Buy or rent real estate in Switzerland

#1

Hi,

I’ve read some very interesting threads on this forum about Swiss real-estate market value. But I must say I’m still even more confused than before. I’m reading and learning a lot but I’m sure your blunt feedback would surely help out.

Right now the only question I would like to solve is this:

  • should I keep renting my house or should I purchase one to live into it.

I fully understand each situation may vary but I’d like to keep it simple. From my understanding the “Price to rent” ratio is a very accurate indicator when it comes to decide if you should buy or rent real-estate.

As a benchmark I look at UBS price to rent ratio of 29.5 for Switzerland. For most of the houses on my list I get a 32 ratio. Looking at different online opinions I’ve settled my mind on the fact that “price-to-rent ratio of 21 or more indicates it is much better to rent than buy” (I’m not sure if this is applicable for the Swiss market).

I fully understand how you compute the price to rent ratio however my head is spinning when it comes to understand its output based on the figures below.

Let me give you an example:

home purchase price = CHF475,000.00
acquisition costs 4.5% (notary) = CHF21,375.00
20% cash downpayment = CHF116,375.00
at 1.3% interest rate monthly payment is = CHF722
yearly operating costs at 1% of purchase value = CHF4,750.00
Monthly “total cost of ownership” (without impact on personal income tax) = CHF1,118

Without going too crazy on the rent I believe this is something which can be rented for CHF1800 (I’m just using this figure to compute the theoretical price to rent ratio).

Therefore in this case, despite having a high price to rent ratio it looks to me that I should definitely buy instead of renting as this would result if a monthly gross profit of CHF682.

I understand disadvantages of owning a property such as lack of flexibility however if I add up the monthly gross profit with tax deductions coming from mortgage interests and maintenance of the house buying a property looks like a no brainer to me.

I would really love if you could prove me wrong and be blunt with me because I would learn new things and wouldn’t commit to a mortgage for the many years to come.

Thanks

#2

It seems you did not include opportunity cost.
The 116’375 CHF you paid for the cash downpayment are now tied to your house, and not invested in an ETF for instance.
In case you rent and the 116’375 CHF are invested in a low cost ETF, you can expect historical average returns between 7 and 10% (depend how optimistic you are), which would make roughly between 8’100 and 11’600 CHF more in case you rent.

Of course, the house value may appreciate in value as well. So your equity in the house could increase as well in the case where you buy. The whole question in this case is:

  • by how much on average your house will increase in value (historically it is usually the inflation rate)
  • if we are at a current high of the real estate market (which i do not know, but looking at current numbers it is not an outlandish hypothesis), cycles in real estate are much more slower that stock cycles => this could mean a down market for several years… how long do you wish to live in this house?
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#3

CHF475,000.00

unfortunately it has been a long time since I have seen a decent property below 700k

At the same time rents are dropping and now we are looking at real returns of below 3% on real estate and it might get worse.

There are a few people who will tell you you can have better returns but they are either … in the property sales business or have been lucky with their investments.

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#4

I have made out to comparis.ch to look for flats comparable to the one I am renting. The lowest one starts at 930k

We are paying 27000 in rent yearly so even the gross rent would only yield a 2.90% return.

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#5

Property sales people will tell you about return on money down, and of course assume you take the maximum mortgage. If you set aside these ridiculously low interest rates, the modest 3% becomes a whopping 15%. Leverage is magic, isn’t it :wink: ?

#6

Yes and then imagine what you would earn with that leverage on VT :blush: you could almost retire immediately from the returns :smile:

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#7

It seems you did not include opportunity cost.

That’s a very good point indeed, moving forward I will now factor this in. Also to get the full picture I’ll factor in tax deduction from renovation/maintenance work in the house I’m planning to purchase

if we are at a current high of the real estate market (which i do not know, but looking at current numbers it is not an outlandish hypothesis)

I have the same feeling as you regarding the real estate market we’re in right now

how long do you wish to live in this house?

I believe for at least 5 years

Thanks @Julianek for sharing your insights!

#8

unfortunately it has been a long time since I have seen a decent property below 700k

What I’m targeting right now is a house with lots of maintenance/renovation work to be done inside as this is something I can entirely deduce from my taxable income hence this very low price. Obviously for such a price you can’t purchase anything in Zurich nor Geneva but you can find nice houses in some remote areas/touristic area.

At the same time rents are dropping and now we are looking at real returns of below 3% on real estate and it might get worse

As far as I’m concerned my rent never dropped for the past 10 years but I’ve read in the forum that some people could get a reduced rent indeed!

In my situation beyond asset appreciation over time doing intensive renovation/Maintenance work should allow me to save about CHF100K of income taxes per year that’s why I’m looking beyond the 3% return on real estate.

#9

@Zerte2

the modest 3% becomes a whopping 15%. Leverage is magic, isn’t it

yeah that’s what it sounds like but in real like I really can’t find any real estate asset producing this type of return (ie 15% on money down) please correct me if I’m wrong I’d be more than happy to get this type of return (as you need to factor in the impact on revenue tax, maintenance of the property etc.).

imagine what you would earn with that leverage on VT

I guess it wasn’t the case in 2018 as the performance looks negative based on what I understood

#10

Did you pay attention to the smileys in my an oozoo’s replies?..
Joke apart, 3% gross rent is completely walkaway.
Even below 7% gross rent it is probably not worth the trouble.

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#11

If you own a house or a flat you have to pay a special tax called “Eigenmietwert”. The tax office takes a more or less wild guestimate a price you would have to pay if you were renting your house (let’s say CHF 24000/yr) which is added to your income. You’ll pay another 50-10k there depending on your Grenzsteuersatz.
On the other hand in Zug and Vaud you can deduct your rent from your income.

#12

This is overblown.

My Eigenmietwert is 17k on 600k flat. Substract ~7k in mortgage and another 4k in “Unterhalt” and this becomes 6k. Taxed at 33% this is 2k/year or 166 CHF/month.

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#13

If you own a house or a flat you have to pay a special tax called “Eigenmietwert”.

Would you rather pay an arbitrary and not income-tied land/property tax like in other countries? Every county taxes property in one way or another.

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#14

Hi, I’m not a tax expert at all, but be careful about the difference in “werterhaltend” (normal maintenance/replacement) and “wertvermehrend” (improvement). The latter costs are not deductible from taxable income. However these are taken into account when you will sell the property (“Grundstückgewinnsteuer”). There is no free lunch :frowning:

#15

@baffo66 you’re spot on. I fully understand the need to stay in the maintenance/replacement zone if I expect tax benefits. If I may ask you a follow-up question, you said:

these are taken into account when you will sell the property

Are you referring to “normal maintenance/replacement” or “improvement”?

#16

The “improvement” ones. If you are going to sell the property and realize a profit (which everybody hopes) you will have to pay a tax on this profit.Notarial fees and improvements can be deducted from the profit.
This tax decreases the longer you kept the property. And of course it changes from canton to canton :wink:

#17

For those interested:

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#18

Hi there. My partner and I are in Switzerland for a few years now and start thinking about buying in a few more years (2-3). However, I am just starting to look into it and all the different aspects so I would have happy to have some clarification on what you meant. It could also be that it is the English terms that I am not familiar with but since I am lurking more and more on those board, it is not bad to learn them.

What do you mean by “return on money down”?

Also, you mention that property sales people assume that we take the maximum mortgage. However, what is wrong with it? I asking that because I heard several times that in Switzerland, when you fully own a real estate or a property in general (I mean that you have no mortgage), the taxes get you while when you still have the mortgage you have a debt that can be deducted from your income. I could be very wrong there and that part of why I am asking for some clarifications.

What did you meant in those two replies?

Again, those questions are probably really silly for someone well versed in this so I apologize in advance.

#19

Hi ecthe

Basically when you buy a property for renting purposes, you will finance a rather large portion of the purchase price with debt (ex. 80%).

Let’s assume a property whose price tag is CHF 100k and can be rented for CHF 4k annually. Basically, the gross return is 4% (=annual rent/purchase price).

When you calculate the the ROE (=return on equity) you will calculate the net return/equity -> net return = rent - maintenance costs - interest paid - various other costs. Equity is 20% (assumption) -> CHF 20k and let assume that all costs amount to CHF 2k -> ROE = 2k/20k = 10%. @Zerte2 was probably implying that the property saleman will tell you how you might make 10% by buying this property. The 20k are indeed the money you put down to get this “impressive” return!

The all VT leverage thing was only a joke from @oozoo illustrating the fact that leverage artificially leads to higher ROE :slight_smile:

3% gross return is very low and I personnally would not consider investing in such a property…
7% is better but not fantastic as well

Please note that the salesman method to compute the ROE (willingly) neglects the impact of taxes and some other hidden costs , which are not included in the mainteanance/various other costs above. So the real after-tax ROE should be way lower than the ROE showed in my example.

I hope it helps!

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#20

Exactly.
The nice percentage is amplified by the low denominator. It is a “feel-good” effect.
If you have only 1 CHF money down (i.e. you invest only 1 CHF) you’ll really feel like a genius with 200’000% RoE in MR.RTF example.
In some countries no money down is possible, even a negative money down (you get 105% financed).
Add to it negative mortgage rates (like in Denmark) - you’ll be the king of Real Estate (your neighbour too, by the way).

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