consider not only the purchase price, but also the acquisition costs. So broker commissions, land transfer tax or the cost of the notary and the registration in the land register (notary costs). Here you are quickly up to 10%-14% of the purchase price, which again come on top!
- Take into account the current ancillary costs and taxes.
- Include the tax advantages in the calculation as well.
- You must build reserves for repairs. Modernization measures (new insulation, new windows, new roof) may become necessary at any time.
- Include the risk of rising interest rates on your loan. Consider already with conclusion of a financing contract the follow-up financing (z.B. via building savings contract to continue favorable interest rates into the future)
- Calculate exactly what minimum rental income you need to generate to cover monthly expenses.
Rules of thumb for financing the real estate
It is said that incidental costs make up approximately 10-15% of the purchase price. You should therefore include these costs in addition to the purchase price of your property.
Your amortization (the initial repayment in the loan agreement for financing) should be around 3%. It should not be much lower, otherwise there will be very long contract terms and correspondingly high costs for financing. The necessary equity capital should be at least 20%, better 30% of the total investment amount.
It is good if you have the possibility to readjust and lower your repayment in case of emergency. Best of course completely free of charge. Quite often this becomes necessary if during the repayment another child is born and thus further expenses become necessary.
And importantly, things do not always have to be worse in life. Inheritances, job promotions or other changes often provide small financial injections. It makes therefore quite sense in the financing contract a special repayment to agree around "free capital" into the own concrete gold for the age precaution to push to be able.
Calculation example for financing
For an average property that costs 350.000 euros, a good 35.000 euros in ancillary costs. If you bring along the necessary equity capital, to only 300.If you had to take out a loan for an amount of € 000, you would have to pay interest and amortization of around € 1200 per month in order to be able to "afford" the property.
This would then also be the minimum amount that you would have to generate as rental income with your real estate for retirement provisions. If you have chosen a bad property, which is unattractive for various reasons (appearance, location, layout), you will have problems to achieve the minimum incomes.
Other problems – other opportunities
When you buy a property as a private retirement plan, you're not just dealing with the direct costs. There could also be problems if the house loses value due to other circumstances (water damage, lightning strike, fire) and needs to be renovated. Or in the worst case is no longer salvageable. In addition, you could run into rental nomads who make the property intended for retirement uninhabitable.
Those who happen to be fortunate enough to have sufficient financial resources should consider buying several apartments, thereby minimizing such risks. Or better said, spread over different properties. It is unlikely that you will have exclusively rent nomads in your apartments, if you carefully check the prospective tenants beforehand.
If you've decided to buy a property for retirement, here are several options. For example, you can think of foreign real estate, listed real estate or care real estate and open real estate funds. However, all options have not only advantages, but also risks and you should definitely get thorough advice from a professional in this regard.
No matter what you ultimately decide to do: If you invest in a property for private retirement planning, you must save permanently. Both for the additional expenses and for the reserves for later repairs. New windows, a new heating system or a new roof can cost a lot of money.
Conclusion – is real estate worthwhile as an old-age provision??
How the real estate market and pensions will develop over the next 20 or 30 years cannot be determined with certainty. In addition, you cannot know how your own financial strength will be during this period. Disability, illness, divorce or death usually make paying off the property impossible.
Also the raising of the additional expenses in the paid off real estate depends in the age whether you can lift these alone or in pairs. Sure, you live rent-free, but not free of charge. Heating, electricity, water, garbage fees, property tax, insurance … all of this has to be paid in addition to the maintenance costs.
Under the best conditions and with good calculation, however, the property for retirement is definitely an option. With sufficient reserves and a property in good condition and in a good location, you can still enjoy it in old age.