Buying a house (or not)?

Real Estate
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We consider buying a house. While it is pretty unlikely that we will do so (not enough time to make a proper decision), I would like to use it as an opportunity to better understand the financial implications. We would consider purchasing a property only if it is financially attractive also. Any help is greatly appreciated!!

Here the “specs” of the house:

  • Purchase price 1,850k
  • Funded via equity 370k and loan 1,480k (ie, 20%/80% split)
  • 10 year interest rate 1.4%
  • Maintenance costs + utilities = 1% (estimate from the agency); the house is in good shape but obviously utilities need to be paid and in the long-run any property requires maintenance
  • Eigenmietwert: not provided

Currently we rent a house (notably larger + closer to the city) at 48k/year (including utilities). We can live here as long as we want (many of our neighbours do so since decades) as the house is owned by a foundation (reasonable rent, tenant friendly).

The agency estimates that tax-deductible maintenance + interest rate would zero out the Eigenmietwert (even though that is not certain as I do not know the Eigenmietwert). If I assume that best-case, in my understanding, the return on equity would be around 2.4% (9k/370k), decreasing over time due to amortisation (as required by law). In my view this is quite low, given the various risks taken (refinancing in 10 years, having/ wanting to move when markets cool down…). Also in absolute terms, 9k/year feels “somewhat limited”, especially considering the size of the mortgage.

Not considered: impact on wealth tax. Not sure how the property value for wealth tax purposes is computed but if it is significantly lower than the purchase price, that would have an impact.

Any thoughts from anyone with a good understanding of the housing market? Is my calculation overly naive, am I too negative, am I missing something “big”, especially on the tax side? How about the wealth tax?

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Maintenance costs != utilities

In my case it was 70% of the purchase price, so indeed you make some money “disappeared” from the taxable wealth by buying property.

It’ll most likely be what the current owners get charged. Ask them directly. My house comes with a 14% eigenmietwert.

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Thanks Giff, I believe they mean maintenance + utilities = 1% (I corrected that). Unfortunately I do not have access to the owners as they left the country. I only have limited information from the agency, not always very useful. Also, we have seen similar objects being purchased very rapidly so not expecting to receive more than that in a useful timeframe. But indeed, I could at least give it a try…

The agency claims that the Eigenmietwert would be computed based on the purchase price (ie, 1,850k) by the authorities and is hence not yet known. No clue whether this is indeed the case, also had the understanding previously that it is rather fixed.

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In my case they apply the same eigenmietwert as the previous owners, who paid the house a looooot less than I gave them. Maybe I got lucky. Anyway, it’s something to do with the sate of the house: if it’s new it pays more.

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Lets change the numbers to be more in favor of owning, so lets reduce it to 4%. If you can rent the place for 4% or below it’s purchasing price, then renting makes more sense.

1850k x 4% = 74k. You’re currently paying 48k/year which translates to buying something for 1200k.

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Cortana postet the answer you are looking for.

ROI Rent Capitalized house price explanation
5% 4’000 960’000 Shows the rented property’s worth at 5, 4 & 2.4% capitalization
4% 4’000 1’200’000
2.4% 4’000 2’000’000
2.4% 3’700 1’850’000 Your dream property’s price at 2.4%
5% 7’700 1’850’000 Your hypotetical rent if your with 5% (gross) ROI

As you see the value of the house changes based on the rent and at what price we capitalize the rent.
In your case, if you planned to rent the the house to a stranger (or to yourself) it needs to generate a cashflow of 3’700.- to be valued at 1.85 Mio at 2.4% return.
If you bought for 1.85 Mio and want a 5% return you need a rent of 7.7k/month.

Considering you are paying 4k for a bigger and closer property i would not change right now. (if we capitalize 4k/month with 2.4% you rent a property of 2million.

The fixed costs of the property you plan to buy are the following:

Item Ammount
Maintinance 1% 18’500.-
Loan 1.4% 20’720.-
Ammortisation (to 66% in 15 Years) 32’955.-
Total 72’175.-

This equals to 6’015.- each month, on top you will have to pay for utilities (heat, electricity, water,…)
You see the property would generate an income of 3’700.- (44’400.-) and generate 72’175.- in expenses, this leaves a deficit of 27’775.-.

Even if we leave out amortisation of the loan the house would still generate fixed costs of 39’220.- that leaves you with a potential gain of 5’180.- a year.
This equals a 0.28% net ROI and a 1.4% ROI on your equity, also consider that if the loan prices only rise to 1.75% in 10 years you even lose your 1.4% ROI.

In my opinion its not worth to buy this property from a financial point of view.

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Thanks for the detailed breakdown.

Why do you consider amortisation as a cost? Shouldnt it be considered as a buyback of your own equity in the house?

The maintenance costs, mortgage costs and the Eigenmietwert tax implication should be considered as the fixed costs of the property, imho.

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Yes taxes and Eigenmietwert will have a big role as well, but they dont help you in this case, they only tend to make it worse. I look if i find some data and will post it here during the day.

You can exclude them, and you are right it will help you since in 10 years when you refinance your loan will be smaller (1.150 Mio) this means also your loan costs will go down oder time.
In my opinion it is still a part of the fixed costs, since you have to pay them.

You could make the calculations over the 10 years, with the lump sum of all the costs. The ammortisation in this case would just go to your equity (making the ROI on your equity worse).

I often ask myself if i would go 5x margin long with this sum in VT over 10 years (where you only would need a 2.6% every year to make equal gains as your RE deal), and i am scared just by the tought of it, but on RE it somehow just seems “normal”.

Just for fun here is a table listing the possible Gains with 1.85 Mio in VT over 10 years (coumpounded). Assuming capital costs of 2.5% (total capital cost over 10 years already deduced: 370’000.-) effective x5 Margin Long.

Avg. % Gain Profit & Loss ROI on equity
0% - 370’000.- -100%
1.0% - 216’700.- -59%
2.0% - 52’430.- -14%
2.6% 51700.- +14%
3.0% 123’500.- +33%
4.0% 311’800.- +84%
5.0% 513300.- +139%
6.0% 728600.- +197%
7.7% 1’128’800.- +305%

With 2.6% you have a ROI equal to your RE deal.
Also if you buy the house you would add 330k equity over 10 years (reducing leverage), if you did that in this case you capital cost would be reduced by 50k.

Well its a bit of an extreme scenario, but i think you might get the point.

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I think this “intuition” or gut-feeling probably stems from the fact that these two asset classes don’t have the same underlying volatility. A good reminder at the very least that expected return is not sufficient when evaluating different strategies, especially since one’s capacity for risk is one of the most important decision factors.

I’m not suggesting any expected volatility figures for these classes though; a notoriously difficult exercise for Swiss real estate! :sweat_smile:

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this
Less volatility and your property will not be reevaluated every 5 minutes → risk of quick drops (and related margin calls) is limited…

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Based on this calculation what will be a good number for the ROI.

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Look, what i described are the pure financial aspect to buying a house or property. If you still consider this as the only reason to buy a house you would look to maximize it based on what the markets offer you. As we all know a home is more than just a financial aspect, and more than just a number so it might be worth for you even if the numbers are not perfect.
Also older properties and properties further away from city centres tend to have a higher ROI than new ones (higher risk).

To evaluate the ROI in this case you need to evaluate the bigger picture:

  • What does the market offer as alternative, like where could i get a better investment and what are the risk for those. A ROI of 2.5% might look bad, but if every other option you have is 0.1% its a no brainer.

  • Where can i expect that the market is moving? Do i think we are at a top or at a bottom?

  • Where does the house stand, do i have any benefit from the position (family, work, etc…)

  • Is the potential upside worth the risk of taking a debt of 1.4 Million?

  • Is your financial (and familiar) situation strong? Divorce is the main reason for RE sales.

  • Do i have time? Somtimes you can not wait and have to handle quick.

As Sunnyberny statet he/she is already renting a house, renting comes with lower risk (and reward) to price fluctuations. Considering the above calculations the family lives in a 2Mio property for 4k/month.
While they plan to upgrade in a smaller, a bit further away house, where they would need to pay 5’180.-/ month and 2’750.-/month amortisation. For a property that is valued less (1.8 Mio).
This is why from a financial perspective it does not make sense.

I discussed with lots of people the urge to buy Real Estate, and i also find myself to look at places to buy with my wife, even if i know it does not really make financially sense. But its a good feeling having your place, and maybe you can’t put a pricetag on this.

The urge to own Real Estate however gets amplified by the fact that everyone considers it a good investment. What is not surprising, since prices are rising since 30 years. I think its really really difficult to find someone that lost money with RE in the last 30 years, every owner is a winner for now.

Thiat said I am not encuraging to go 5x margin long on VT with the same cash.

I hope this answer helps.

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I did the step 8 years ago, prices already going up. At that time, my conditions were to do not increase the cost and to be able to pay all the cost with the lowest of our salaries

Now I am in the point to decide I sell it or I rent it. As I change my living place closer to my wife’s work.

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I can only talk here about my own experience. I came in Switzerland 15 years ago with almost no money . I’ve met my girlfriend about 1 year later. 1 year later we wanted to move together and rent an apartment , but the monthly rent was really high for the poor quality of the proposed apartments (Geneva). She pushed me in buying an apartment, but all her friends were saying that it was too expensive at the time, that market was overvalued (13 years ago). I was also impressed about the conditions to get the mortgage approved, but my uncle said to me once: If you don’t take risks you will never get anything. I’ve decided to follow my girlfriend and we bought an apartment in Geneva. In 12 years the value has increased of about 40% (400k). I have been able to increase my mortgage to buy 2 other apartments. Today I have 3 apartments. 2 are rented and the income pays for my own apartment.

Don’t get me wrong I’m not perfect, I did mistakes and I lost a lot of money…in trading! I had advice from friends and guess what that was the worst thing I ever did is listen to some friends and read some FORUM advices about specific companies which were supposed to have some great future returns. They never did…

I see a lot of people talking about the great return you can have in investing money on the Stock Exchange instead of Real Estate, but I do believe that the price of RE in Switzerland will still increase in the future. I’m not saying there is no risk for sure, but I can tell you there is also risks on the Stock Exchange!!!

Personally I see RE as bonds and balance in my life. When I see today’s RE price I’m really happy about my past decisions. My goal is to lower my mortgage by making some massive buy-outs in my second pilar, then wait 3 years to withdraw an amortize a big chunk to be able to retire peacefully. Not there yet I’m 45…

Personally I think RE is part of a balance Portfolio of any investor. A lot of people have theory about investing in RE that it’s too complicated and risky, but if you understand how it works and the opportunity of buying something well located and analyze all the parameters,I do believe it’s a good investment BUT yes there are risks of selling before the end of your mortgage contract and get penalty, or risk of divorce, or risk of increase of interest rate, risk of loosing your job, etc…but this is life.

My only recommendation, buy something you can assume by yourself. For example can you pay if your wife loose her job? Can she pay if you loose your job? That way you can split risks.

Also keep in mind that if you don’t want to loose money in RE you need to keep it for a medium/long period meaning take the time of the reflexion. Also I would never block a contract for 10 years, but that’s me. I would go max for 5 years. Never know what can happen and penalty on a 10 years contract of 1,4M…ouch!

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Thanks a lot everyone for contributing, this is very interesting and definitely I learnt a lot.

I also found a calculator (in German), here comparing renting vs purchase. I entered my original (simplified) specs:

  • Kaufpreis = 1,850,000
  • Instandhaltung = 18,500
  • Vergleichsmiete = 48,000
  • Zinssatz = 1.4%
  • Eigenkapital = 370,000
  • All other = 0

I receive a return on equity of 2.4% as expected (9k/370k). As a second scenario, I assume a modest inflation of 0.5% impacting all prices and services while the house price is assumed to remain flat in real terms. This means I use an annual increase of 0.5% for the rent, the maintenance and the property price. The 10 year ROE then increases to 4.6% (4.1% after inflation). That actually looks pretty good! The increase in return on equity seems to come mostly from the fact that the house increases in value in line with inflation (ie, gains around 9k/year) so that leveraging into that appreciating asset class bumps up the ROE signficantly.

Actually quite interesting and in contrast to what I have thought. Real flat property prices and a modest inflation does not seem unreasonable to me…

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Just in case you hadn’t seen it yet, there’s quite a comprehensive, swiss-specific calculator here as well:

Good luck with this decision, not an easy one! :sweat_smile:

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I played with the calculator some times ago but at the end I figure out it’s pretty much pointless. The most significant metric is the extra valuation of the house/land over time. 10 years ago I was looking at the market in Leman Lake area (especially between Geneva and Lausanne) without having the money to buy anything, and you could find a decent family house for like 1.1 to 1.3mCHF. Now you need at least 2mCHF and even so it’s hard to find anything decent. This translate to at least 5% price increase per year. So even if you buy the house full, if the price increase continue in this direction and VT continue to average 5% per year, you have no real advantage for or another scenario financially speaking. However, with VT (or stock market in general), if it crash hard you might have to wait a long time to be able to use your money without a loss, while your house you can fully use it from day one and for as long as you can pay for the tax and utilities, even if the market value crash by 50%, and there is fewer chance in this region that housing market crash that hard than global stock market crash by 50%, you can still live in your house for as long as you want without any chance in how can use it. Of course you might avoid to sell it until it recovers, like stocks, but you still have option to rent at lower price for some years if you really need to live some place else.

Isn’t it the main point of buying (in high demanding area) and the main reason that price are getting crazy high?

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Only difference is that with a property you are (likely) leveraged, so in case there is a large drop in evaluations you might need to couch up additional funds to the bank.

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Also you have fixed costs, like maintinance costs.

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Why additional funds? In worst case you might need to pay back according to price at purchase even if you would make less money by selling it during a crash. So you continue to pay high price for something worth less now but you never pay more, right?
Personally I would not buy a house if I have to put all my 2nd and 3rd pillar, borrow the maximum allowed and have no more money or investment remaining but I guess most buyer are doing this in current market so you are right.
If I still plan to buy one day in the future, I might only hope that my investment grow faster than housing market and it housing crash, investment doesn’t crash in parallel (but this is highly probable I would guess, everything might crash together more or less).

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