If I want to invest in Rental Real Estate, (thoughts re-triggered by the recent post by Mustachian Post Invest in Rental Real Estate in Switzerland. Finally done!) , what should be the right expectation for buy-to-rent ratio? buy-to-rent ratio = “buy price” / “gross annual rental income” in my definition.
My impression before is that properties in Switzerland typically has buy-to-rent ratio in the range of 30-40. If it’s around 25 then already super good. The numbers in the recent post,
cost 1.6 million and 108k gross annual rental income,
look amazing to me. 1600k/108k = 14.8. This is a crazily good. I am not sure if my understanding of the numbers in the post are incorrect, or my impression of the buy-to-rent ratio is incorrect. Should I change my expectation of this ratio in switzerland to 15-25?
Also the post doesn’t reveal how much is the down payment, nor the mortgage, nor the interest expenses, nor amortization. Here is my guess. Let me know if you spot my guess completely wrong.
downpayment/equity: 38.75% x 1.6 million = 620k
mortgage: 61.25% x 1.6 million = 980k
gross income: 108k
-----interest expense: 1.35% x 980k = 13,230
-----amortization: 1% x 1.6million = 16k
net income: 108k - 52k = 56k
net cash flow return on equity: 56k / 620k = 9.03%
net income + amortization: 56k+16k = 72k
net income + amortization on equity: 72k/620k = 11.6%
Do they make sense? The last number doesn’t quite match number in the post 12.7%. Most likely some of my understanding to these numbers are wrong, or the guesses are wrong. Hope to get corrected.
A ratio of 30 to 40 is too high, especially for today now that interest rates have risen. I believe 25 to 30 was a realistic range for many years now. An older, established portfolio should be around 20. It all very much depends on what properties and what region we are talking about. Significantly above 30 only ever made sense at negative interest rates, for a new flat in a large city where you can be sure the property value will rise quite a bit too every year.
Skimming over MPs post, he leaves out some crucial details. This looks like a large 6 to 8 flat property outside of a major city in Romandie, with low-level income renters, and in need of crucial repairs over the next 10 years. In that case it would probably be a fair deal, if not, he might just have found a very attractive opportunity.
In my experience, that depends heavily on the location and the age of the property. New multi-family houses in Zürich? In the last years, they were sometimes sold with a gross yield of 2% (i.e. ratio of 50). During times of negative interest rates, many institutional investors were happy to get at least a positivie yield. With the higher interest rates, the gross yield should be higher, but they are still relatively low in the cities for newer houses.
In the countryside, you find some offers with a 5% (or even higher) gross yield. However, the risk of vacancy is usually much higher and these are often older houses that may require significant investments in the future.
Thank you for the reply. It makes a lot of sense to me. Alright, in the future when I look for rental properties investment, I will expect the buy-to-rent ratio number to be around 20. It’s rare but possible. Is it right?
And also the repair cost, when it is an old house, is also something not to be neglected about.
Got it. Thank you for the reply. It makes a lot of sense. Naturally a new multi-family house in Zurich near University will be an ideal rental property, but I might not get the chance to participant. Just needs to wait and see I guess, for the good opportunities.
Side question about notary cost. In the post it says
Notary fees at the time of purchase (5% in canton Vaud)
Does this mean 5% of 1.6 million, and if yes, then the notary cost is 80k? This looks insanely high to me. And is this the cost shared between buyer and seller? Or it is actually 5% on buyer and 5% on seller?
I vaguely remember when I purchased a house in kanton Zurich about 2 years ago, the notary fee is 0.05% on buyer and 0.05% on seller. I bet if the numbers were higher, my memory won’t be so vague.
20 is still rarely found today, and only possible far from city centers. Should change if high interest rates persist for a couple years (unless immigration significantly surpasses newly built flats and houses, which is to be expected). If you want to buy something in the next three years, you will likely have to aim higher.
Yes. It is not really the notary itself, but a tax on properties changing owner (Handänderungssteuer). It is 0% in Zürich (so you really just paid the notary itself) but typically 3.3% in Vaud where the notaries round it up generously for their share on top.
As I understand: the notary asks for a provision of 5% of the purchasing price from the buyer, to cover the tax (that he pays on behalf of the buyer) and other expenses (including his future invoice).
When the transaction is fully completed, the buyer receives a final accounting, and generally a small reimbursement.
Correct, but its a cheap and unnecessary way to inflate your final invoice. I suspect the Vaud notary ends up being more expensive than the Zürich one.