Renting out apartment calculation at marginal income+wealth tax rate in Zurich

Real Estate
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I’ve made a hypothetical calculation, and I’d like to check what’s wrong with it, because the result is rather disappointing:

Imagine, in a location in Kanton Zurich, you can buy an apartment for 700k CHF, and rent it out for 2k CHF/month, and all your additional costs as owner to maintain it are 8k/year. So net you make 16k/year from the 700k. That means you earn 2.2% income on the 700k.

However, at the marginal tax rate of 40%, you only earn 60% of that: 9600/year income left

However, you have to pay the marginal wealth tax rate of 0.6%, and the 0.3% of wealth-based AHV tax, for a total of 0.9% wealth based tax on the 700k value: that’s an additional 6300 CHF tax.

So now only 3300 CHF/year of actual income from this apartment is left, meaning you make 0.5% gains on the 700K, and not much has to go wrong in additional costs to make that a negative gain.

Some things that can decrease the pain:

-Having a mortgage with 1.5% interest rate or so improves the situation here, but if FIRE’d you can’t have a high mortgage due to affordability checks.

-The 40% marginal tax rate is maybe exaggerated, because getting 200k-300k income while FIRE’d is not realistic. But it would be if someone would, e.g., want to live from renting out 10 such apartments…

-The 0.9% wealth+AHV tax however is perfectly realistic when having a FIRE portfolio.

-The fact that an apartment is valued lower than its buying cost on the tax letter helps, but afaik Zurich is going to reevaluate all apartments some time soon

My question is: am I missing something? If you see this as a business where you spend 700k on something to make income, but due to the taxes in Switzerland you really only make 3.3k income… That does not sound realistic and maintainable, there has to be a mistake in this…

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I think it’s not fair to just deduct wealth tax from the gains here, or at the very least, it depends. Ultimately what you are doing is comparing this type of investment to different ones (you don’t mention alternatives, but they are kinda implied: stocks, under the mattress, etc.). Most of alternative investments will also incur in the wealth tax. For example, with the same logic the return on keeping the 700k in your checking account becomes negative.
It would make more sense IMO to take the case of “wealth tax applied to 700k” as the 0 point baseline, and then you actually add a bonus to the investment opportunities that decrease the wealth tax (pillar 2, direct RE funds, RE in your case because of lower taxable wealth value vs real market value as you mentioned).

The choice of applying a marginal wealth tax rate is also arbitrary: why these 700k are the “marginal” ones on top of the other assets you have? I can flip this and say that these 700k are taxed as the lowest wealth tax rate and your other investments (e.g. VT) are taxed at marginal tax rate. Using the average wealth tax would be more reasonable

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If you are renting out at 2k per month, you should pay no more than 480k for it.

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Can you elaborate on that rule? Also, are there really apartments where this is possible? I doubt 2K rent + NK is realistic for a property this cheap. Maybe if you buy a whole block?

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The issue you are dealing with here is that 2.2% is not good rental income. I know some Zurich city apartments have even lower yield but 2.2% is not really income play. People buy such apartments mainly for capital appreciation over long term.

If you are looking for 2.2% , just buy Swiss RE Direct fund and you can get similar income tax free.

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It’s a contribution rather than a tax. But overall your assessments looks right. That’s probably why real estate investments are often highly leveraged with (cheap) loans.

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Based on my limited theoretical knowledge of real estate investments:

  • It becomes more interesting than stocks investing when (strongly) leveraged with cheap loans.
  • affordability calculations are for self-occupied property. For commercial rentals, it is the rental income that is of primary importance. If you can pay the interest from the business income, why refuse it?
  • interest rates are higher for mortgages on commercial property. It is a business loan, and the risks are different.
  • self-managed rentals is a lot of work. Have you considered it, and its costs?
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This gets repeated a lot but the real bulk of the work deals with statements of service charges (and refunds), and that is a monthly task (in some countries) or an annual (like here or Germany) - and collection. Which takes less than an hour a month, or less than a day a year.

Granted, that’s if nothing breaks :slight_smile:

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Exactly. Some examples from the forum and friends:

Renter calls you for a broken dishwasher and shower head. You need to get quotes for repair, and discuss why the shower head isn’t your problem. Renter then complains about neighbor that keeps a shoe rack in the hallway or blocks their parking. And threatens rent deduction because apartment gets too hot. Let’s hope they do pay rent regularly and open windows after long showers to avoid mold.

Once they leave, they’re not as accommodating for time slots for visits of new renters, of which 100 apply and need to be screened. After solving issues with damages and cleaning, you finally settle on the release of rent deposit (maybe even outside of court), and after some small renovations like repaint now document the state of the apartment more detailed. Your new renter then challenges your service charge statement and rent calculation. Then the oven breaks. Let’s not forget potential issue with other owners, use of renovation fund etc.

May or may not happen, but most private first-time landlords underestimate the effort. Given the high regulation for landlords, it seems to be you can only get out ahead financially if you are really lucky, or hope for value increase of the apartment.

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You need to choose the right tenants, that’s a huge part of being a good landlord.

Highly educated, entitled Swiss people (that know their rights) aren’t good tenatns, so it’s very advantageous for landlords to discrimminate locals in favors of immigrants that don’t know the language that well (insurance brokers also use this trick to trick Immigrants into 3a life insurance contracts).

This also allows you to get more income than you’re entitled to (according to the civil code) as they probably won’t question utility (NK) bills, not ask for rent reductions, etc.

If you want to have peace and quiet you rent to blue colar people from non EU countries that are well mannered. But even then it’s ofc not without risk.

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I’m not sure and don’t want to find out as landlord myself :smiley:

Maybe it’s better for a renter reporting small (real) issues, instead of keeping quiet until they become bigger ones (like a bit of mold, or appliances making funny noises).
And even the best tenants eventually move, make some scratches and stuff breaks.

But either way, I think the above point that it’s quite some work is valid, along with the purely financial considerations.

The (very few) private landlords I know didn’t mention nice returns, but diversification, hope for price increases or keeping the place “warm” for later us for themselves or kids.

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Yeah the usual reasons people I know become small-time landlords involve changes in life situation without the pressing need to dispose of some prior self-used real estate. Plus, tax breaks get nicer the longer you keep it

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Imo, a good move is investing in real-estate with a margin loan from your stock/ETF portfolio. It is uncorrelated enough to be safe and can give you an extra 1-3% return on the long run. Of course it’s extremely important to know what you’re doing and the kind of liquidity risk you are taking. Personally, I do 33% LTV margin loan to invest in a mix of liquid RE funds and direct RE with mortgage on-top.

Swiss RE returns are too low for simple investments compared to equities. But they are worth doing with borrowed money if done right. This is a consequence of structurally low CHF interest rates + restrictions on foreigners buying Swiss residential keeping prices (relatively) low.

It’s also the only asset class for which you can easily borrow against your salary. In my view, not borrowing against your salary, is a waste in the Swiss context. (But yes, that’s an aggressive move, not for everyone)

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I see this differently. The missing correlation increases the risk, not decrease. Why using the more risky margin loan if you can get a bank loan at a lower rate?

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Could you please elaborate a bit on how and what exactly you do and maybe the portfolio size / volume we’re talking about?

Because with margin you can effectively borrow 100% - this isn’t possible with just a mortgage.

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You will not get a classic bank mortgage to invest in RE funds. For direct real-estate I’m speaking about using margin loan for the down payment on top of a mortgage backed by tenants cashflow and your own salary (assuming you don’t own your primary residence and that tenants cashflow is insufficient)

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For direct RE it’s doable as soon as you can buy something with a down payment worth a 1/3 of your ETF portfolio.

My personal preference are small apartment buildings starting from 3 units because with this size, it starts to make sense to rely on a Régie/Hausverwaltung. This way you don’t need to handle dishwasher breakdowns but it’s gonna hurt returns. If you’re hands-on or can’t afford the size, doing it on your own is totally fine and you can aim at much higher returns. Also, I prefer more rural/sub-urban regions, they are a better fit for me from a risk/reward perspective.

I also keep a smaller part of the RE allocation in a RE fund that I could sell quickly if I would ever start to feel uncomfortable with my margin levels.

But in my opinion it is first very important to well understand the risk you are taking with margin and run stress-test scenarios.

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OK. I misunderstood. You would use the margin loan for the downpayment. That could make sense.

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Yes, on top of a mortgage.

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