Should I invest in house? [duplicate]

Question

I'm a 26 year old guy living in Croatia (Europe) in a coastal town known for tourism.

Average salary in Croatia is around 700€, while I have a steady job and earn 1700€ (after tax) as a software developer.

Flats and houses are very expensive for our standard, averaging around 1900€/m^2 (about 216,000€ for 116 square meters or 1250 square feet).

Rent prices start from 300€ (per month) for 1 bedroom apartments, and around 450€ for 2 bedroom apartments.

Right now it's hard to find a long term renting place since many owners rent their properties to tourists during the summer.

Currently I pay 300€ for my 1 bedroom apartment which represents 17% of my month income.

Long term girlfriend earns 900€ per month and also has a very secure job.

We don't have any other loans or debts.

We found a house in the city center (most attractive area for tourists) that has 2 flats, first one having 2 bedrooms and second one having 1 bedroom.

Buying it with loan would mean 900€ per month for the next 30 years. Interest rate is 2.9% and total interest after 30 years would be around 33% of the house price.

We have around 10K € of savings and half would be used to cover property tax and other half is our emergency fund (5k € is enough for around 6 months).

1 bedroom apartment would be easy to rent for 350€ per month (that's the average price in the area for the same apartments) from which we would save 50€ for unexpected house repairs and 300€ for principal payments and loan reduction.

Our current lifestyle cost us 1000€ per month which would leave us with 700€ buffer.

We're considering waiting strategy that would allow us to take smaller loan but housing prices are going up each year and it's insane already.

I'd like to hear your opinions on this?

Thank you!

Answer 1

Buying property with someone else is always a risk, and generally not recommended. (With an exception for married couples.) More importantly, you don't want to rely on both your incomes, as if either of you lose your jobs, you'll have trouble making payments.

I'm seeing a severe mismatch between the monthly payments you would make, and the monthly rental income you could make. (300+450=750€/month, vs 900 €/month) In many places, you can basically rent out a place and pay the mortgage off of that. Here, there would be a substantial shortfall even before taxes and repairs.

You say 5k € is enough for 6 months, but with your new mortgage, you'll only have enough funds in there for 2 months. I'm also concerned about your savings in general. You only have 10k €, but with your finances, you could be saving 1k €/month. This makes me think your salary is new, or you are underestimating your costs. (Also, I'm not seeing any down payment funds in there. Are you seriously able to get a 0% down mortgage with 2.9% interest?)

A quick rule of thumb is, if you had the money needed to purchase the place outright, would it be better to do so, or to invest the money at 5% interest. In this case, that would give you 900€/month, which is significantly more than rental income. (Again, 750€/month, before expenses.)

I don't know how to price out the lack of rental housing, but I have serious concerns about your ability to afford buying a house in general.

Answer 2

I live alone, and where I live, one square meter of housing costs approximately half of my monthly income before tax and approximately 80% of my monthly income after tax. I consider houses too expensive to purchase; instead, I rent. By renting, I have the possibility to live in a larger house than what I could do by purchasing.

A one-bedroom apartment costs 17% of your monthly income. Where I live, a one-bedroom apartment from the free market¹ would cost 17% of my income after tax, too, except I choose to live in a larger house.

So, the cost of renting is same to both of us, relatively speaking. For me, one square meter costs 80% of my monthly income and for you, 112% of your monthly income.

I think you'll find renting and investing the saved money into a well-diversified stock portfolio makes more sense: higher return AND lower risk at the same time. At least for me it makes more sense, and for you it would make even more sense than it makes to me because purchasing a house is more expensive for you than it is to me.

(1): I don't actually live in a free market rental property; I live in a subsidized house, which makes renting even better option for me. But even if I had to rent a free market property, I would do so instead of purchasing a house.