I have a conceptual question. Posting it here as i could not find other matching topic
I and my friend are thinking of investing in real estate in Switzerland. The idea is to have 50-60% equity and rest mortgage, with potential to reduce debt to zero after 10 years. I understand this might not be good financial decision compared to stock investments. However, we would like to diversify and own real estate nevertheless. Due to high RE prices in large cities, most likely we would need to find a property in cheaper cities (and not in big cities)
So the question I have is - what is the best way to execute this. I was thinking of two options
Option 1. Invest as co-owners with certain ownership ratio and take mortgage from the bank for the debt portion. Option 2. Form a company/fund which owns the Real estate and we just own the shares of this entity.
I have following questions -:
Is option #2 even possible if we only have one real estate in beginning ?
In option #1, would banks be willing to give us mortgage (being friends) or they only give mortgage to co-owners who are in a marriage or cohabitating relationship ?
Is there an advantage or disadvantage in terms of income tax (rental income) for option #1 vs 2
Is there an advantage or disadvantage for Capital gains tax in event of one of us selling their stake to the other party
Is it even possible to pay off all the mortgage after 10 years if we happen to have enough cash at that point of time ?
Is there a better option … option 3 ?
As much as possible, please focus on the actual concept and not on the following. we would do the research on these separately -:
complications of buying real estate with a friend (legal, social)
opportunity cost vs other investment vehicles
advantages of higher leverage in real estate investments.
Yes, but I can tell you that it will be a pain, since there is no track record. Banks will therefore ask for a higher margin. Moreover, some banks will also not provide the mortgage. It will be crutial, that the property can cover the imputed costs by itself (being “selbstragend”). Therefore, the income for renting out has to cover the 5% interest rule, 1% maintenance costs and the amortization. Since you plan to invest a substancial amount of equity, this will be doable. Once there is a solid track record (coming with time and amount of properties), the mortgage offer will improve.
Yes, you will get a mortgage if you are friends and if it is a buy-to-let property.
Pass, I have not many information to answer this.
Lesser experience with this kind of topic.
Yes, you can also pay of earlier, depending on your chosen mortgage period.
Not better, but another approach any maybe (partial-)immoral due to the current housing situation: (long-term) rent apartments, buy furnitures and rent them out with a mark-up. No equity needed, but you have the risk, if the subtenant is not paying the rent
Not allowed in any case, you have to check the T&C of the property management.
Thanks . it makes sense. Since mortgage would be for an entity, there is no credit history. I understand this might be an issue/challenge for Mortgage scenario.
Any idea on how such a thing is actually called in Switzerland? REIT ?
Financing the first property will be very equity intensive since there is no history and the imputed costs must be same or lower than the rental income.
But once the banks sees after couple of years, that everything runs smoothly and you have a gain each year (ideally), the higher the leverage can be in future. But as said, this will take some years.
Such properties are called IPRE (income producing real estate), buy-to-let or investment properties.
Depending on your assets, you can start with an apartment and aim to buy a multiple family house as a full buy-to-let. With apartments you have a very nice diversification and the costs on refurbishments (which affects the building and therefore all parties) will be split. But if you own the whole building, you are deciding to 100%, when and if you want to refurbish something.
Doing these things under a company (GmbH/AG) has a few advantages, mainly taxes. For example, let’s imagine you live in Schwyz and own a property in Geneva through your GmbH, also in Schwyz. Your Real Estate is worth CHF 8 Mio. and you generate a revenue of 200k with it.
CIT would be around 13%, aka 26k. The remaining 172k you pay out as a dividend, which will incur about 13.4k in taxes (not taking into account any deductions and stuff). Then you also need to pay wealth taxes on the 8 Mio, which would be around 15.6k. Total taxes around 55k.
In comparison you, as a person living in Geneva privately owning the RE will give you 40% income tax and 1% wealth tax, or around 160k.
With a company you also have other advantages, since you do not own the real estate. You might sell it and won’t have to pay any taxes on it, because there is no capital gains tax for selling shares*. In a company you can defer paying out dividends for whatever reason, gives you better tax planning opportunities or you can use those proceeds to invest into other ventures or move them up tax-free into a holding if you use that setup.
But all these things only make sense if you generate a lot of revenue. If you are just making 25k a year, it’s going to cost more with a company than doing it personally, but I guess you already know that.
Normally, the income and the value of the property have to be taxed at the location of the property, in this case Geneva. So, - it seems - that there is a completely different calculation for a AG/GmbH?
In this case, it absolutely makes sense to have the company listed in ZG/SZ.
You can’t just list the company, your management also needs to be there. Can’t just have a letterbox…, otherwise everybody in Zurich would have the company in ZG lol.
I’ve got my calculations from this article. Property taxes will probably be levied in Geneva, you are right. I’ll do more research into that.
Well isn’t that the case for lots and lots of foreign companies?
So many companies that pay taxes in ZG, no way they all have their management there ^^
First of all. Thanks a lot for the detailed comments. For now I am just evaluating different options to understand what’s the best approach.
Regarding capital gains -: I also thought about it. In my view capital gains tax on real estate company is different than individuals. This was my main motivation to even consider Option 2. However, I was of opinion that tax would be low, but you are saying it’s totally exempt. This is quite interesting
For example -:
Just to continue the example you shared. A company owns RE worth 8 million (NAV). There are two share holders. And let’s say each have 1-1 shares. So each share is worth 4 million
Now in 10 years, NAV of RE is worth 9 million. This means each party’s shares are worth 4.5 million. If one party sells their shares to another party, they have capital gains of 500K.
You are saying such capital gains won’t be taxed because they are shares of company. Is this really the case?
Somehow I thought that capital gains for shares in companies (whose main business is RE) are always taxed.
You would think, but this is not the case. This counts as “Wirtschaftliche Handänderung” and is treated in the same way as the default “Zivilrechtliche Handänderungen”. If something is essentially a sale of your real estate property, how you go about it doesn’t matter.
Thank you for the clarification, I updated my comment.
It also only counts as a Wirtschaftliche Handaenderung if it’s more than 50%, but that will more than likely be the case (Except in LU, VD, VS, NE und GE, where it’s always taxed)
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