Invest in real estate in or out of Switzerland?

Hi Patirou

They are both separate houses. I have a ‘policy’ to only buy houses so I don’t have to worry about building management. Also I believe the value of land goes up more.
Actual management depends on the country. 1 has a manager who takes 5% but does everything (I have not seen the house in 4+ years) and another is direct but no maintenance.
Tax we have had no problem, especially since everywhere else has higher tax than Switzerland. However, it does add to the ‘rate’ which is annoying. We want to avoid tax, but I guess paying tax means you are making money so it isn’t a bad thing in that regard.

I had 2 properties in Central-Europe until last year, I cashed them both out 'cause the valuation spiked to ridiculous levels over the last 5 years.

What struck me though is… if you re-calculate purchase price, profit and selling price, on a CHF base it wasn’t a huge deal (about 3% pa compounded, plus about 3% net rental income, also compounded). And I was running a losing hedge against the CHF which is not a good position to be in if the currency they generate income in is losing 10-15% a year against the Swiss Franc.

I’ve reinvested the proceeds to 50% Fundsmith and 50% Swiss RE (via Crowdhouse).
Was that a wise decision? Only time will tell.

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Depending on how long you hold both properties, did you include inflation into your calculation or not ?

I had them for 15 and 9 years, respectively.
I haven’t put in inflation into the calculation, but what one should’ve put in, is the inflation difference per year vs Switzerland… too much hassle :smiley: I just considered both to be zero.

On the foreign RE side, what seems interesting is the AirBnb market. What I don’t like is the effort, but there are plenty of management companies.
What could be interesting is the market is a bit depressed now (for obvious reasons). So maybe the opposite of the Swiss perspective. Here you are buying when the market is down, and if you can ride out whatever variant comes :frowning:… the yields are better than long-term.
We have zero experience in the AirBnb market (ours are long-term rentals). Anyone have experience?

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We have also been toying with the idea to purchase RE in Swiss, but given the high valuation of Swiss RE, I agree with others that the upside is not that great, and the risk of rising interest rates makes the investment even less attractive.

There are, however, good opportunities in other parts of Europe. I’d be interested in Portugal, Spain and Greece.
How did you do your research? Did you reach out to an agency in the country you bought the houses? I’d be interested in how you approached the whole thing and what steps you took before doing the deal.

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AirBNB is a different taxation story for most countries. Plus the mgmt of the place can also be much more expensive. Plus the local regulation risk.

But if you find a good setup pls let us know. :slight_smile:

Hi Rombob,

One of our properties was in a country we already lived so I won’t go over it. The second was in an ‘abroad’ country.

Choosing the country - this is very unique to each person and what they need. E.g. some countries have restrictions of ownership and even different tax rates if you are an EU vs non EU citizen.
One of the biggest things was we needed a mortgage. Many countries do not give mortgages to non-residents (I was surprised how many). I spent a lot of time on the phone to banks to be told ‘no’. Also then the LVR for non-residents varies. So the mortgage element reduced the long list of countries to a much smaller list. Then we looked at the different taxes (capital gains and income tax) and overlaid with our predictions of the country in terms of growth, friendliness to business/investment, etc.

Once we had decided our country, we travelled there and spent a week looking at properties. Prior to going we researched on the various property websites and had the inspections already booked so we just went from one place to another while we were there. After this we had a good feel for the market, and then via a recommendation of our lawyer we paid a property consultant on an hourly basis (NOT commission) to review our shortlist and to provide further recommendations without bias. After we received this, we actually then flipped it and hired him as a buyers agent with commission to negotiate one of the specific properties. This was ok as we had learnt enough about the market to know what was a good price, and actually he got us a price I don’t think we would have achieved on our own. He also helped a lot when during the contract stage, the buyer was becoming a bit reluctant.

Some comments for those interested:

  • Another country = another tax return to do each year (often an accountant to pay)
  • With the additional country, you will also need a local tax number usually, and a local bank account = paperwork and some cost depending
  • Various local laws for rental, ownership, etc.
  • In my opinion, you must travel and do the research. What looked good on the web was many times not great in person. It took many properties to find the right one.

It sounds complicated, and a lot of work (we saw MANY properties). But we brought a ‘bargain’ and 6 months after we had purchased, we were asked if we would consider selling for an amount 25% higher, which was what the property was actually worth in my opinion. It was a matter of finding a good deal.

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Thanks for the info @Joe-2021

Would it be possible for you to provide an overview of the original list that you began with and the optimised list that you finally ended with? And also the reasons for eliminating each country. Thanks.

I tried to dig it up, but it is quite a bit fragmented and it is a long list. Everywhere from Portugal, Spain, France, Turkey, Georgia, Belgium… and more :grinning:. We were looking wide!

Also our process of elimination wasn’t 100% numbers driven. According to our analysis, the most profitable option was Ukraine, but we didn’t purchase there so that is a limitation of pure numbers. For interest, check out the interest rates: Mortgage loans | Credit Agricole Bank 2021

There are also some thing that the analysis doesn’t cover of which we know now and would have changed our mind. And the big thing is if you need a loan. If no loan needed, Brussels looks interesting, but we couldn’t get a loan there as a non-resident.

For a loan which was a must - we found options with good rates in France, Portugal, Germany and Spain. So this became our shortlist. After this, the rest was more subjective analysis. Yes, there were tax rate calculations, but needed to look at the impact of rent controls in some regions, etc.

I would be interested in looking at Finland as an option (maybe), and the UK which I didn’t consider but gives different currency exposure. But then a question of more complexity (tax returns, local laws, etc)…

To be honest… I am still torn. Switzerland seems an easy option, but I do look at the opportunities elsewhere.

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putting in all this effort into RE… why not just buy a diversified RE ETF or a REIT and be okay with their knowledge and management? e.g. https://www.morningstarfunds.ie/ie/funds/snapshot/snapshot.aspx?id=F000000K8D&tab=1

I would propose 3 reasons:

The biggest is leverage. Getting a mortgage, even abroad in many cases, is easy to obtain with good LVR and low rates. So instead of making returns on 200k, you make it on ~1M. For balance, you also make greater losses if it goes the other way, but the point is leverage is easier for property than shares. A margin call is very rare for property too.

Opportunity for more gains. One property we purchased 8 years ago has gone up 50%. In doing the research, you can find bargains that are underpriced to the market. Often there is something ‘wrong’ with them that scares buyers, but can be fixed.

Third point relates to the second. You can increase the value directly and dramatically by making fixes yourself. You can make renovations to the property that can add a X value of value both to the rental value and to the capital value. In most cases of what we have owned, we have ‘upgraded’ the property via renovations (outsourced and sometimes via work ourselves). This is work, and it should be accounted for, but we have brought 3 properties (1 we sold) and the gains are far higher than the ETF yielded… plus all were leveraged so we had greater gains. It must sound like I’m an advocate for RE :wink:

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Hi, in reflection of the comments above… and thinking back to Swiss RE, is there less of an ability to buy - fix - rent - take equity and repeat?

From my experience outside of Switzerland, this is more or less how we have made money.

The approach is summed up well in this video (from the Our Rich Journey channel for those who know it): How We Made $400,000 in Real Estate Profit - See Our Properties & Numbers - YouTube

Coming back to Swiss RE, isn’t there an interesting opportunity to purchase a house that needs renovation. Live in it for a few years and conduct the renovations while living there. Then draw upon the equity of the increase of value (not by rising prices but by a better house) to then make the next investment - shares, more RE?

And you can deduct the costs from your Swiss income taxes :slight_smile:

Yes there are less options to do this in CH. Here are some examples why:

  • Higher purchase tax and and taxes on mortage lending (total ~6.5% in Geneva for example).
  • High capital gains tax, even on your own house. These 2 points pretty much kill short term “fix and flip”
  • Tax on deemed rental income
  • High percentage of appartments relative to houses, appartment market dominated by pension funds and professional investors
  • High labour costs and people expect high quality workmanship (not amateur DIY)
  • Rents low as % of price due to controls on rent. Rents are currently decreasing
  • Tighter controls on lending - no option for 90% or 100% loans
  • huge capital outlay required (house cost 2M vs. perhaps 200k in US)

Underpinning these differences :

  1. SNB intervention to try to avoid repeat of 1990s crash
  2. European-more-left view that in general housing is a social need, not a speculative asset for the rich, resulting in rent controls and taxes
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I agree with all other points. But purchase tax apparently varies a lot by Canton (it is pretty low in Zurich - 0.1%).

What are “taxes on mortgage lending”?

Agree it varies a lot by canton and I assume Geneva will have one of the highest taxes.

In Geneva I believe there are taxes payable to the notary based on the value of the property plus taxes based on the value of the mortgage contract. The rule of thumb I have heard is to budget ~6 to 6.5% of property price for both combined.

[Edit: here an example in French- in this case the cost seems a bit lower than I quoted above]

With Swiss banks, is it possible to have your house re-valued, and to take a loan for the difference of increase? In other words, you achieve your capital gains not through selling, but refinancing. You take the increase in value (from the renovations and potential market increase) as an additional loan on the house, which you then reinvest. You keep repeating to build wealth. It is nice as you never pay tax, but you get the benefits of the gains. This is common in some countries, but I have no idea if it is possible in Switzerland?

PS. Many thanks for the other points you raise. There are some I had not considered.

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For the fun of the conversation. Why not USA to invest for property then if it has all the upsides? From my limited knowledge (needs checking), non-residents can get 80% loans. Tax on rental is a bit high (30%). But there are no capital gains tax for non-residents (I think).

Yes it is further than Europe countries mentioned, but from a pure investment perspective… it is a strong contender if you want a relatively safe investment (yes I know GFC), low tax, and with leverage.

Everything is possible but if I am correct one difference is that the max loan for rental properties here is 75%, and this is subject to rent covering interest at a 5% stress test rate. Not easy to find when market rents are 2.5%.

Second difference is the huge purchase price /notaire taxes. Those Youtubers in US might be able to buy a house for 100k, spend 40k to rennovate, and (re)mortgage based on 160k value. Nice % return in 6 months.

Equivalent here might be: buy a house for min 800k, spend 60k on rennovation, if lucky market value will be 900k. That might just about cover your notaire tax to get you to break even, depending on the canton. Then if you try to remortgage the bank is unlikely to spend much effort on such a small relative increase in a short time period. In our experience one asked to see invoices (so would have valued at 860 in the above example)

Exception might be if you are able to add livable m2 - for that you need to go through planning permission etc.

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