Rent or buy? The numbers that will change your mind

Living in one’s own house is a strongly rooted idea in Slovakia. But is living in your own home really automatically a rational choice? Or is it rather a cultural setting that we do not economically calculate? In Peter Varga’s lecture on real estate, we looked at this question without emotion, through numbers, liquidity, tax implications and the broader context of investing in Slovakia.

Mathematics that is not intuitive

In the model example, we work with a property worth 1.5 million euros, own resources of 500,000 euros and financing of 1 million euros with a mortgage. The comparable rent is EUR 4 500 per month. We consider the alternative capital appreciation conservatively at 3% per annum.

In order to make the purchase mathematically worthwhile in this setting over a five-year horizon, the value of the property would have to grow by approximately 2.7% per annum.

This is the key moment. The decision is not just about “rent is money wasted”. It is about comparing two models of working with capital. In one, we tie up capital in an illiquid asset. In the other, we retain flexibility and allocate capital elsewhere.

In addition, we often do not take into account:

• the cost of renovations and technical interventions,
• time dedicated to due diligence,
• transaction costs on sale,
• the risk of a change in the market cycle.

Excel is not enough: Flexibility, liquidity and “loss of opportunity”

Pure mathematics captures only part of reality.

The first factor that we don’t get into Excel is liquidity. Real estate is an inherently illiquid asset. At the higher end, the time to sell can be several years. Yet liquidity has a standalone value in times of uncertainty.

The second factor is flexibility. The lease makes it relatively easy to exit and adapt to a change in living or business situation. Ownership implies commitment.

The third factor is the so-called loss of opportunity. The time that an investor spends on property selection, technical condition or contract documentation is time that cannot be devoted to his primary expertise. And that can be worth more than the difference between rent and mortgage alone.

Tax context: why investors don’t make neutral decisions

Petr Varga’s lecture was not only about housing. It was also about how the Slovak tax system distorts investment decision-making.

In Slovakia we have:

• Exemption of income from sale of property after 5 years,
• 1 year time test for securities,
• 7% dividend tax,
• in some situations, effectively taxing up to 45.4% for active trading,
• multiple taxation in mutual fund structures for certain types of income.

The state declares tax neutrality and support for long-term savings. In practice, however, the different regimes lead to the investor deciding not on the economics of the project, but on tax optimisation.

Therefore, the decision between buying and renting is, in the broader context, a question of capital allocation, risk and the legal environment.

There is no universal answer

The purchase can be rational if the investor:

• accepts lower liquidity,
• expects stable growth in value,
• wants long-term stability without the need for flexibility.

Rent can be rational if it is a priority:

• Flexibility,
• capital diversification,
• efficient use of time and expertise.

The decision should not be the result of a cultural stereotype, but a conscious comparison of models.

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Do not hesitate to contact us:

• Peter Varga, e-mail: peter.varga@highgate.sk

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