What you need to bring to the table as an investor

If you are considering a property for investment, you should think long and hard about whether you are in a position to invest and what it means for your future.

These are the key questions:

• Do you have the required equity of at least 25 percent of the collateral value (the lower of either the purchase price or the market value)? Remember: money from pillars 2 and 3a cannot be used to purchase investment properties.
• Are you in a position to reduce the mortgage required to two thirds of the collateral value in the space of ten years?
• Does your expected rental income guarantee affordability?
• Will you still have enough liquid assets to live on after purchasing the property?
• Are you aware of the cluster risk if you invest the majority of your assets in a property? 
• Investment properties are generally not quick earners. Are you aware of the very long-term capital commitment involved?
• Are you willing and able to bear the risks as a landlord, e.g. rental loss because the property is empty, unforeseen repair work or a sale made at a lower price?
• Are you aware of the major costs and time involved in managing, renting out and maintaining the property, plus running costs?

Essentially, all property types are potential investments:

• Apartment buildings
• Condominiums (owner-occupied apartments)
• Single-family homes
• Office buildings
• Commercial properties
• Properties held for mixed use (residential, commercial, office space) 

Apartment buildings are the most common investment properties.

An owner-occupied apartment is popular amongst investors with a smaller budget. The benefit: the price is affordable, and you can share the costs of upkeep with the other owners. The downside: you do not have full freedom of choice as far as upkeep or renovation works are concerned. As part of a community association, you need a certain openness to compromise and discussion.

For single-family homes, the return tends to be quite modest given the relatively high costs of upkeep.

The right investment for you will largely depend on your financial situation, but also on your personal life planning.

The most important criteria when it comes to buying an investment property

If you’re looking for an investment, you should bear these points in mind as an investor:

Condition of the property

• The property should look good and well maintained
• Especially with older houses: good building material, no long overdue renovation works (e.g. outdated heating or poor insulation). Watch out for hidden defects!
• A good energy performance according to the cantonal energy certificate for buildings (GEAK).

Location of the property

• Good transport connections
• Attractive view
• Infrastructure (shopping options, schools, cultural amenities, etc.)
• Low rate of tax 
• Good forecast for the economic/infrastructural development of the area and an absence of emissions of any kind, e.g. proximity to a motorway, flightpath, electricity pylons, nuclear power plants, etc.

Purchase price

• This should not be more than the market value of the property, or only marginally over
• The higher the price, the lower the return on equity 

Running costs

• Not too high, otherwise you risk an unattractive rental property/an empty property
• Regarding energy costs: check the cantonal energy certificate for buildings (GEAK)!

Risk of having an empty property on the rental market

• High demand for rental properties in the region/municipality
• Property is already rented out / easy to rent out

Current tenants (existing house)

• Very little fluctuation
• Risk-free tenants (no payment arrears or legal disputes)

The better met these criteria are, the better your long-term prospects of success are.

How is the return on a property calculated?

In property, threre are two types of return: gross return on rent and net return on rent.

Gross return on rent

The gross rental income per year is divided by the price.

Example:

• Gross rental income per year, CHF 107,000
• Purchase price, CHF 1,800,000
• Gross return on rent (gross rental income in relation to the purchase price), 5.94%

The gross return is just a rough value used to estimate the return. The net return on rent is a more significant figure.

Net return on rent

First, the net rental income is calculated (gross rental income minus property costs), and this is then divided by the purchase price, including additional purchase costs.

Additional purchase costs include:

• Notary fees
• Fees for the land register office
• Broker commissions where applicable
• Property transfer tax where applicable

Depending on the canton, the additional purchase costs can amount to 5 percent of the total price.

Sample calculation: net return on rent

• Gross rental income, CHF 107,000
• Minus running costs (1% of the collateral value), CHF 18,000
• Net rental income, CHF 89,000
• Purchase price incl. additional purchase costs such as fees and taxes (let’s assume 2.5% of the purchase price), CHF 1,845,000
• Net return on rent (net rental income in relation to the purchase price), 4.82%

The expected return is also an important key figure for the lender when deciding either for or against financing. 

Just as for owner-occupied properties, the second decisive factor is affordability.

How is the affordability of an investment property calculated?

To calculate the affordability of an investment property, lenders first ascertain its market value or collateral value. This value is calculated using what’s known as the capitalized earnings method for investment properties, i.e. based on the expected rental income.

A simple formula for calculating capitalized earnings is as follows:

Net rental income per year x 100 / capitalization rate in % 

The capitalization rate is set on an individual basis by each lender and varies depending on the location of the property. A usual benchmark is about 5 percent.

Net rental income: CHF 90,000
Capitalization rate: 5%
Market value: CHF 90,000 x 100 / 5 = CHF 1,800,000

Once the market value and subsequently the mortgage amount have been determined, affordability is calculated as follows:

Rental income deductible

• Mortgage interest (for a calculated interest rate of 5%)
• Amortization of the mortgage
• Running property costs, e.g. upkeep, repairs, management costs, etc. (1% of the market value)

≥ 0 (there should be no loss)

Sample calculation: affordability of an apartment building

• Market value (purchase price), CHF 1,800,000
• Equity (in this instance: 30%), CHF 540,000
• Mortgage, CHF 1,260,000
• Net rental income / year, CHF 90,000
• Mortgage interest (for a calculated interest rate of 5% / year), CHF 63,000
• Amortization, CHF 9,000
• Upkeep and running costs (1% of the market value), CHF 18,000
• Surplus (net rental income minus interest, amortization and running costs), CHF 0

Remember the lower-cost principle!

Depending on the market situation, the actual negotiated price for investment properties may be higher than the market value. According to the lower-cost principle, the lower value of either the market value or the purchase price is taken as the basis for the mortgage amount. In other words: the buyers must make up the difference from the collateral value with additional equity.

The most common mistakes when buying property

Even if you keep hearing talk of “amazing returns” on properties, you should bear this in mind: there is no guarantee of profit with investment properties. Every now and again, investors do get it wrong.

Here are some of the most common mistakes made:

• Not enough attention was given to the value factors of the property. An apartment building in a poor location, for instance, is at a high risk of being empty, which, in some circumstances, will result in it losing more and more value. 
• The investor has paid too much, making a return practically impossible. This is why investment properties should always be assessed by experts.
• The property was not checked thoroughly enough for (hidden) defects. This mistake can cost the buyer dearly. The same rule applies: have the condition/building material of the property checked by experts!
• The investor did not check the relevant documents or the entry in the land register and overlooked important easements such as right of use, right of residence and right of first refusal.

Calculate possible investments and returns carefully and realistically and consult an expert.

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