We’re following FIRE and this Forum since many years and are now at a crucial point to buy our first property. However, we’re unsure what the best path is in terms of how to do it financially: cash or finance/invest?
Below we have put together the details and our thoughts so far. It would be great to get your point of views and experiences, especially in terms of:
Feedback on options & assessing associated risk(s)
Missed anything for pros and/or cons?
Missing other financial options?
Situation:
Property is not in Switzerland but abroad (outside Europe)
Property: 100k CHF
Remodelling:100k CHF
Property will be used by us, not rented out and we do not plan to sell it in the foreseeable future
Mortgage not possible / feasible
Mortgage / Hypothek not possible through Swiss bank due to property being abroad
Mortgage locally possible but rates >10% + don’t want to be exposed to fluctuating currency
Financial situation
Have sufficient cash savings to pay for both property (100k CHF) and remodelling (100k CHF) in cash >> saved up for this purpose, thus not invested so far
Investing 50k CHF / year in VWRL (will continue regardless of which option below we end up picking)
Have >1M CHF in stocks / ETFs / cash (on top of above mentioned 200k for property project)
Goal
Find most profitable path to handle investment
Options looked into:
Pay property in cash:
100k CHF one-off expense initially
100k CHF one-off expense spread across the upcoming 1 year for remodelling
Pro: Know from day 1 what property project will cost overall
Con: Potentially miss out on stock market opportunities
Private loan through Swiss bank + invest 2 x 100k CHF in VWRL
Goal: Gain a greater return with 2 x 100k in VWRL than interest paid for loans
Term: 84 months (seems to be the longest being offered) to maximise investment period to counter year(s) with negative annual returns
Interest rate: 4.9% seems to be the lowest right now (e.g. Migros Bank)
Avg. annual return required from VWRL over 7 year period: 2.43% (if we did not mess up the calculation)
Checked 7 year periods of VT previously (not VWRL though) on a monthly basis from 2008 to 2024 resulting in 106 scenarios. All 106 beat the required 2.43% avg. annual return, however did not include FX rate from USD to CHF.
Loans
Get 1st 100k CHF loan when property is being paid
Get 2nd 100k CHF loan in year 1 when remodelling takes place
Pros
Potentially benefit from outperforming loan interest amount with stock market gains OR at least get loan “for free”
Paying off property project over period of 7 years by using incoming future salary while keeping the 2 x 100k CHF invested in VWRL
Property is ours, not the banks (since it is a private loan and not a mortgage)
Interest can be deducted from tax, however in this case “only” ending up in savings of a few hundred CHF a year
Cons
Potentially suffering from poor stock market performance resulting in having to pay for both loan interest + stock market losses over 7 year period (note: we will keep the 2 x 100k CHF invested after 7 year period)
VWRL exposed to CHF/USD FX rate development in 7 year period
Higher monthly fixed costs due to loan payment(s) for next 7 years
Lombard loan
Looked at it but even though rates are in the 2.x - 3.x % range (e.g IB), this seems like a risky adventure over a longer period as the rates are not fixed
I would go with following assumption You are convinced about Real estate investment abroad and the discussion is mainly about how to execute it.
I feel you are mixing and matching your options and this can complicate decision. I would recommend to keep them separate as each one of them need to be considered on their own merit. If i demystify the options, all options boil down to
(a) Use cash to buy property and (b) relax
(a) Use cash to buy property & (b) borrow money to invest in Equities
These two options have one common element. (a) Use cash to buy property. So assuming you are convinced about long term prospects of this RE investment, then that is fine. But it needs to be justified on its own. So please be sure that 200 K CHF invested in RE abroad is a good investment.
This leaves us with second element, should you borrow money to invest in Equities? You can borrow using private loan or you can borrow margin loan, but both are borrowing. In my view, not a good idea. I generally recommend to invest in equities from savings and not by taking loans because this is a very risky strategy.
In addition, I would not bet > 5% returns in CHF from VWRL in coming 20 years. It might happen but it might not happen too. Lot of wealth managers are not expecting it given the high valuations at this moment.
These limitations stem from the fact that these offers are regulated under the Konsumkreditgesetz. This only applies up to 80k CHF, so if you really ask for 100k CHF, for which this doesn’t apply, you will have much fewer options to choose from.
Did not understand this. Are you claiming that with a 2.43% return you can pay a 4.9% interest on a loan, plus have the potential additional market upside?
That is a useless analysis I believe. You checked from after the last financial crisis in the period of one of the greatest bull runs in history, and you noted yourself that you ignored the FX development. That is no indication of expected returns. Despite this, you can certainly expect an average long-term return of 2.5% from VWRL, not so sure about 4.9% though.
All things considered, this sounds like a very clear case to me: Buy that property in cash and continue to invest the 50k per year in VWRL.
You are convinced about Real estate investment abroad and the discussion is mainly about how to execute it.
Yes, that is correct.
So if I get what you are saying is that you recommend not to get a loan to invest in equities. Instead only get a loan to borrow money for the property investment in case you have not saved up enough. Right?
Did not understand this. Are you claiming that with a 2.43% return you can pay a 4.9% interest on a loan, plus have the potential additional market upside?
I was claiming that with a 2.43% return (in CHF) you can break even a loan with 4.9% interest. My understanding was that since you would amortize the owed amount on a monthly basis the 4.9% interest is applied to a lower amount every month while the 100k CHF invested in VWRL are benefitting from compound interest. As example I took the comparis calculator that calculates for 100k, 84 months and 4.9% interest rate a total interest cost of 17’910.62 CHF. In order to make that amount of profit with an initial 100k CHF investment in e.g. VWRL you would need an avg. annual return of 2.4x%. Or did I get something wrong?
Yes. And normally taking loan for property investment is best via mortgage solutions because other loans are generally high interest. 10% interest via local bank might sound bad but I think it is all dependent on what is the risk free rate.
Swiss 10 year bonds have <0.5% interest, so 4.9% might sound low (vs 10%), but it is all relative. Taking 4.9% loan in CHF terms is very high risk because you would not find it easy to make such returns from any asset class.
Your net worth is already more than 1.2 million (stocks and cash) , so I would take this opportunity to diversify and add RE into the mix.
** This is my recommendation because perhaps I don’t like debts. Perhaps that also not very good profile to answer your question
Your not correctly comparing the same cashflows. You realize and account for the fact that you pay down the loan gradually, and therefore lower it’s absolute interest. But you fail to account for the fact that in order to pay down that loan, you also must lower your investment (or reduce the amount of new investments by taking the money from elsewhere), hence lowering your investment return over time too.
In your example of 100k for 84 months at 4.9%, the monthly rate would be over 1’400 CHF, or ~16’800 CHF per year. If your return is ~2.5% in that first year, you’ll have to sell 14’300 CHF of your investment portfolio to cover the rest of your loan payments.
Generally, to cover a 4.9% loan, you need at least a 4.9% return. If that is not obvious to you, you should not take on a 100k loan.
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