German housing market

houserich

I come from a culture where owning property is encouraged and something everyone strives for. Most of my Canadian friends in my age group (early 30’s) own at least their first properties already.

Real estate doesn’t seem like such a hot topic here in Germany though. At least not amongst the people I know, who tend to be in the middle class.

Although things are changing. Over the past few years, low interest rates have been stimulating the housing market across big German cities.

Mr. German and I are toying with the idea of buying a small apartment in our city. Not because of the housing market, but because we feel we are in a strong position to buy.

Our criteria is pretty standard for a young couple:

  • 2 bedroom apartment
  • 120K max
  • low maintenance fees
  • well kept building
  • a nice, walkable area
  • near amenities (grocery shopping, transit, etc…)
  • minor renovations to add value

We have been actively searching for about 5 months, and are now in serious talks with the owner of a 67 sq metre (721 sq ft) flat that fits all of our criteria.

The process is a bit on the slow side, which suits us well since we’re not 100% sure we’re doing the right thing.

It’s scary!

If we buy this place, we would be ‘house rich but cash poor’, which is a hard pill to swallow.

I will admit though, that I want to buy this flat. Not because it’s good for us financially, but I want to buy it for emotional reasons. I’m tired of living in temporary flats and want to live in something nicer that’s ours. Basically, I’m falling into the trap of romanticizing home ownership, and I know it too!

We’re trying to figure out whether this fits with our early retirement goals.

It definitely could, because it reduces our monthly expenses which is what we are aiming for. But it could also inhibit us since we wouldn’t be able to create passive income with the capital that’s tied up in the property.

There are other things we can do though, like rent out the other bedroom to help us pay for it. But we probably won’t do that, since we don’t want to live with a roommate.

We’ve said that we would be fine with any outcome, but the outcome that involves owning something is much more involved than continuing to rent.

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A frugal Valentine’s day

Love

Yesterday was Valentine’s day, which apparently isn’t celebrated much here in Germany.

Still, we try to do something small but special every February 14th, just for fun!

This year, we attended a play performed by a community theatre group that was hosted at the university. We knew the Director of the play, who saved us the best seats in the house.

We weren’t expecting too much, but ended up being blown away!

The actors were so so so so good. The production was low-budget but beautifully executed. The storyline was relatable, funny, and delivered in English. It was a wonderful evening and we’re looking forward to next years’ performance. 🙂

After the show, we took a stroll around the neighbourhood, then took the train home.

Cost of tickets: 6 EUR each

Snacks: 3 EUR

Train: FREE (included in my monthly pass)

Total Valentine’s day date night cost: 15 EUR :mrgreen:

The 4% Rule

4percentrule

Early retirement or financial independence means a lot to me. In this entry, I outline what it means to me on a numbers level.

I aim for the 4% rule, also known as the safe withdrawal rate (SWR):

(annual expenses / net worth) x 100% = 4%

This means that if your expenses are less than 4% of your networth, you can withdraw 4% per year to live off of without running out, thus becoming financially independent. Hurray! Assuming your networth earns you more than 4%.

For comparison, the S&P 500 gave an average return of 5.5% over the past 10 years, 7.6% over the past 20 years, and 8.6% over the last 30 years according to this S&P 500 calculator.

So it’s entirely feasible to earn more than 4% on investments using a passive investment strategy such as index investing (if you are so inclined!).

Our withdrawal rate is currently 13%.

Which is not yet ‘safe’, but luckily we have jobs and are on track to reaching 4% in 9 years.

However, this is a very conservative projection, and assumes that nothing will change.

I used a low savings rate, didn’t account for the raises / bonuses / tax refunds that we will get every year, or that we will soon start investing and will hopefully likely earn more than my estimated 2%. There is also room in our budget to slash rent, and perhaps reduce other expenses further.

Our goal is still to retire in 7 years (at age ~40), or sooner!

What I like about the SWR calculation is that it’s not just about how much you have, but also how much you save and spend. Both numerator and denominator are affected by these factors, and you can play around with the formula to see how small tweaks here and there can affect your withdrawal rate, allowing you to see how your lifestyle delays or improves achieving financial independence.

It’s extremely empowering to know that we have the control to make this happen. We can drop out of the rat race early if we choose to live mindfully, rather than fall into the consumerist trap.

Would you consider downsizing to a studio apartment?

studioapt

That’s exactly what Mr. German and I are thinking of doing. Or rather, I’m thinking of it and he’s sort of with me on it. 🙂

We’d be downsizing from our current 65 sq metre (700 sq ft) flat to a 35 sq metre (376 sq ft) flat.

If we did this, our rent would go down from 610 EUR/month, to 300 EUR or less/month. These are warm rents I’m quoting.

Already we’re living below our means.  610 EUR is affordable for us even though we’re probably paying 100-200 EUR/month more than market value for our place. In comparison, my colleagues easily spend 1400 EUR per month on renting 80 sq metre (861 sq ft) flats in a neighbouring expensive city.

But I can’t help but feel we can do better. Especially since we’re thinking of moving anyway, why not give 35 sq metres a try?

While it may seem extreme, with the right layout, it’s actually quite nice for us. We used to live in about 32 sq metres when we were students, and it was great.

We’re also trying to be more minimalistic, and having less space will help.

Plus, I get really giddy thinking of halving our rent! Not only because we will save more, but because my aim is to set up passive income streams that will cover our costs. It’s much easier to achieve this when our expenses are low, thus making early retirement all the more reachable, and sooner. :mrgreen:

The most difficult part of living in 35 sq metres is having to ‘explain’ to family WTF we’re doing. Already my in-laws tsk at us for living in a flat that is not that nice. We actually think it’s VERY nice, but it doesn’t have up-to-date finishings like the gorgeous places Mr. German’s siblings live in. Still, our current flat is a ‘normal’ place to live that won’t raise questions. If we suddenly move to a studio, that would appear insane for a thirty-something professional couple. 😕

It can be hard to go against the grain. People don’t like it when you do things they don’t understand.

Though we shouldn’t let other people’s judgements deter us from working toward our goals. Life’s too short to be slaving away at a job just to pay for a lifestyle we’re not even interested in!

Should we continue renting?

germanflat

Last year, Mr. German and I moved into a rental apartment in a nice area of our city.

At the time, we were in a pinch to find something fast so ended up settling for a place that was over our agreed upon budget.

I like it here, I really do. But ever since we moved in 7 months ago, I’ve been wanting us to move out.

The frugalista in me can’t take that it’s so pricey for the area. If it was 100-200 EUR per month cheaper, I would love it. But because it costs so much, and will go up every year by 20 EUR per month (which btw, I think is illegal!), I have higher expectations and can’t get over that we are getting a bad deal.

I hate bad deals!!

So we started apartment shopping immediately after moving in, but have been looking to buy, not rent.

This made sense as we finally feel we are in a position to buy. Though buying a place will mean an increase to our expenses, and also a decrease of liquid capital.

Since my goal is to bring our expenses down, and to generate passive income through dividend stock investments, I’m unsure if owning our primary residence makes financial sense to us.

There is another rental down the street for 100 EUR less per month, and it appears to be in better condition too. It also has 2 bedrooms instead of just 1, is closer to the train station (good for me!), and is a 3rd floor rather than a 5th floor walk-up. No parking though.

It’s a pain in the ass to move again, especially so soon. Especially for another rental.

We are also in the privileged position of not having to chase cheap rents. Even though our rent is a lot right now, paying an extra 100 EUR per month is manageable. Although I still think it’s a lot of money to lose.

Rent is our biggest expense. If we went around tweaking everything else, we probably wouldn’t be able to save 100 EUR per month. So adjusting our biggest expense will also have the biggest impact.

I think what I would like to do, is to visit this cheaper rental, talk to the landlord, and find out more about it. Maybe it could be the right place for us and we could stay there for a few years while focusing on saving and generating passive income. Or maybe we’ll figure out that it’s better to stay put.

We won’t know until we try.