TIPO, Total Investment of Property Ownership explained
‘How much did you make on your apartment? You surely made a couple of thousands, right?‘. My neighbour threw a barbecue party this summer and I overheard Raymond and Carl talking to each other, and as on many other parties, it does not take long before the neighbourhood property prices are discussed.
Carl used to live for more than 10 years above Caroline, our host (and grill master) and recently sold his apartment for nearly 380’000 eur. Ten years ago, prices had started dropping due to the global financial crisis and Carl benefited from the price drop, which continued for 2 years after he bought the apartment. Carl did not mind; he knew about price cycles and since he wanted to spend some time living in the city center, he thought that the worse thing that could happen, was that he had to sit out the upcoming cycle a bit longer than he envisaged.
‘Oh yes, I made a serious amount of money. I bought the apartment for 320’000 eur, so yeah, I made close to 60’000 eur‘, Carl answered nosy Raymond. ‘And your mortgage?‘, Raymond asked. ‘Sure, yeah, if you look at it like that… it was 350’000 eur, because I needed to renovate a few things when I moved in. Anyway, it was still a good investment‘, Carl smiled.
Carl invested around 35’000 eur in renovating his bathroom, kitchen and insulating his floor and walls. Quite an amount, but he thought it was well worth it. His explanation was that he would earn the investment back by spending less on utility bills. It made sense; the insulation reduced his energy bills significantly, and his bathroom and kitchen made use of water saving technology. Carl told me once that he saved up to 1’200 eur a year compared to the previous owners. Not bad, saving 12’000 eur over the course of his property ownership.
‘You know Ray, I think property is the biggest investment in your life. It’s important to maintain it well and make the right choices when you renovate. I think Peter and Aida did not fully realize that this can make a huge price difference.’
‘Yes, I guess. You got a much better offer than the couple across the street‘, Raymond said. It was true; Peter and Aida’s place was exactly the same as Carl’s in terms of direction, size, floor plan and level, but they sold it for 352’000 eur, almost 30’000 eur less than Carl did. ‘You know Ray, I think property is the biggest investment in your life. It’s important to maintain it well and make the right choices when you renovate. I think Peter and Aida did not fully realize that this can make a huge price difference. Or maybe they had another reason for not maintaining their place. My real estate broker told me that the new owner needs to spend a lot on home improvement when she moves in‘, Carl said. Apparently, no renovation had been done, even though Peter and Aida spent a serious amount on maintenance, almost 5’000 eur a year on fixing broken parts.
‘Really? I am happy that I just pay my monthly rent of 1’500 eur and don’t need to worry about all these costs!‘, Raymond said.
Was Raymond right, I asked myself. Was it really worth investing so much in sustainable home improvement and renovating with good quality materials?
I woke up the next day – slightly hungover, I must admit – and all the numbers Raymond and I talked about went through my head. I stoop up, made a cup of coffee for my girlfriend and myself, and opened my laptop. Excel. I needed to compare these numbers to see who was right: Peter and Aida for not spending anything, Raymond for paying his monthly rent, or Carl for investing so much money on their apartment. So let’s have a look what their costs of home ownership and rent were over a period of 10 years:
Home ownership cost items over 10 years | Raymond & Elise | Carl & Irene | Peter & Aida |
|---|---|---|---|
| Outstanding mortgage | – | 350’000 | 320’000 |
| Property purchase price | – | 320’000 | 330’000 |
| Notary, taxes, brokerage fee | – | 15’000 | 15’000 |
| Interest (net) 3% and 40% deductible | – | 42’000 | 38’400 |
| Property taxes 1% | – | 32’000 | 33’000 |
| Utilities | incl. in rent | 28’000 | 50’000 |
| Maintenance | – | 16’000 | 49’500 |
| Renovation | – | 35’000 | 0 |
| Rent | 180’000 | – | – |
Some serious amounts. But who is better off? Does it make sense to invest, do nothing or just let the landlord take care of the property?
Raymond & Elise | Carl & Irene | Peter & Aida | |
|---|---|---|---|
| a) Total Investment of Property Ownership (TIPO) over 10 years | – | -488’000 | -515’900 |
| b) Property purchase price | – | -320’000 | -330’000 |
| c) Sold for | – | 380’000 | 352’000 |
| d) Gross profit/loss (c+b) over 10 years | – | +60’000 | +22’000 |
| e) TIPO -/- Property purchase price (a-b) | – | -168’000 | -185’900 |
| f) Mortgage | – | 350’000 | 330’000 |
| g) Renovation financing (b-f) | – | -30’000 | 0 |
| h) Net profit/loss (d+e+g) over 10 years = actual net housing costs | – | -138’000 | -163’900 |
| Rent | 180’000 | – | – |
Raymond & Elise | Carl & Irene | Peter & Aida | |
|---|---|---|---|
| Actual net housing costs or rent per 10 years | 180’000 | 138’000 | 163’900 |
| Actual net housing costs or rent per year | 18’000 | 13’800 | 16’390 |
| Actual net housing costs or rent per month | 1’500 | 1’150 | 1’365 |
Out of these numbers we can conclude that Carl & Irene spent the least on housing (1’150 eur/month), with runners up Peter & Aida (1’365 eur/month), and that the tenants Raymond & Elise spent the most (1’500 eur/month).
But is it that simple?
No, it isn’t. A few factors come into play to complete the picture or the actual context:
- First of all, it is very difficult to actually make money on real estate when you live in it. You have your housing costs and you can only counter these to a certain extent by selling your property for a higher price compared to the purchase price.
- Secondly, you can mitigate the running costs (utility bills) when your energy consumption or energy performance is on par. This needs investment in most cases, unless you purchase property with a very high energy performance level.
- Thirdly, most building materials wear out and need to be replaced during renovation projects. When you are not replacing obsolete building materials, you will spend a lot of money on plugging holes, which significantly increases your maintenance costs and pushes up the utilities bills.
Carl seems to be right; it does pay off to ‘to maintain it well and make the right choices when you renovate‘. However, you could argue that he was fortunate to buy low and sell high. Sure. But that is what Peter & Aida did too; they made a gross profit of 22’000 eur. But Carl & Irene made more: 60’000 eur. 38’000 eur more, which is 10% of the purchase price!
This shows that more factors come into play:
- Potential buyers who are interested in moving into a certain neighbourhood, compare the listed properties.
- More than ever before, buyers are interested in the condition of the property, which includes the investments that are needed to keep or improve the condition.
- They are willing to pay more upfront, because they do not want to run the risk of paying a bit less now and spending loads of money later on plugging holes and outrageous utilities bills.
When Carl said ‘I think property is the biggest investment in your life‘, he was right too. It is a big investment and he took an additional risk to take up more debt than his property was worth: 30’000 eur, close to 10% of the market value of the property when he bought it. He made the right choices and it helped that he sat out the pricing cycle, so he earned it back and lowered his housing costs over the 10 years that he lived in his apartment.
Peter & Aida were somehow fortunate too; they were able to plug the holes and sit out the cycle. However, if prices would not have come up, they might have had to sell for a much lower price or they had to stay longer, leading to a much larger backlog of renovation projects.
So the moral of this story for a buyer: when you are interested in buying property, the asking price is probably only around 60-70% of what your total costs of housing will be during a period of 10 years. Make sure you fully understand the TIPO: Total Investment of Property Ownership!
The moral of this story for a home owner: make the right choices when investing in your property, so that buyers are willing to pay a premium, which should cover more than just your renovation and maintenance investments!
And Raymond & Elise. Well, when you pay rent, you know exactly what your housing costs will be. No surprises, no risks, no upside. Just hope that you have a nice landlord.
