Should you buy a rental property while renting your own home?

It can make sense, provided you treat where you live and where you invest as two separate decisions. Renting your home keeps you mobile, while a rental apartment lets you buy where the numbers work rather than where you happen to live.

That does not make a rental apartment the better choice. It is leveraged, concentrated in one building and slow to sell. In the ten-year comparison below, an illustrative Leipzig apartment had to rise in value by roughly 1.4 to 2.6 per cent a year just to match an equity ETF (exchange-traded fund) on equal terms. This guide sets out that comparison, then the trade-offs that numbers do not capture.

Renting your home while owning a rental elsewhere is sometimes called rentvesting. Your home follows your job, your partner and your children's schools. An investment follows price, achievable rent and the condition of the building. A household renting in Berlin may find that an apartment in Dresden or Leipzig fits its budget better than one in its own neighbourhood.

Keeping the two apart also preserves flexibility. If you move city or country, a tenant can usually end a residential lease with about three months' notice (§ 573c(1) BGB), unless the lease contains a waiver of notice. Selling a home you own takes considerably longer and costs more.

The trade-off is that you remain exposed to rent increases on your own home while carrying a mortgage on someone else's.

A home you live in is a different asset from a rental apartment, particularly for tax.

• There is no rental income to tax, and no deductions. Mortgage interest on your own home is a private living cost (§ 12 no. 1 EStG).
• A sale is generally tax-free if you lived in the property throughout, or in the year of sale and the two preceding calendar years (§ 23(1) sentence 1 no. 1 sentence 3 EStG).
• A rental apartment sold within ten years of purchase is generally taxable, as the example below shows.

Owning your home can bring stability, but it ties a large part of your wealth and your flexibility to one address. If you might move within a few years, purchase costs of around 11 per cent in Berlin, Dresden and Leipzig when commission applies, plus selling costs, are hard to recover. If you move and let the home out, it becomes a rental property with a landlord's obligations; see what happens to your German property if you move abroad.

Buying a home is a housing decision first. Buying a rental apartment is an investment decision first. Neither is right in general.

Illustrative example. Fictional figures, not a forecast, an offer or a recommendation of any property or fund.

We take the Leipzig apartment from our rental property cash-flow guide and compare it with an accumulating, globally diversified equity ETF. Both paths start with the same €50,568. Each month, the household pays whatever the apartment needs after tax, about €246 to €256, and the ETF path receives exactly the same amount. After ten years, both are sold.

Inputs

*The 1.5% rent increase is an assumption. Increases in an existing tenancy are limited by law and the lease (§ 558 BGB).*

What goes in, and what is taxed

Net wealth after ten years, after all costs and taxes

Nominal figures, before inflation. The property reserve that an owner should also hold is left out of both paths.

To match the ETF at 3, 5 and 7 per cent, the apartment's value would need to rise by about 1.4, 2.0 and 2.6 per cent a year.

Three points stand out. First, purchase and selling costs set a high hurdle. At an unchanged value, the owner receives €240,000, less €9,600 of selling costs and €163,820 of remaining debt, which is €66,580 back on €80,556 paid in. Second, leverage widens the range: the apartment's results span about €101,000 across its scenarios, the ETF's about €32,000. Third, neither result is predictable. German residential property prices fell 8.4 per cent in 2023 alone (Destatis), and equity funds can fall further and faster in a crisis.

Leverage means most of the apartment is bought with the bank's money. On day one, your €50,568 buys only €24,000 of equity, because the purchase costs are spent. A 10 per cent fall in the apartment's value, €24,000, removes that equity entirely. Selling at that point would leave about €8,640 still owed after selling costs. The same 10 per cent fall in an ETF holding of €50,568 costs €5,057.

Leverage also magnifies gains. In the 3 per cent scenario, the apartment finished ahead of every ETF case.

Concentration is the second difference. An apartment is one building, one city, one owners' association and usually one tenant. A broad equity ETF spreads the same money across many companies and countries, although it carries market risk of its own.

You can sell part of an ETF holding within days. An apartment is sold as a whole, usually over several months, often with a tenant in place and a buyer who needs financing.

Timing also carries a tax cost. A rental apartment sold within ten years is taxed on the gain at your marginal rate, and the depreciation you have claimed reduces the cost used to calculate that gain (§ 23(3) sentence 4 EStG). In the example, a sale shortly before the ten years at an unchanged price would still produce a taxable gain of about €3,800. At 1.5 per cent a year, the gain would be about €40,800, or roughly €16,300 of tax at 40 per cent. Ending a loan during its fixed period can also trigger prepayment compensation (Vorfälligkeitsentschädigung).

An ETF savings plan needs little ongoing work, and a German broker generally withholds the tax. An apartment involves a tenant, the owners' association (WEG) and its meetings, repairs, the annual operating-cost statement and the rental section of your tax return. Much of this can be delegated for a fee. The decisions and the legal responsibility remain yours.

For 2026, the base rate (Basiszins) used for the Vorabpauschale is 3.20 per cent (Federal Ministry of Finance). Amounts already taxed this way are deducted from the gain when you sell (§ 19(1) InvStG). A saver's allowance (Sparer-Pauschbetrag) of €1,000, or €2,000 for married couples assessed jointly, applies to all capital income (§ 20(9) EStG).

Buying where you grew up can feel more familiar, and family nearby may help. It also brings its own questions.

• Currency. If you earn in euros and the property's value, rent or loan are in another currency, exchange-rate movements affect your result in both directions.
• Management at a distance. The time difference and local rules apply however well you know the area.
• Tax in two countries. As a German resident, you are generally taxable in Germany on worldwide income. Under Germany's double tax treaties, the country where a property is located may usually tax its rent (see OECD Model Tax Convention, Article 6; Germany's treaty list). Germany then either exempts that income or credits the foreign tax, depending on the treaty. Exempt rent from property outside the EU and EEA can still raise the German rate on your other income (§ 32b EStG). Losses from letting property outside the EU and EEA can only be set against income of the same kind from the same country (§ 2a(1) EStG).

German property is not better than property in your home country, or the reverse. Take advice in both countries before comparing them. If you live outside Germany, your country of residence may also tax an ETF or German rental income.

A rental apartment may fit if your savings cover purchase costs and both reserves, the monthly top-up fits a difficult month and not only an average one, you expect to hold for well over ten years and you accept the concentration and the work. Our guide to how much money you need to buy a rental property shows how to test this.

Your own home may fit if you expect to stay in one place for many years and value security of tenure over mobility.

An ETF may fit if you may leave Germany within a few years, want to invest smaller or irregular amounts, need access to your money or do not want the role of a landlord.

Property in your home country may fit if you are likely to return, know the market well and have reliable local support.

Waiting and saving may fit if your probation period has not ended, a permit renewal is pending, your reserves are incomplete or you carry high-interest debt. Many households combine paths, for example an ETF savings plan while building the equity for a later purchase.

Is a rental property or an ETF the better investment in Germany?

Neither in general. In our illustrative comparison, the apartment came out ahead only if its value rose by about 1.4 to 2.6 per cent a year, depending on the ETF return assumed. The apartment adds leverage, concentration and work; the ETF adds market volatility without a tenant or a loan.

Can I buy a rental property before buying my own home?

Yes. Many people do, and it keeps your home and your investment decisions separate. If you later move into the apartment yourself, a sale is tax-free only once the owner-occupation conditions are met or more than ten years have passed since purchase.

Are ETF gains tax-free after a holding period?

No. Gains on ETFs bought under the current rules are taxed when you sell, however long you have held them. The ten-year rule applies to property, not to funds.

Should I invest in Germany or in my home country?

It depends on where you expect to live, which currency you will spend in, and how each country taxes the income. Treaty rules vary, so compare after-tax results with advice from both sides.