Investing in Real estate in Switzerland : is it worth it?


#1

Hello everybody,

Until now I had a strong bias against investing in real estate in Switzerland for rental purposes(not for principal residence).
Below are my reasons :
-We have to make a downpayment of at least 20% in order for the bank to lend us money
-The prices are sky-high compared to other countries, even compared to renting ( i don’t have the impression that the rent can come close to the mortgage monthly payment)
-the net returns seem to be quite low (<5%)
-the rental income is taxed (i am not sure of this one)

However, I am currently willing to review all my biases against real estate. Therefore, i would be grateful if some of you could provide feedbacks about successful real estate investments, or if any of you could provide resources specific about real estate in Switzerland, or if you have heard about specific forums talking about the subject, even if it is in German :slight_smile:

I am willing to learn a lot on the subject, but i need to find resources specific to this country!

Thanks in advance,

Julianek

EDIT : I just found out that in the description of the Real Estate category that this topic should be more in the investing category. @Moderator : feel free to move this topic if you feel so.


[Guidepost] to the Swiss Mustachian Investment Forum
#2

Hi Julianek,

good question, I hope someone with experience on the subject will step in and give some advice ! :wink:

In this period I am wondering about the same topic. In general I have to admit I’m not a big fan of RE, because on the one side I don’t like the idea of having quite a big amount locked in an illiquid asset and on the other I think the effort (life energy) I had to put into this business would reduce the possible gain. Anyhow, having some cash to invest and with mortgage rates so low it’s surely worth it to examine the subject in depth.

Downpayment has to be al least 20% and you’re right that the prices are extremely high. This is also one of the main aspects which detains me to take the plunge (fear of facing a big loss if and when I’ll want to sell).

Regarding gain: I think that with such mortgage rates you can get a little bit more. Clearly it depends where and what.

My case: in Tessin, near where I live, I would need between 250 and 300k to buy a 2 1/2, from which I could expect to get about 950 CHF/month (11.4 k/year).
Subtracting about 3.4 k/year for the interest payments, it would remain 8k/year for a 60k investment (more than 13%). Clearly one has to take into consideration and estimate: months without tenants (1 month/year ?), savings for repairs, etc… anyhow I think something like 7-8% would be reachable.

I don’t know (yet) if this 3% of possible additional gain, if compared to investing in our beloved ETFs, is worth the effort I had to put in and the illiquidity of the asset… in the last days I’m leaning towards a no, but haven’t taken a final decision yet. Let’s see if someone can bring additional arguments in favour of this kind of investment ! :slight_smile:


#3

I can give you some experience, not mine but my parents who own a “chalet” somewhere in Valais, not so far from our main location. It requires a lot of time, is very consuming, I would not even consider a RE which is too far away, you would have to hire someone to take care of it.

We used to go there from time to time and during winter, the chalet would be occupied by tenants.
The problem is the energy required to maintain this asset, find tenants, cut the grass (in mountain, on sloppy fields…), cut the trees, flowers, garden, repair the fence, repaint the barriers, repair always and forever. My father is skilled in various manual tasks, has the tools and could address 99% of the typical RE issues, that helps a lot to bring cost down. In all cases you need someone like this for minor things, you know the kind of guy that “can repair everything” :slight_smile: You also need to consider investing into costly options like Internet/Swisscom TV/Satellite that won’t be used every months. If you can use your RE when you don’t have tenants, it may counterbalance that but still, lot of hassle. I don’t know how old you are but if you are retired like my parents, a RE may become a problem with all these stairs, etc.

We never had too many issues with tenants but you may end up with neglecting people that break things and don’t give a F***. One of of them had a dog that ate the doors…it’s a lot of headache when you need to involve insurances for minor things like that. You have to make a strict selection of people to whom you will rent, discard all non-serious “Anibis” dudes that want your chalet for 100 CHF per week…


#4

I literally have no Idea about it. Since I believe i have more than average reasons not to engage in RE, i have not invested much time in reading it up. I am always curious, but considering that I just start building my stash from zero and potentially have a mobile career I think I am better of renting for quite a while.

Also, Switzerland does not have REITs to invest in :confused:


#5

Thanks for all of your inputs.
I understand that Real estate requires much more efforts than other investment supports.

The point I am struggling with is the structure of the mortgage in Switzerland : it seems quite different from other countries!

In France for instance, a smart RE investor would do the following : Let’s say a house costs 300’000 EUR.
(1)If your bank credentials are good, it is possible (tough difficult) to have the full financing from the bank (300k plus notary fees) : no payment upfront! Plus you agree to reimburse the whole amount over a fixed period of time, let’s say 20 years.
So each month you pay interest but also a big part of equity (the amortization of the mortgage).
(2) If the smart investor did his homework correctly, it is possible to find occasions where the rent from the tenant covers your mortgage payments plus charges : this is the ideal situation! The tenant is then building your equity and you have nothing to pay! At the end of the 20 years, you globally did not pay a dime, and have an equity of 300k euros.

The big advantage is that, because you don’t pay anything, you can use your money to invest in stocks for instance.
Even if you have to take care of the house, the return of investment you get is quite high (you put almost nothing on the table and get 300k after some time!).

Here in Switzerland, things seem more complicated :
(1) As i said, a downpayment of 20% (or 25% with notary fees) is required.
(2) As far as I understand, the amortization of the mortgage is very low : between 1 and 2% per year! And the bank only asks that you pay reimburse 15% of the capital, over a 15 years period… This means that afterwards, there are stil between 60 and 65% of the value of the house that you owe to the bank => you will pay interests until your death. This is apparently to leverage tax regulations…
This is very not advantageous for the investor because the part of the rent paid by the tenant that goes into the equity becomes much much lower!

For instance, i went to a mortgage simulation website for a 250’000CHF apartment : downpayment 50’000 CHF. I borrow 200’000 CHF.
The bank let me choose between a 1% or a 2% amortization per year. Let’s say I choose 2% : this means that I will reimburse 4000 CHF per year, and build only 4000 CHF equity per year by paying my mortgage. For the 15 first years, because afterwards I will build nothing.

Even if i am in the perfect situation where the rent paid by the tenant covers the mortgage payments plus the charges,
For an initial capital of 50’000 CHF I build 4’000CHF equity per year : this is only a 8% return, and it is not a compounded return!

I find this mortgage rules crazy! Can someone confirm if I understood correctly?

Perhaps @_MP can confirm how the amortization of his mortgage works?

If this is really how mortgages work in Switzerland, then it is clearly not interesting to invest in RE here for rental purposes.


#6

Hi Julianek,

actually it’s not so complicated as it seems.

  1. Normally you can finance maximum 80% of the “estimate value” (the value the bank says the property has)
  2. You should amortize another 14% (that is, reach a 66% finance) in - I think - 15 years (this probably because they want to be sure you’ll be in the condition to keep on paying the mortgage even if the interests rise or your wage sinks as you age).
    Usually you are not forced to amortize directly this 14% if you put your money in a 3rd pillar.

The fact that you are not “forced to” doesn’t mean - afaik - that you are not allowed to amortize more (or all) of your mortgage. It depends how much you can - and want - to put in it (and for how long). The high prices, compared to the rental earnings, mean it’s more difficult to do what you would do in France (and I in Italy). In my example, if I have to pay 300k and expect to get less than 1k/month from the tenants, I would need at least 300 months / 25 years (not taking into account interests) to refund the mortgage.

For the house where I live, which I’ve (had) built some years ago, for example, I decided to amortize indirectly (3rd pillar) and pay only the interests to the bank.
Here (different from Italy, don’t know what happens in France) you have to pay taxes also on your primary residence (they call it “rent value” and it’s +/- 70% of the market price you would pay to rent a similar property). On the other side you are allowed to deduct the mortgage interests. In my case - without amortization - the “rent value” equals the mortgage interests, so it’s neutral from a tax standpoint. If my yearly “rent value” gets bigger than my yearly debit I pay taxes on the difference (which counts as additional income).

Anyway you are free to do as you want, either putting the whole rent you get from the tenants into direct amortization or pay the bank only the interests and invest the difference into the market (thus taking advantage of compound interest) or a mix of both.


#7

So if I understand correctly, part of the problem comes from the fact that purchase prices of real estate are way to high compared to the rental income to make the building of equity appealing?

In your example, taking interest into account, it would take at least 40 years to reimburse the mortgage : that makes an amortization of 300k/40 = 7500 chf per year (actually for this kind of mortgage the amount is not linear, i.e you amortize less at the beginning than at the end of the 40 years). Compared to the 60’000 CHF upfront payment, that is still a return of 7500/60000 = 12,5%. And this is still the ideal case where the rent is paying for the mortgage plus charges, because if it is not the case returns are shrinking very fast. Plus, it is simple returns and not compounded returns.
But someone is building your equity while you are paying absolutely nothing (in fact this is wrong : you have to do a lot of work to keep the house in good standing for the tenant).

Regarding the taxation : does it still apply for investment properties? I mean : i will already be taxed on the income I get from the rent. I don’t understand why I would be even more taxed on a “rent value”, since I am in fact already renting the property to my tenant… That would be kind of a double taxation.


#8

Never forget the opportunity cost. The money which would be used as downpayment could be invested in ETFs.

If you buy, you need to take into account the house’s value which will increase. In some parts of Switzerland, the prices have increased a lot more than inflation. I still believe (without having run any number) that Real estate is an expensive and time demanding investment.

There two interesting posts on this subjects I would strongly recommend:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/


#9

To answer your last question: if you rent your property you declare “only” the rental income -> no double taxation.

I’ve tried to run some numbers, based on my example to see what happens (see below).

With these assumptions I would have 732.5 CHF/month available “before financing” (reserves considered) and 452.5 CHF/month available “after financing” (ca. 9% ROI).

Mortgages here are max. 15 years (as far as I’ve seen) -> if I put the whole amount into amortisation with the bank (I use a mortgage calculator like this: http://bretwhissel.net/cgi-bin/amortize ), after 15 years I will have a final balloon payment of 146’600 CHF -> I’ll have “amortised” 90’400 CHF, with a “real” annual interest of 17.27% / 15 = 1.15% (see screenshot below, sorry for the MediaMarkt advertising…:wink:).

If I only pay the mortgage interests (280 CHF/month) and invest the difference (452.5 CHF/month) at a 4% return rate, in 15 years I’ll have accumulated (compound) 108’700 CHF (compared to the 90’400 CHF amortised in the above example).
In this case I’d have more flexibility as I can save - for example - the whole amount I get from the tenant in the first rent year, in order to have some stash for potential extraordinary repairs, vacancy periods etc… If I amortise directly I’m stuck with the agreed monthly payment for 15 years…

This said, and apart from the numbers, one has to take into account the energy it takes to manage this business by yourself, compared to “passive” investments… in my case, to make the investment really “passive”, I would chose to leave the management hassle to a rental agency, but I still have to investigate how much their costs are (will do, in order to have a better overview of the situation…)


#10

hi guys
nice conversation. I don’t believe in direct RE investing in Switzerland for the small investor because:

  • tax-wise is not good. Capital gains in RE are taxed in the first 10 years, to avoid speculation. So you cannot buy, repair it and flip it for a higher price. Not worth it.

  • 5% of purchase costs (taxes, notary fee and so on). WTF. ETF costs you 0.15% for the stamp duty.

  • Minor point: they are a mess if you die (and leave it as inheritance). If you have to split the house with multiple children is a lot of work and tensions between family members. If you only have REITs and ETF, is it easy to sell/split and there is no emotional value.

  • lot of work. I’m seeing with my parents that rent out the apartment of my grandfather while he lives with them. Right now that they are between tenants is at least 50% occupation with deciding what to do as work, searching and killing small animals that go under the roof, moulding, repainting, etc.

  • low interest rates are driving prices to the stars. The rule of thumb in CH is that the house value should be equal or less than 25Xannual rent (to be considered a good deal). so in your example @weirded :max price should be 285’000 chf (9501225).

@nugget REIT ETFs for CH exists, they are provided by UBS:
https://www.ubs.com/ch/en/asset_management/etfs/etf-institutional/about-ubs-etfs/investment-themes/real-estate.html

Read the Real estate bulletin from UBS, is a good lecture:
http://resimmo.ch/sites/default/files/ubs-bubble-index-1q-2016-en.pdf


#11

@Grog
thanks for the UBS link. In fact it is the same fund as listed on justetf.com and i now know why i disregarded it: on justetf it say 0.93% TER. im i looked in it constituents which is some funds itself (high TERs) and actually some Stocks of RE companies. hmmm not a straight forward thing :frowning:


#12

There are 2: One is a etf of funds that invest in RE companies, the first one instead is a fund of real estate companies, market-weighted. Company like SwissPrimeSite.
Look at the constituent of the two etf and you’ll see the difference.
If I had to invest in one I would invest in the direct RE etf, but most if this companies are already included in SMIM etc
It would be probably be cheaper to look at the composition and buy the same stocks …if you really want some exposure to Swiss real estate


#13

Interesting topic!

I’m considering buying a house in the Lausanne area in the coming 2-4 years, but that would be for living in, not for rental.

Some points I consider worth mentioning:
It’s easier to know if you bought a real estate at a bargain price (considering the current local market) than with stock. So you risk losing some money due to general market fluctuation and to possible evolution of the zone where you want to buy (e.g. huge new building constructed next door, …), but if you are optimistic on the long run on the general market risks, specific risks can be considered quite low.
I would look for a house in a small town not too far from main transit roads and with good public transportation and currently growing. This is because it’s actually what I like but also because I believe it will generate value on the long term.

If you buy your home, you are able to take your 2nd and 3rd pillar. And you can pledge them (mise en gage) meaning that you don’t actually withdraw them. At banque coop, they consider for instance 80% of the value of the 3rd pillar invested on swisscanto index 45 R for pledging (10% reduction for tax and 10% reduction for market price changes). Of course this means you have to borrow more at the bank, but with the current interest rates it’s interesting. If the interest rate changes drastically after a few years, you can also withdraw the 3rd pillar to reduce the debt.


#14

The general opinion is that buying to live in is not an investment but a money pit. It has more to do with emotions than investing.


#15

Well, if you buy your own home you are at least not depending on a landlord who can raise your rent. Although the rent system is subject to various rules and laws, when home interests rates are raising, the landlord has a right to raise your rent. Considering the rates are so low actually, you can expect them to raise, together with your rent in the near future.

According to some sources, it is cheaper to be owner than to rent if you stay in the same place for three years or more:
owner or rental (in French)

This being said, my wife and I bought an apartment some five ago (to live in) in a 6 flats building. Two years ago we sold it to move to downtown Lausanne. I would not buy an apartment again. Although nothing really bad happened, the relations with the other apartment’s owners were quite tiring. Just to plant one tree near the entrance, there were long discussions: which tree, where exactly, plant it ourselves or ask a professional gardener, etc. Moreover some owners were living there and some were renting their apartments for money, our interests were not aligned which made things more difficult.


#16

Hi @grog, good points (especially the additional costs and inheritance…). I probably could find something in the “good deal” category but still uncertain, above all for the related work (compared to other passive investments…).


#17

@grog, for sure if we compare between an etf and buying a house, I quite agree that it has many disadvantages. However when comparing buying to rent and buying to live in, I do not really get how it can be considered such a money pit.

The main arguments I see are:

  • When owner the calculated renting value used for the taxation seems to be quite lower that the actual rent you would ask (From what I heard from friends who are owners), meaning the tax burden shall be lower.
  • You should not suffer from lack of occupancy or depredations
  • (I would feel like a terrible person when raising the rent with already such high prices in the Lausanne area) (Ok that’s kind of personnal^^)
  • If you took advantage of the pledging of a 3rd pillar linked to swisscanto index 45R, the raising interest shall partially be compensated by the raise of the income on the pledged value. (Ok that’s no so big)


#18

Well 3 years sound a little optimistic to me. What people always forget to calculate are the transaction costs and the opportunity costs on them. Notar, Grundstuckgebühren, Handhabungbesteuerung and so on.
Let’s be optimistic and say that in you canton you only pay an average of 2% to actually buy the house.

So you buy one house worth 1 million, but with 20k of different fees, so in total you pay 1.020.000 chf and you have 20% of your own money (204k) and 80% mortgage (816k).
But your assets are worth only 1.000.000 so you have an instant loss of 20k (of course, they are fees). This fees invested on the market would generate 5% p.a., so around 1000 chf every year for the first years. So in the first 3 years you have sunk costs of 23.5k, ~8k per year only for the fees. How can it be better than renting is beyond me. You need at least 10 years then the average will only be around 3.5 k per year of losses (20k + 15k for lost market opportunity costs snowballing).

And I repeat, all of this only considering the transaction fees and the associated opportunity costs. You reaaallly have to find a sweetr deal in CH to be better off buying than renting.

And about the money pit, just read here:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

great blog promoted by MMM too and he has a lot of good points. Buying house to live in is an emotional question, and an horrible investment.


#19

Just as an example, my own case: in 2011 we bought an apartment, before that we were renting. Both places were at about 30 minutes train ride to Lausanne. More or less the same size, the apartment we bought had a garden (not the one we rented).
Rental: 1’590 + charges (heating, etc.) + 150 for the garage
Owned flat: 1’250 (interests on mortgage, repayment of mortgage, charges, etc. all included) including garage.
We could spare at least 4’000 every year. Not so bad.


#20

OK, but considering the deal only from a financial point of view, even if we don’t take into account the fees (notar, mortgage notes etc.): if you’d put your 20% principal (say 80k on a 400k flat) on the market, assuming the above mentioned 5% return, you are then loosing (compound) 4k interests the first year, 4.2k the second, 4.4k the third and so on…