I’ve been a frequent reader on the forum and have received great tips and tricks, which I am thankful for !
There’s a change in our personal situation and I would appreciate your inputs and/or thoughts.
Along with my wife, we will soon inherit a building with 4 apartments. The valuation should be around 2 million to 2.5 million (the estimation is still ongoing, so might be a bit more or a bit less). With it comes a mortgage of 650’000 CHF. We would not live in it but instead continue to receive rental revenues from the apartments.
Our combined salaries range between 230k-280k and should increase to 350k-400k in the next 3 years.
Our initial thought was to maximize the mortgage to 65% of the value of the property. With these funds, we were thinking of purchasing cash a property abroad for family (which would also be our vacation home) while using the rest, potentially 200’000 CHF as investments through ETFs.
Tax-wise, the rental revenues should partly be offset by the interest rates from the mortgage, minus deductions we could apply fiscally.
This is quite new for us, and while it is exciting, we’re afraid of missing key steps or not maximizing the opportunities from such a situation.
What are your thoughts here? Is this even a good idea to increase our mortgage? Do you see anything else that we could do?
I’ll let others who know rental real estate better than I reply on the specifics but I just want to weigh in on this:
The impact on your lives of having things messing up (which can come out of things you have few to no control on, like periods without tenants, real estate crash or changes in laws and regulations) may be greater than the benefits deriving from maximizing the opportunities ahead of you. I would take a conservative approach and assess my situation:
if 1, 2, 3 or 4 appartment(s) stay(s) vacant for a significant amount of time.
if the household income gets cut significantly.
if real estate values go down significantly (real estate crash).
if interest rates rise significantly.
others at your discretion (disability/death being among the obvious low probability (depending on age for death)/high impact ones).
Leaving the semantics and financial mechanics aside, to me this sounds like borrowing money to invest in property abroad plus ETFs.
I would recommend the decision to do so shouldn’t depend on the fact that your means (through inheritance) to increase mortgage have improved. It should depend on the basic principle behind the investments you are targeting.
So the questions are
Is it a good idea to borrow money to invest in Equity ETFs - in my view NO
Is it good idea to borrow money to buy real estate abroad - it’s quite common to buy real estate on debt. So this might be worth it depending on your desires to do so. However keeping in mind that you are going to take a debt.
Personal opinion
I don’t like debts. I like owning assets which create income. Low interest environment might make debts appear attractive, but in the end debt is a debt which has recurring cost.
Having said that, I know a lot of people who prefer a debt arrangement in real estate. So understand the appeal of it because financially owning real estate with high debt is more interesting than owning it with low debt in low interest environments. Not sure if this is a sustainable long term model but it is what it is for now.
The apartments have been generating stable revenue for many years and we expect them to continue based on the information from the tenants, however we do know that this may change quickly. Given the location, we think finding new tenants shouldn’t be too complicated.
We are both 30 years old, and are not risk-averse. Keeping the property seems like the better option for both the income generated and the fiscal reductions we can apply.
Given that we are both somewhat young, investing part of the funds coming from the 1st line mortgage into ETFs does seem risky, but I’m curious to hear if others have done so, or not, and the reason behind.
As for the house abroad, the main reason would be to pay it off completely and avoid the high interest rates in that country, while enjoying the lower interests rate in CH at the moment. Amortizing the 1st line mortgage could be an option later down the road.
In my opinion, maxing out your credit facility immediately is not a smart move, especially not to buy more real estate, and a property that doesn’t even generate a return nor is it your primary residence. I would file that as consumption and not investing.
Given your income level, it should be fairly straight forward to save up for a vacation home, if that is your goal, and then pay for it in cash a couple years down the line.
I’ll drop in an idea - my stance in your shoes would be to get rid of the property ASAP and plug the proceeds in income-generating investments - have you had a holiday home before, or experience of it? I have had this experience.
Will you be content with going to the same place for each and every holiday…because otherwise you may feel dumb paying for hotels etc? (my experience: annoyance from my wife for us always going to the same place)
Will you be relaxed knowing it’s in another country, can get broken into/squated? (my experience: yard and garden were looted during COVID lockdowns - at least they didn’t break into the house - and nature moved in)
Will you be looking to rent it out/AirBnB it for the time you’re not there? Who’ll manage cleaning, keys, scheisse? (my experience: too much trouble, especially if you’re not in 15-20 mins distance OR it’s not in a highly touristic area where you could hire a firm to clean it etc).
You are in a privilege situation if the rentals are generating money, you then can invest that money in whatever you want liability (with a vacations home) or to an asset (i.e. ETFs,…)
And I am going to tell you something different. Consider all components of your wealth, your investment horizon and expected returns. Are you going to retire in 5 years? Do you really need 70% (net value) of your wealth invested in one property? Will this rental income make a significant change for you?
Nevertheless I also advise against buying a vacation house. I am sure this is your anchoring bias talking.
A family member would live in the house abroad and pay rent, which would cover the taxes, utilities and provide a positive return. It’s not equivalent to the rent we could get at market rate, but it helps the family while allowing us to go whenever we want. General upkeep would be done by this family member.
I do understand that this arrangement might go on for 5 years or 10+ years, bringing some risks. And since I’m originally from that region, with most of my family living in that city, there’s an emotional motivation that is difficult for me to ignore as we frequently go back for visits.
As for investing part of the loan on the 1st mortgage (around 10% of the loan), I do see the risks as others have pointed, which is giving me pause.
I have owned several properties and as a first step I would suggest to evaluate what the likely return is on the unleveraged asset, and then decide whether to keep it, leverage up on it, or sell:
What is the rent on the property after allowance for maintenance, expenses and void periods?
How old are the major items and when are they likely to need replacing?: roof, heating, external walls, electrics, repainting, redo kitchens, bathrooms etc You need to factor that into your maintenance costs
Financial relationships within families have a high risk of making your relationship more difficult. What happens if they can’t pay anymore? More pervasive, because you wouldn’t have a mean to detect it, would be if the rent was too high for what they can afford, for whatever life reason, but they wouldn’t dare to tell you, out of pride, and would slowly start to nurture negative feelings toward you.
All can go well and your family member could be grateful to you for it but the risk is also there that it would put a strain on your relationship, especially if you being in the position of the landlord (a position of authority over the family member living in the house) is the result of inherited wealth.
I wouldn’t see it as that risky myself. It is very common practice to have family members renting properties. Usually you lose out on some return since you would feel bad squeezing the pennies out of your family member. But on the other hand, you have a reliable tenant that takes care of the property and lets you know if something is wrong with it.
I would surely prefer doing it this way than renting it out to an outside person. Then you would probably need an agency on-site that would solve things for you, which again costs more.
But yes, it might not work with any family member…
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