I was thinking about building/owning property to rent to tenants. But “unfair rent” laws have me spooked. Resources as to how to charge market rent lawfully (or at least as much as permitted) are sparse.
I will try to put forth my understanding of the foundations and potential solutions. I hope that others will correct me on them, and add their knowledge to the discussion.
Introduction
Rents in Switzerland rise and rise because quickly rising demand meets not so quickly rising supply. In my view mainly driven by immigration, sprawling regulations, and NIMBYs against rezoning. Recently there have been claims that landlords in Switzerland have too high (and unlawful) yields. The crazies from the Swiss tenants association even want to launch an initiative to remove any market elements from rent prices fixing them to costs only.
Anyway, the concept of unfair rent does already exist in our laws. In general this area is complex and driven by court rulings instead of laws. Many interest groups claim many things, and lawyers earn good money on the state of affairs. I base myself upon the following sources:
- Mieterverband: So fechten Sie Ihren Anfangsmietzins an (German)
- Mieterverband: Anfangsmietzins (German)
- Laws: Art. 269-270e OR: Protection against Unfair Rents or other Unfair Claims by the Landlord in Respect of Leases of Residential and Commercial Premises
Unfair rent and challenge
Tenants have the right to challenge the rent as unfair. They can do so initially and after every rent increase. The deadlines for this is 30 days. They can also challenge if costs decreased significantly. The challenger has to prove that the rent is unfair.
If I understand correctly there no conditions for challenging when the rent increases or cost decreased. There are certain conditions for challenging the initial rent in the first 30 days:
- personal or family emergency is cause for entering rental contract; or
- local vacancy rate below 1.5%; or
- rent increase over 10% on previous rent without having renovated anything; or
- the rent is unfair
Especially number 2 is satisfied in many, many municipalities (map).
I’m not fully sure if rent increases or cost decreases can be used to challenge and adjust the rent on absolute or only relative grounds (e.g., the rent has always been unfair and is reduced to a fair rate vs. cost decreases reduce rent and rent increases are capped to a reasonable relative increase). Sources seem to point to relative only, and the initial rent is fixed after 30 days.
How unfair rent is defined is based on the property:
- If the property is older / didn’t change hands in 30 years: Higher than custom in the neighborhood/local area. Difficult to prove, as it is often difficult to find comparable objects.
- If the building is newer than 10 years: Gross yield exceeds mortgage reference rate plus some percentage (1.5 - 2% according to federal supreme court rulings).
- If the property did change hands in the last 30 years: Net yield exceeds mortgage reference rate plus some percentage (0.5% originally, and 2% on reference rates >2% after the last federal supreme court ruling).
Maximize permitted rent
Apart from relying on your tenant being too content, uninformed or lazy to challenge, maybe actually optimizing for fair rent could be another strategy.
If you make it to 30 years, you probably win, and charge whatever people are ready to pay. You being a company could help that. You could maybe even buy one that already holds for 30 years. Or you maybe you could buy an older property (though, I’m not sure if renovating it can make it lose old building status).
So what remains is optimizing gross or net yield. According to the tenants association:
where
- rent is exclusive of service charges
- expenses are mortgage interest and maintenance, operating, administrative cost
- investment cost is buying land and building buildings
Those yields should be as low as possible on paper. How could this be optimized? Here are some things I thought about:
- Use the highest investment cost possible. The building and land might be worth more now than when you bought it. Though, I don’t know what is good enough proof. Independent, insurance, or government estimations?
- Raise costs. If you do everything yourself then it never appears as costs.
- I’m not sure if you can just account the work you do in the internal books (e.g., directly income (from painting walls) → expenses (for having walls painted). Would you need to bill from another company?
- Costs should be realistic. Where to find good estimates? Maybe ofri.ch?
- Pay higher markup for the mortgage, but get something else for something unrelated from the bank (e.g, free trading, TER free funds).
I’m not sure how much difference this can make. Will it push it to an attractive investment? Or should “someone else” (i.e., nobody) deal with all these problems? Global stock ETFs are much less complicated.