Clarification on buying vs renting

[Julianek]

@Lumo

Question: Collumn N, “Total Cash Outflows” shouldn’t it be picking the amount of “Total interests” instead of only “Interest on non Amortization part”?

Total Cash outflows takes into account column C (“Amortization paid”) which is the trickiest one. This column is constant and equal to cell B14, which computes how much you need to pay every year to both repay the capital borrowed (say the 15% amortization), AND the interest on this capital, this over a fixed period of N years (here 15 years). I can provide further calculation if needed.

So actually the total cash outflows do take into account the interest of both parts of the mortgage!

@OogieBoogie

The house we bought was also for rent for CHF 3`000.- on the market. We bought it for 750k 10y ago.

We bought the house literaly with no cash 10y ago. All money from the PK and enjoying the 6.5 room house with the family for around CHF 400.- monthly mortage cost (plus money you put aside).

Would I buy a today house again for e.g. 800k? I guess yes, if you use it for yourself and your family. Putting 80k cash and 80k PK money in. Why PK money, because it seems to be kinda dead money for the forseeing future. Currently the banks even don’t ask for amortisation. So you can put that money aside into VT or some other fund.

Well for sure if the rent was 3’000 CHF per month, then it is easier to find opportunities where you may be better off buying, even with 3% interest rate on your mortgage. Especially so if, as you say, you are not required to pay any amortization…

@Cortana

1% interest? Maybe now, but the historical average is closer to 3.5%. Maintenance cost 0.5%? This is not realistic. The “Nebenkosten” are already close to that, probably around 0.4%. Gerd Kommer wrote in an article that 1.5% is a realistic value, banks are working with 1.0%. Did you account for the selling tax of 25%? So if you sell it after 30 years for 1.5 million, you’ll end up paying 175k in taxes.

Those are all very valid points, especially the maintenance one. Regarding interest rates, I have no idea when they will be in 20 years, but indeed 3.5% is not farfetched. They might go into negative territory as well (as Denmark currently does… the guys are paid to borrow money for their house, crazy). And the capital gain tax makes things even worse indeed.

All i wanted to do is to provide the tools so than people can do their own simulation, so the thread does not goes in circle.

I agree with you though, buying in Zürich in the current market conditions is very unattractive.

@trotro

What explains the optimal strategy switching twice?
E.g. from Rent to Buy to Rent
[I understand the first one is due to fixed/transaction costs with buying, but I couldn’t really figure out the second switch.]

It depends on your parameters. Usually in the very long term (25+ years), the stocks compounded returns takes over the leverage of the house if real estate does grow too much (<=2%).
In the short term, it all depends of your cash flows. The leverage on the house plays a big effect as well since you are leveraged x5 and it magnifies the real estate growth (a 2% becomes a 10% minus borrowing costs). But this effect will be less strong in the long term: as the value of the house grows, the proportion of liabilities compared to the house value becomes less and less, and your leverage diminishes.

@DonDraper

Very cool spreadsheet @Julianek!

However:

• what do you rent for 1500CHF/month in Zürich?
• what do you buy for 800kCHF in Zürich?

I think those values are too biased on the lower end (or please send me your contacts )

These prices are for sure on the lower end of Zürich City. I live in a 65 sqm apartment in Leimbach, on the 16th floor of a Baugenossenschaft. While it is still technically Zürich City, 50 meters further and you are in Adliswil. But the connections to Hauptbahnof are very good, and this is the view on the Glarner Alps I had from my balcony early this morning… So the price is cheap-ish, but i really like it.

[Cortana]

@Julianek

All i wanted to do is to provide the tools so than people can do their own simulation, so the thread does not goes in circle.

It wasn’t an attack or something. Thank you for the calculation. It made buying even less attractive for me than it was before.

I mean it’s just ridiculous…buying real estate for 1-2 million.

[Sjess]

@Cortana

I mean it’s just ridiculous…buying real estate for 1-2 million.

Many in our circle of friends are looking though, mainly fueled by low interests. But it is just an insane amount of money to spend 1 million on a 100 square meter apartment. We will rent here and consider buying real estate abroad.

[Cortana]

I saw 2 projects from Werner Sutter in Muttenz and Lausen (both in Baselland). The exact same house with the same land size. 1.2 million in Muttenz and 0.8 million in Lausen. You are basically paying 400k to be 13km closer to Basel.

I would srsly consider that when buying property. Moving farther out from the city might save you a couple of 100k.

[Sirob]

Unless, that is, you intend to sell the house/apartment within 6-7 years, in which case, it should be in a prime location to avoid sitting on the market for a long time.

Usually, within 10 kms of Basel should be ok, but beyond that, it becomes a bit doubtful. Of curse, as usual, ymmv.

Btw @Cortana, I am also in the process of buying an apartment (shortlisted a few) in Basel-land. My primary banking relationship is with u b s. Any tips from your side on how I should proceed to negotiate the mortgage with them for a better rate?

If you are cool, I would even want to meet up with you in Basel to get some guidance/advice on this aspect and the process.

[Cortana]

I have a couple of friends that work as private client advisors in UBS, Raiffeisen, Valiant, BLKB, BKB and MoneyPark. I work in this field too.

Just hook me up with a private message if you need help or tips for negotiating or chosing banks.

[Sirob]

Thanks! will send you a private pm.

[pch]

Interesting discussion, covers mostly the financial aspects. I looked at properties a while back (7-8 years, again 4-5 years ago) and now, reality - there is no land to buy and no adequate properties around Zurich +40km for 800K, which is my break-even. We (+ gf) currently pay 2500CHFx12months = 30k/y for a 120sqm flat close to the airport. Things that motivate me get out of the rented flat (which has a decent standard): stupid neighbor just below; eco friendliness/closer to the nature; enjoy the sunset (currently altersheim in front of my balcony hide the evening sun); gardening/house as a hobby. What frustrates me slightly is that there is a kind of mafia on the real-estate market in CH, you cannot buy „Bauland“ as it is already taken by building companies willing to force you into a contract. Alternatives like buying an older (1950-60) building still for 700k CHF and modernizing it seem to be a financial ruin. Wonder what your experience is. Thx.

[Bojack]

Thank you @Julianek for that spreadsheet. I had some fun changing the values. For the values I provided, rent almost always came out as the winner.

I decided to also give it a shot. In my spreadsheet I imagined that a realty is like capital that you can have at your disposal and I’m trying to calculate the annual cost of having access to that capital. To keep things simple, I made some assumptions:

• there is no inflation
• realty and rent do not change in value
• there is no amortisation

In the following example the annual cost of both RENT and BUY is 36’000 or 3.6% of the realty’s value.

A final thought: what these comparisons don’t address is the risk premium. Both scenarios have different volatilities and different risks involved. So it’s a bit like comparing the return of a time deposit with bond and with stock. Yes, the returns are different, but it doesn’t mean everybody automatically invests in assets with highest expected returns.

So I guess what I want to say is that if you want to know: should I rent or buy, then I can say: it depends on the kind of risk that you want to be exposed to. The market is probably roughly efficient anyway, so don’t look for any risk-free savings here.

Buy vs Rent

[mbaluda]

You won’t need 30% equity until retirement.
Till then, 10% cash and 10% 2nd pillar will be enough and substantially improve your numbers

[Bojack]

Do you mean, you can use your 2nd and 3rd pillar as coverage of your loan? This sounds interesting, because it reduces opportunity cost by a lot.

[mbaluda]

For the downpayment you need 10% in cash.
The remaining 10% can come from the 2nd pillar, either from withdrawal or pledged.

[Bojack]

and how about the amortisation of the remaining 14%? Can you simply pay into the 2nd pillar and use that?

[mbaluda]

No, the indirect amortization goes in a 3rd pillar, I don’t think there are alternatives.

[Grog]

Great spreadsheet but eigenmietwert is not calculated every year - very often it stays at the value to which your house is valued at the tax office, and that is very often a very low value, lower than market value. So it may have less of an impact.

[REandSTOCK]

In Vaud, they use an inflation index to change the eigenmietwert every year.

[pch]

There a couple of articles in tagesanzeiger.ch/newhome.ch etc. saying corona might impact the property market. I am not seeing any cool down yet.

[Giff]

Wealth tax is negligible compared to the interests you pay to the bank. I don’t get why this idea that having a mortgage is always a good thing financially is so widespread here in CH.

[Giff]

Thanks @Julianek! I should probably spend more time with your nice spreadsheet, but at a first trial with my actual numbers it seems like I did the right thing buying

A couple of points:

• The property transaction tax is wrong, at least in Zurich, I paid something like 0.1%.
• As someone noted already, the Eigenmietwert is not computed on the commercial value of the property, but on a much smaller value, in my case ~70%.

[SteveDB]

@Julianek

Nice spreadsheet. I was playing with this over the weekend.

I understand that few of us live in Zürich or zug canton. For something relative large (over 120 sq m), nice and a little view. We are easy in the 2m territory. At that level, renting always win. However, the only parameter that could change outcome or making comparison a little closer (beside the interest or return rates), is the use of the 2nd pillar.

One thing that is missing in the model is the optionally to use the 2nd pillar for 10% of the property value. 2nd pillar does not count toward wealth tax and generates often very low return. Plus blocked until retirement, beside exceptions.

Challenge is to have 200k in the 2nd pillar for house of 2mil. Or even more. However, if you are in this league, buying or renting decision will be a much tighter race.