Real Estate Investment formulas

Real Estate
1

How do you evaluate a Real Estate deal? I’m looking to possibly make a RE deal in my home country soon, I know roughly what would be a good deal within other RE deals, but how do you compare, mathematically to let’s say investing in ETFs etc?

What I mean is, let’s take an example such as:

(The values are merely indicative, not representative of Switzerland nor any particular deal, rounded for ease of analysis. Taken from similar deals in Euro but to keep this generic no currency is mentioned).

Purchase price = RE value = 500k
Deposit = 200k
Purchasing costs = 50k (Taxes and other permits etc)
Total Spent = 200 + 50k = 250k
Loan = 500k - 200k = 300k
Mortgate rate = 5%
Rent = 2k
Tax on Rent = 25% (Not using Swiss module for simplicity)
Net Rent = 1.5k

RE valuation = 2%/p.a.

This will probably not add up with the above but let’s assume that the mortgage % and duration is set in such a way that we have a monthly payment of 2k where 1k is for interest and 0.5k is for the principal. Meaning that one has out to pay out of pocket another 500 per month, the rest coming from the net rent.

How do you go from here in computing the effective % of this investment over 1 year?

For example with 250k invested one would have generated over 1 year 0.5k * 12 = 6k (the rest went to pay interest). I guess one should also add the 2%*200k which is another 4k, so 10k total. Over the year one would invest 500/month so at the end that’s 6k invested, total = 256k.
10k/256k ~= 4% (For now let’s ignore that each payment is monthly so that will affect the yearly return for each of them, which is also true for the valuation of the property itself).

Obviously this doesn’t really mean much as the numbers are not real but what am I missing? Is there a better formula(s)?

2

As expenses (maintenance) 1% of the total value + Nebenkosten

1 Like
3

Yes good point

4

Usually, you have also :

  • landlord tax
  • Accountant fees in your home country
  • Loan insurance
  • Landlord insurance
  • reduce the annual rent of an average of 1 month vacation between 2 tenants
  • Real estate agency fees to organise the visits + sign a contract (average of 1 month rent)
  • Declaring the rent in Switzerland will slightly increase your revenue tax. You need to add them to your international revenu to calculate the tax level applied to your Swiss revenue
1 Like
5

High level you can look at the gross rental income. I.e. gross rent / market value. In your example, 24k/500k gives just under 5%.

You really need 7% or more to be worthwhile and closer to 10%. In recent times you get nothing like this due to low interest rates pumping up asset values. So if you want to play, then fix a long low rate to protect yourself as long as possible and realise that if rates go back up, not only is it expensive to finance, but asset prices might also fall.

1 Like
6

I agree with the target. It should be around 8% gross.
But this is usually an anomaly on the market with shitty area or lots of work improvement to bring bad the good to the market value.
Another option is to buy a small building to mutualise the fee management and the common fees for the whole building.
You can find few articles on the blog to get some ideas.