Dream home or money machine? You’ll understand what I mean in a moment! When it comes to real estate investment, many people are faced with the decision between owner-occupation and capital investment. Both approaches have their own advantages and disadvantages. Let’s take a look at the main differences between these two options to help you make your decision. First, as always, a quick checklist on the difference between an owner-occupied property and an investment!
Can be outsourced to third parties (property management)
Focus on personal living comfort
Focus on financial returns
Purpose of the property: Fact #1
What does self-interest mean?
A property is bought and used for your own living requirements. The focus here is on personal living comfort – simply put: you buy your dream home
What does investment mean?
A property is acquired in order to generate income. This can be done by renting it out or selling it later. The focus is on financial returns – simply put: you are buying a money-making machine
Extra tip – The two can also be combined to a certain extent. You buy a house or buy an apartment, live in it for 3 years and can then sell it tax-free(speculation period). Let’s say you buy in an A-location in Berlin, then property prices usually rise by ~8% per year. Calculate 3 years and you will see that this profit alone is considerable.
Owner-occupation: Financing is usually provided via a real estate loan or the buyer’s equity.
Capital investment: Financing is often provided by borrowed capital, such as mortgages. The aim here is also to leverage borrowed capital. Proper financing needs to be planned, read more about financial planning before buying here.
Extra tip – In principle, both forms are the same, the only differences are state subsidies and taxes, more on this in a moment. In the case of personal use, however, banks may see a greater risk in the credit check. Why? Let’s say you have 2 incomes and 1 house. Someone falls ill, loses their job, the loan installment defaults.
Why do investors like to borrow?
The explanation would be long, in a nutshell: there are many aspects. Firstly, you don’t want to spend your equity on a property. With the leverage effect of financing (20% equity [or less] + 80% debt), you can “afford much more”. A loan is now taken out, including the loan installment, i.e. the monthly repayment. Inflation ensures that money becomes worth less. The loan installment therefore becomes “cheaper” and “cheaper”. Learn more here:
Owner-occupation: Owners plan for the long term and intend to live in the property themselves.
Capital investment: The focus is on short or long-term income, whether through rental income or sale. Also important for you: the speculation period. Want to quickly calculate whether you can already sell tax-free? Use our speculation period calculator.
Now we come to one of the main differences.
Tax aspects: Tax advantages for landlords
Owner-occupation: Under certain conditions, tax benefits such as homeowner’s allowance or tax exemption on sale (after owner-occupation) can be claimed.
Capital investment: Rental income is taxable, but tax benefits such as depreciation and income-related expenses can also be claimed.
What tax benefits do owner-occupiers / investors enjoy?
Extra tip – Quickly explained, only 2 examples each:
Owner-occupiers receive homeowner’s allowance: Under certain conditions, owner-occupiers can receive homeowner’s allowance for the construction or purchase of owner-occupied property in order to facilitate their financing. This brings us back to the speculation period, which is of course also important for owner-occupiers when selling.
Tax exemption on sale: If you sell your owner-occupied property after a certain holding period, the profits made may be tax-free under certain conditions. However, this does not apply if you sell your home within ten years of buying it.
Capital investors can claim depreciation: Capital investors can claim depreciation on their rented property. This means that they can deduct certain costs such as building depreciation and financing costs, which reduces their tax burden.
Income-related expenses: All expenses incurred by renting, such as repairs, management costs and insurance, can be deducted as income-related expenses to reduce taxable income.
Owner-occupation: The owner is responsible for the maintenance and management of the property.
Capital investment: Management and maintenance can be transferred to third parties, such as property management companies.
Extra tip – What should you expect? I recommend 2% of the purchase price per year. I also have a small calculator for the maintenance reserve here. PS: Of course you can pass on operating costs to tenants.
Expected return: earn money, don’t spend it
Owner-occupation: The main motivation is the personal quality of living, the return on investment is secondary.
Capital investment: The focus is on returns, and investors expect to generate income from their property. Again, because it is very important for investors:
“The focus is on returns, and investors expect to generate income from their property.”
The choice between owner-occupation and investment depends on your individual financial goals, circumstances and preferences. Both approaches have advantages and disadvantages, and the decision should be made carefully.
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