Question on the performance of real estate vs ETFs : eupersonalfinance


Hello! I’m a 22 year old Spaniard and I’m completely new to the world of investing.

This is going to be a fairly long post, so feel free to skip to the last section if you wish.

Some background:

I work from home and I would like to explore the world while I’m young. Last year I lived in a different city (in Spain), and it was a great experience. I would like to keep doing that for a while, and maybe somewhere where the cost of living is cheaper (Croatia for example). As people say, sometimes the best investment is to invest in yourself.

Now, I’ve given some thought to renting: if I rent, the money I spend isn’t coming back, whereas if I settled in just one city, I could buy, and eventually I would own my house and not have to pay anyone.

So for quite a while I’ve been thinking about a plan: live with my parents for a bit to save enough for a house down payment, get a mortgage, and rent the place. Ideally the rent should be higher than the mortgage, and the difference could be spent on a property manager so they can deal with the tenants, and the cost of repairs that would eventually have to be made.

Ideally the equation of “rent – mortgage – repairs – manager” would be positive or close to zero, or at least very slightly negative.

Then, I would leave my city and rent an apartment somewhere else (in another country). By the time I decide I’ve had enough traveling and I’m ready to settle, I would have many years of the mortgage paid already, whereas if I didn’t buy any property at all I would come back to my city with nothing at all.

The idea that made me question this plan:

I discovered the personal finance subreddits and the FIRE philosophy. While browsing around I came into an idea:

“Sometimes it is smarter to rent instead of buying: rather than spending 150k on an apartment, one could invest 150k in ETFs and use the profit to pay rent”.

Now, I did some basic math. I searched for apartments in a specific neighborhood of my city:

  • The average cost was 170k.
  • The average cost for rent was 700 €, or 8.4k a year.
  • Therefore if I owned an apartment, the my yearly “APR” would be of 4.94%

I’ve read that ETFs can do better (The specific example I’ve read said something along the lines of an average APR a bit higher than 7%)

Apart from the higher APR, ETFs would have some other advantages too (at least the ones I have noticed):

  • They are actually passive income, they don’t require a property manager to do the work for me.
  • They should always keep generating profit (long term, that is), while my property could become empty for some time if the tenants decided to leave.
  • They don’t have the risk of okupas (“occuppiers”? I don’t know how to say in English – people who live at your property and refuse to pay). I don’t know for the rest of Europe, but in Spain they are a thing, and the process to kick them out is very long and bureaucratic, time during which you would not be making money.
  • They are more liquid (is that the correct term?) – you can sell part of your ETFs but you cannot sell part of your house; either you sell it or you don’t.
  • From what I read at /r/personalfinance they have less taxes, but I have yet to research if this applies to Spain.

Now here’s my question:

The strategy of ETFs seems solid to me. However, even though they have higher APR, you also have to account for the real estate market rising. If I purchase my house now for 150k, and in ten years the cost of living doubles, I would expect to be able to sell it for 300k. So in ten years I would have made 150k plus rent. 15k per year would be 10% APR, plus the rent APR.

Obviously the numbers are made up, but the concept stands: if I’m correct, then the better idea is to invest in real estate.

The possibility of the real estate market tanking exists, that is true, but so does the possibility of the stock market tanking.

So my question is: am I correct in my thinking? Should I continue saving for a house, or should I start looking into investing? Did I make any wrong assumption? Is there something that I missed?

Many thanks for your help, and have a good day!



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