I was fortunate to discover this amazing community not too long ago, in the run up to what feels like the biggest financial decision of my life. The moment has arrived and I am looking for any wisdom or experience you guys have to help make the right call.
We just reserved a new construction property (not yet built) in Vaud near Nyon. It’s the first home we buy. We ended up going for a place that is below our max budget which was 1.5m. Final price 1m. It’s a ground floor property with a garden and the lot next door is the only other ground floor apartment (but smaller), 660k.
Out of morbid curiosity, we asked the bank to check if they would be willing to finance buying the lot next door at the same time, in order to turn it into a rental property. This should be impossible because normal calculations would place the two (1m+660k) out of the reach of our max budget of 1.5 (as per traditional affordability calculators). Somehow?!, UBS came back and said yes they can do it.
Enter full panic. On the surface it feels like a unique opportunity. At the same time, going for the house next door would take all savings, all LPP, all 3a. Our accounts would read 1000 CHF left over. We would rebuild our savings, but we estimate we will need 50k for extra costs during the build – and this is around what we can save in 1 year. We would pretty much be bouncing off the zero-line continually for the next year.
On top of this, we are planning a family (which might also need a car – which we don’t have right now). There are some other risk factors too; I work for an NGO which cannot be defined as a stable job, even if I have been there 8 years. My wife recovered from cancer almost 4 years ago and her sick leave has only just started to re-build. If I lose my job - we will be fine. If she gets sick within the next year or so, we might be in trouble because her income would not be covered – we would need a savings buffer in that scenario.
The scary part is losing a savings buffer completely for an extended period. Cashflow wise it actually looks good. The lot next door rented out would be cashflow positive even if we took a 2.3% 10y fixed. Our current housing costs are 2.4k CHF and the new place would be 2.9k CHF (of which 766 is amortisment).
What do you guys think – does buying the next door lot sound like an overreach? Or is panicking about 1 year at the zero-line ridiculous?
In general it is a very tricky question what is better - to buy or to rent, and even this objectively thinking and scrupulously calculating community did not come to a conclusion.
I guess it should be a very desired location with lots of people looking to rent.
If you are stretching your resources, I wouldn’t buy a property.
But I can suggest few alternative routes to explore:
Buy the smaller apartment to live before you have children, afterwards rent it out and rent another apartment for the family.
Buy the larger one, rent it out until you have children.
Buy both apartment, rent out the larger one and live in a smaller one before you have children. Swap afterwards.
How would I feel if a real estate crash comes shortly, both the properties loose value and we are stranded with no available assets? Would that impact my wellbeing beyond the point of acceptable risk for the opportunity?
How would I feel if I don’t go through with the deal, I’m hanging out with my friends and they are all flaunting their amazing real estate gains and income from rentals. Would I feel bad about it? Would that warrant the previous risk?
Personnally, I wouldn’t do it: the risk would look unnecessary to me, particularly since I can invest the money in stocks with good chance to not loose to the deal in the long term (probably even gaining more, though there again, we could be in the midst of a crash) but I’m a conservative person to whom the risk of loosing something I already have matters more than the risk of not getting everything that’s on the table.
to Dr PI:
Nyon is a pretty strong market and lots of renters. We already “reserved” the bigger one. Altering the “residence” property is apparently prohibited because if the LPP provider finds out they will demand a full refund of your pension fund
To wolverine:
if it is a real estate crash and the property prices drop - I feel ok because I don’t intend to sell and want to ride it out until they are back up again. The problem is if there is another personal catastrophe on top of this - then it gets stressful real fast.
yeh this will feel bad - not comparing myself to others (they are not FIRE minded), but self-critical. Which is arguably worse haha.
Your point about putting it into stocks is very very valid. I calculated that the monthly return on cash needed for the next door property is about 2% per year. I’m guessing there are stock market options that will beat this.
Then the next question becomes… if I don’t take the next door, do I leave my LPP and 3a untouched? or do I take the opportunity to pull them out… and use the extra cash to dollar cost average into Vanguard ETFs…
You can invest 3a money in 100% stocks very efficiently at finpension or VIAC, so not necessarily to withdraw. Depending on your target assets allocation, I would use an opportunity to withdraw part of the 2nd pillar if it is too high.
Talking about assets allocation: stocks portfolio have higher expected return than real estate and hardly needs any maintenance. So another argument not to buy second apartment. Not mentioning that having 300% of your net worth invested in a highly concentrated illiquid asset doesn’t sound like a reasonable assets allocation.
Especially of import regarding asset allocation is to make sure you can withstand a prolonged, deep downturn. Stocks, bonds and cryptos may be inside one and real estate could follow. We could be in an everything crash, or we could have bottomed already and be heading to new highs.
The family situation will probably change things. Depending on how soon you think you’ll have children, getting more on the conservative side, especially checking you have proper insurance coverage for their needs may have extra peace-of-mind value. Insurance, in particular, should cover what’s required to cover the affordability of the mortgage in case of death or disability.
I’d check if the insurance part of my 2nd pillar is linked to the amount in it before withdrawing. If it isn’t (as may be the more frequent case), then it’s just a matter of asset allocation or return on investment. If the 2nd pillar doesn’t pay more than the interests due on the mortgage and that doesn’t change the insurance coverage, I’d withdraw it to reduce the mortgage. A common strategy for a married couple if both partners have a 2nd pillar is to withdraw one of them and keep the other untouched. That way, it’s still possible to get tax deductions with voluntarily contributions to the untouched 2nd pillar even before having repaid the first one.
For married couples, I’d spare a thought for future situation when considering dealing with the 2nd pillar: in a divorce situation, the default is splitting it in half and judges tend to uphold that pretty tightly if one of the partner contests the way it’s planned to be shared.
For 3a, it’s dividend tax and wealth tax free space (that will be taxed upon withdrawal). I’d make the calculations to see if it’s more interesting to use that space or give it up but chances are it’s worth it, in which case I could consider pledging it, but I wouldn’t withdraw it unless I had to.
Regarding the real estate crash situation, the purpose was to envision the worst but still realistic worst case scenario. The situation I’d keep in mind is if my life situation was to change and the mortgages became barely or no more affordable, or the extra money on the side required. It’s mainly a matter of keeping your family safe if shit hits the fan, in my mind.
Costs are deducted by the theoretical rent. So in theory you could buy something for 10 million CHF with 3.33 million CHF in assets and a 6.67 million CHF mortgage without earning anything (being jobless). The rent just has to cover the costs.
6.67 million mortgage = 334k interest (5%)
maintenance = 100k (1% of buying price)
So if you can rent it out for 434k/year or 36.2k per month, you’ll get the approval (even without a job). Because it’s self-sustaining.
Coming back to your example: I’m assuming that your total gross salary is somewhere around 260k (hence 1.5 million max. with 20% equity). When you buy both apartments with 20% in equity, your calculative costs will be around 98k per year in total. With a 260k salary that’s 38% and above the limits, so that’s why you assumed it shouldn’t be possible. But renting out the other apartment for lets say 2k/month net reduces those calculative costs down to 74k. That’s 28% of the salary and so totally doable. I guess UBS used some conservative number like 1.5k/month which still gets you to 31%.
P.s. I know that’s kind of not what you asked, but just wanted to explain why UBS (or any other bank) is financing it.
It sounds like putting all your eggs in one basket at a time when a lot of people would say the Swiss property market has had a long run up and is overheating and is highly sensitive to interest rate risk
What would the monthly rental income be on the 660k flat ?
I assume it is not going to be more than about 3% before costs and remember if it is an apartment the monthly ownership charges can be quite high.
I think the risk here is not only about making a sale at a loss, which you can avoid by keeping the assets, but if the market downturn warrants a reevaluation of your property(es) from the bank, they may ask you to pony up the difference in cash between residual mortgage and asset value (assuming you don’t upfront the 33-35% in equity). That is a real risk because it’s directly hurting to your cashflow or cash reserves and not to the wealth.
Even if the market were to downturn this year however it’s unlikely it will happen within 12 months.
Re. the mortgage itself, I’m not clear on one thing though, I thought the bank has preferential rates for first residences, which would apply only to the trance belonging to the unit you choose as “yours”. Did they offer a separate mortgage for the other rental unit and if so did you check that you can make it?
Talking this out is incredibly helpful. Even the writing process makes things clearer so thank you guys.
Wolverine:
Yes funnily enough you were right to touch on that insurance point. My wife works for the state so her insurance part of 2nd piller is specifically linked to the amount in there at the moment it is needed. If she were to become sick again - it would get frozen instantly at current value and pay out a disability allowance based on that amount. If we withdraw to buy that second lot - this value drops to zero.
Really strong argument that 3a is protected from dividend tax / wealth - especially if I consider moving it to VIAC and do the ETF thing. I think that is incentive enough to keep it there. If I withdraw it - I would only use the extra cash to put into ETFs anyway… but that would be outside the 3a tax protection. I feel silly for even considering it.
Cortana:
I totally get where you’re coming from. I’m still scratching my head how they are working it for us. We are on 209k gross. with 428k funds of which 104k is 2nd piller, 54k is 3a. we are supposed to have 20% for living property but the second one is supposed to be forced to 30% because it is an investment.
Barto:
Yeh eggs in one basket argument is definitely tilting us to stick with the one apartment and do some other investments with the leftover cash (while keeping 2nd and 3rd pillers untouched).
Theoretical rent is hard to tell but lookoing at other offers in the area, we are estimating it pretty conservatively at 1600. extra 100 for the (outdoor) parking space rented out for a total of 1700. We could likely get 1800 if we tried hard enough. But who knows what this market will be like in 2 years after the place is built. 2% return estimate I mentioned above was based on the 1700 number.
Lowyeild:
This is something I am really terrified of. I’ve been told that it is quite rare to have a re-assessment out of the blue, unless I miss a payment or unless I am trying to do something ambitious like buy a third place. Surely in a massive downturn they will do everything to avoid reassessments because it would trigger a massive wave of foreclosures and screw up their books no? Im actually scared about it not in the context of a downturn, but rather if I suddenly find myself jobless and they decide to reassess and remove the house even though we are paying our monthly fees no problem.
Thanks again for all your thoughts guys. I wish I could get a round of beers for you all.
Borrowing at 2.3% to invest in a 3% gross yield before counting vacancies, repairs, tax on hypothetical rental income, purchase tax repainting etc does not sound like a great return potential
What’s your reason for wanting to buy it - are you speculating that the price will increase? Price and rent both sound cheap so I wonder how close to Nyon you are as opposed to somewhere remote like e.g. St Cergue
Also surprised UBS are so aggressive - they aren’t financing the project for the constructor are they (?)
Property A (200k equity, 800k mortgage):
Interest = 40k (5% of 800k)
Amortization = 8.9k
Maintenance = 7k (0.7% as it’s new)
Property B (200k equity, 460k mortgage):
Interest = 23k (5% of 460k)
Amortization = 1.4k
Maintenance = 4.6k
Total calculative costs of 84.9k. With 209k gross salary that’s 41%. It works if you bring that down to 70k, then you’re at 33.49%. Meaning renting the 2nd apartment out for at least 14.9k/year.
Barto:
Agree that return is not great - the reason is that I have a dream that one day we will have this portfolio of properties paying us rent so we don’t have to work. I guess its an illogical desire to be a slumlor… I mean a landlord. That plus I have a feeling UBS is stretching upwards for us and it is an “opportunity”. It’s in Gland - so main train line! Yes UBS are the construction finance.
Cortana:
This is really useful to see. Part of the reason we were influenced to think about the place next door in the first place is because we thought UBS are doing something special to let us afford it. It seems somehow not… although they do add notary costs to their analysis which adds 5% to their offered mortgage.
It’s just in their personal interest to sell you an additional 460k in mortgage But is still has to work out…which it does because you’re renting out the 2nd apartment.
If you want to take safe leverage to buy multiple properties I would recommend having NET rental yield of 5% or more. As @dbu says it is highly difficult to find such properties in CH, we are living in exceptional times with negative interest rates
If anyone here knows, is there a tax optimization potential we are forgetting when considering returns (gross and net) on a rental property? I feel the tax question would be a bigger part of a real estate investment (versus pure stocks) and am unfortunately not learned in it beyond mortgage and renovation/maintenance costs deductability.
If this is the reason, then I would recommend against the 2nd purchase. Notably yield on Swiss real estate is low. The key driver of the last decade was capital appreciation. Coming out of a strong decade with properties doubling in value I would recommend caution.
Moreover, reading your situation and your wife’s previous health condition, I would recommend taking a step by step solution. You won’t firing by accelerating this purchase. You are actually adding a lot of risk and potential stress. There is no shortcut to wealth accumulation. You may be lucky once or twice but doesn’t work all the time and surely not for everyone. You may have some money to play and find a short cut that way but it seems you don’t have much room so I would warn caution.
Good luck either way. You are already blessed to have your wife overcoming cancer, a nice job and opportunity to buy a property (only a fraction of people in Switzerland will ever be able to buy a property)
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But is still has to work out…which it does because you’re renting out the 2nd apartment.