I’m Anna, a new French Permit-B resident in Zurich, very nice to meet you
I recently found an apartment that asks me for a deposit of CHF 6700. I have the money but I was wondering if it wasn’t better to invest them rather than let them rot for > 5 years in an account.
I’m very new to investment so I wanted to check with you if I didn’t make any wrong reasoning in my calculation.
I used this [S&P 500 simulator](https://dqydj.com/sp-500-periodic-reinvestment-calculator-dividends).
Starting date: July 2016
End date: July 2020
Starting Amount: 6700
Monthly Investment : 0
The final value is 11080.97 and since there’s no tax in capital gain, that’s basically (11000 - 6700 =) 4400 in my pocket.
Axa’s rental guarantee is 255/year so 255*5 = 1275 in five years so I’d earn (4400 - 1275=) 3125. Plus given that I don’t have this money blocked, I can start with a bigger starting amount.
I’m very surprised by this number because, on the web, I couldn’t find any insurance using this argument to sell their product, so what did I miss here?
Thank you for your answers
I’ve been a long-time reader and it’s really relieving to see so many people replying.
Your not missing anything, except that past performance is no guarantee for the future.
Generally, those rental deposit solutions are quite expensive, yours/AXAs at below 4% seems to be one if the cheaper ones, but I assume its because it requires you to have a liability insurance (with them?) too…
Also, big real estate companies should be fine with such a solution, smaller ones and private landlords might think you don’t have the money upfront and may opt not to give you the promised contract after all once you propose it.
Most of the time, you would be right, though some of the time, stocks go down. I’d try again using 2004 and 2009 as starting/end dates. If you’re ok with the risk, then that may be a good option.
Other factors to take into account:
Your calculator uses USD for calculation. Exchange rates between USD and CHF can fluctuate during a 5 years period, in either direction.
Dividends are still taxed, counting 2% dividends for a 10% expected nominal compound annual growth rate (CAGR - S&P500), that’d be 1/5th of your gains that would get taxed as income, that you’d then have to multiply by your marginal tax rate to see the cut it would do. That’s not a huge number, but it’s still there.
Shit happens, you may want to relocate earlier (change in your life situation) and stocks might be significantly down at that time. You may want to stay there longer, which would incur more rental guarantee fees. You may face complications when you leave, not being able to cancel the guarantee on the spot and have to still pay the premium for some time even though you’ve already leaved the flat (presumably, I don’t know how these guarantees truly work, it might be that even though they’re still on the hook for providing the deposit, premiums only apply for the months you’ve been in the appartment).
Hi Anna, welcome to CH & MP Forum.
For example a big provider is Swisscaution, they charge 5% p.a. (of the deposit amount) + Fr 20 p.a.
If invested, that’ll probably be just about possible to match on long-term average, after dividend/income tax, in CHF.
But take a look at the historical SMIC index (SMI with dividends reinvested), zero gain between 2002 & 2012 - that’s 10 years! Who knows may be coming again 2022-2032.
It would be a risky argument to make to sell the product, so Swisscaution (for example) stays vague “More freedom for you and your money!”
What happens with that insurance money you paid in, i.e. I assume it is lost after you move out? (Like all insurances if unused)
Whereas for the deposit you get all or most of it back (if there are some fixes to be made) at the end.
I have been wondering this aswell.
Why is there no rental guarantee bank accounts that you can use to invest into stocks? It could even be structured so that if the total value drops below the value you had to come up with for the guarantee you’d be required to deposit more money into the account.
A volatile asset like stocks isn’t a guarantee like a restricted bank account - because its future value is uncertain (irrespective of interest rates). Landlords or management companies would need to increase the deposit to account for a buffer.
But… it’s a good question. You may be up to something there. UBS or Credit Suisse wanted to take a stab at the idea, it could look something like this:
You need a CHF 6’700 rental deposit? No problem! Just open up our rental deposit securities account and benefit from returns in the stock market by investing into your choice out of our three in-house actively-managed funds.
Account keeping is free - there’s just the standard subscription and redemption fees of the fund, and the low (1.5% TER) yearly costs of the fund itself. To provide downside protection and stability of your investment value, your funds will be invested into a diversified mix of bonds, stocks and real estate.
So… do you prefer to play it safe 10% equity exposure? Are you willing to take a bit higher risks (25% equity) - or are you one of the most daring investors, who can tolerate a whopping 40% equity exposure? The choice is yours!
I think the demand for such products would be very low. And the risks associated for bank relatively high, compared to costs of administration and return.
I think most people consider rental deposits as a necessity to rent - but then want to be done with and not need to worry about it, let alone contribute to it again, once they’ve paid in. At the same time, many people wouldn’t consider 5000 CHF (or 6700) an investable amount that they’d consider investing in stocks on its own.
Mustachian readers of this forum, on the other hand, may just take out a(n additional amount of) margin loan from IBKR for the amount of their rental deposit.
Furthermore what needs to be checked is if the caution is actually paying for damages.
Never looked much into it since the amount for me is too small really bother, but I heard that Swisscaution and co only give a guarantee to the landlord that they will pay for eventual repairs, but afterwards they will collect the money from you.
So actually, it is an insurance for the landlord you are paying for…
And in the end, the products offered right now are too expensive in comparision. 5% p.a. is basically what you would expect from a VT portfolio after inflation/taxes, so not worth the hassle.
Thank you a lot Wolverine for pointing those factors
counting 2% dividends for a 10% expected nominal compound annual growth rate (CAGR - S&P500), that’d be 1/5th of your gains that would get taxed as income
That’s very good to know about the dividends, thank you. How did you calculate this number, please?
Shit happens, you may want to relocate earlier (change in your life situation) and stocks might be significantly down at that time.
I understand that unfortunate events can happen but aren’t these risks common for any expats who’d like to invest?
You may face complications when you leave, not being able to cancel the guarantee on the spot and have to still pay the premium for some time even though you’ve already leaved the flat.
Thanks for mentioning this. I just checked with Axa and my real estate agent and I can cancel anytime and even convert to full deposit whenever I feel like it
Yes, the insurance money is lost at the end of the road, but according to my calculation, it seems to be worth it if I’m investing for the long term.
You are right Patirou, the insurance can pay the damage right away but will request it from you later on. The benefit here is that my money’s not blocked in an account.
Thank you everyone for chipping in!
Based on all the data, I’ll try to go with the rental guarantee for the first year, so I can invest the 6700 (+ more) right away. Every month, I’ll save a bit and I’ll see if I go full deposit next year.
In my pov Anna has a good idea and statistically will more likely gain than lose
SF is right that 3.8% interest at Axa (255 yr/6700) is not the cheapest option for everyone. If one has significant net assets at IBKR - meaning very low margin call risk - taking a margin loan there is 1.5% and interest can be deducted from taxable income
I can confirm that you can switch between them, I’ve done it for my current apartment. Started with the insurance because I wanted to have the cash readily available and then moved to the deposit after about one year. I contacted the management company in advance to ask if they were OK with the change. They gave the green light and then all I had to do was send a registered letter to them with the details.
My deposit was smaller than yours, and I personally felt it would be very optimistic to assume any investment would consistently exceed the premium… Particularly since I’m not planning to stay in the apartment for the long run.
I’ve used numbers commonly thrown around for a quick very rough calculation. More details below. All in all, the amount of taxes you’ll be paying on dividends is small so it won’t move the needle much. Using very rough estimates is probably good enough.
Choosing inception as a starting date is as arbitrary as choosing any other would have been, past performance is no guarantee of future returns and other indexes have performed differently (US Stocks have outperformed the rest of the world during that period, that may hold for the future, or not). Using more recent returns for tax expectations purposes may be a good idea.
I’ve used nominal returns because they’re the ones that matter for tax purposes but inflation adjusted returns for the S&P500 during that period would be around 7% p.a.
Also of note is that those returns are in USD. From the end of the gold standard for the USD in 1971 to the end of 2020, the value of 1 USD went from 3 to 0.88 CHF. A quick back of the envelope calculation makes that historical nominal returns of 8.5% p.a. in CHF, or roughly 6.5% real. There again, this has a lot to do with a sudden drop of the value of the USD after abandoning the gold standard, using more recent numbers may be more appropriate (and the IRS uses dollar value for the tax they levy, so returns in both USD and CHF are potentially relevant for tax purposes).
Dividends distributions of the S&P500
The historical dividend yield of the S&P500 seems to be 1.87%. I’ve rounded it up.
They are and you probably had already taken them into account. I’ve just put them here in case you hadn’t.
Interesting, from evorest.ch there are 4 strategies:
0% ETFs, 100% cash: 0% annual fee
25% ETFs, 75% cash: 0.4% annual fee
50% ETFs, 50% cash: 0.5% annual fee
75% ETFs, 25% cash: 0.6% annual fee
Also, there is a one-time fee of 25 CHF to open the account.
It’s not clear if there are additional costs related to the ETFs (I couldn’t find the list).
To further reduce your risk of not being able to cover a damage when moving out, Evorest requires you to top up your deposit if it falls below 80% of its initial value.
What I wouldn’t like to happen is to have to top-up my rental deposit during a huge market crash when I lose 50% of the value of my investments (and maybe even my job…)
That’s the issue I see as well. What would make a lot of sense is if you could have a rental deposit portfolio that you can take with you from one rental home to another, topping up if a higher deposit is required. That would eliminate those risks.
In Switzerland, most people have personal liability insurance that covers damages, so the deposit is primarily just a security that landlords can seize if rent goes unpaid. So technically, the only thing that would have to change when moving would be the name and rights of the second party (the landlord).
One thing that is obvious is that the current system is not great. I’ve had three-months rent tied up in a zero-interest account for years now, because that’s the only bank that the property manager works with. I’m not sure how that would work with Evorest. Technically your landlord or property manager would have to agree to using them.
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