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Old 12.04.2019, 15:13
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investing in real estate vs buying property

So, this is a long-term dilemma of me that I'd like to vet with a larger audience.

Basically buying a 5.5 room garden house in Thalwil (or a similarly nice location and size) is out of budget, and I'm unwilling to rent something for 4k a month. Reasonable flats with good connections very quickly skyrocket the 3000 CHF/month mark. Heck, it's tough to be poor in Switzerland.

The short story: investing in real estate on 6% return and keep renting - vs - buying property at a worse location and enjoying its (financial) benefits.

For the sake of numbers, let's calculate with a flat worth of 1M and a downpayment of 250k, 1% mortgage (7500CHF a year).
Same flat in rental would be 2500CHF a month.

Option A)
- Assume that 6% income on real estate is possible "indefinitely".
- Running regular housing market risk, of course.
- 250k invested at 6% = 15k/yr income
- renting the flat above, 30k/yr

Disadvantages:
- One can't use the 2nd and 3rd pillar for capital
- The income on renting is taxable (~3k loss)

Advantages:
- Netting 18k costs per year, which is easily bearable. Even 12k higher is not too bad.
- flexible with moving to smaller or larger apartments or closer to work as needed
- keeping the capital flexibly available in a 5-year horizon

Option B)
- buying the flat above
- yearly costs 7500 CHF on interests, 7500CHF to amortize = 15k
- Running regular housing market risk, of course.
- 30k eigenmietwert, -7500CHF tax base deduction = 22.500CHF base increase (let's say 5k plus load)
- total of 20k costs per year

Advantages:
- one can cash out or pledge 2nd and 3rd pillar, so the actual capital to invest is "less". One can also pump this money back which is then tax-free again.

Disadvantage:
- your capital are locked in in a mortgage and an immovable property
- you are locked to your property, at least for a while (can't rent with a B permit)
- one has the 750k mortgage renewal looming over the head if not paid in full in 10 yrs, interest rates are likely to rise in the next 10 years
- with these numbers, it's very hard to find anything in the greater Zürich area, so you'll be locked into sub-par locations and will need a car to add to the costs.

Now I am either totally wrong with my calculations, or owning property is not such a good business, after all?

Enlighten me please.
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Old 12.04.2019, 15:41
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Re: investing in real estate vs buying property

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So, this is a long-term dilemma of me that I'd like to vet with a larger audience.

Basically buying a 5.5 room garden house in Thalwil (or a similarly nice location and size) is out of budget, and I'm unwilling to rent something for 4k a month. Reasonable flats with good connections very quickly skyrocket the 3000 CHF/month mark. Heck, it's tough to be poor in Switzerland.

The short story: investing in real estate on 6% return and keep renting - vs - buying property at a worse location and enjoying its (financial) benefits.

For the sake of numbers, let's calculate with a flat worth of 1M and a downpayment of 250k, 1% mortgage (7500CHF a year).
Same flat in rental would be 2500CHF a month.

Option A)
- Assume that 6% income on real estate is possible "indefinitely".
- Running regular housing market risk, of course.
- 250k invested at 6% = 15k/yr income
- renting the flat above, 30k/yr

Disadvantages:
- One can't use the 2nd and 3rd pillar for capital
- The income on renting is taxable (~3k loss)

Advantages:
- Netting 18k costs per year, which is easily bearable. Even 12k higher is not too bad.
- flexible with moving to smaller or larger apartments or closer to work as needed
- keeping the capital flexibly available in a 5-year horizon

Option B)
- buying the flat above
- yearly costs 7500 CHF on interests, 7500CHF to amortize = 15k
- Running regular housing market risk, of course.
- 30k eigenmietwert, -7500CHF tax base deduction = 22.500CHF base increase (let's say 5k plus load)
- total of 20k costs per year

Advantages:
- one can cash out or pledge 2nd and 3rd pillar, so the actual capital to invest is "less". One can also pump this money back which is then tax-free again.

Disadvantage:
- your capital are locked in in a mortgage and an immovable property
- you are locked to your property, at least for a while (can't rent with a B permit)
- one has the 750k mortgage renewal looming over the head if not paid in full in 10 yrs, interest rates are likely to rise in the next 10 years
- with these numbers, it's very hard to find anything in the greater Zürich area, so you'll be locked into sub-par locations and will need a car to add to the costs.

Now I am either totally wrong with my calculations, or owning property is not such a good business, after all?

Enlighten me please.
Repairs & maintenance that over time will be 1% or 10,000 a year
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Old 12.04.2019, 15:46
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Re: investing in real estate vs buying property

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Repairs & maintenance that over time will be 1% or 10,000 a year
making the "owner" position even worse then... on the other hand, repairs are tax deductible, so I guess that zeroes it out somewhat?

to be fair the building I live in was built in 2005 in Minergie standards, I don't think there was anything done to it in the last 14 years and it doesn't seem like anything else is coming in the next 5-10.
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Old 12.04.2019, 15:50
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Re: investing in real estate vs buying property

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making the "owner" position even worse then... on the other hand, repairs are tax deductible, so I guess that zeroes it out somewhat?

to be fair the building I live in was built in 2005 in Minergie standards, I don't think there was anything done to it in the last 14 years and it doesn't seem like anything else is coming in the next 5-10.
You also need to look at interest rates, I remember when Swiss Post were paying 2.5% interest, Mortgages were much higher, Banks stress test at 5% + 1% maintenance.
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Old 12.04.2019, 16:13
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Re: investing in real estate vs buying property

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You also need to look at interest rates, I remember when Swiss Post were paying 2.5% interest, Mortgages were much higher, Banks stress test at 5% + 1% maintenance.
this one is indifferent as one would be invested in real estate either way (higher rates mean higher income on the investment end, and a looming renewal after the 1st period + dropping real estate prices in the long run).

Banks test at 5% gross AFAIK.
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Old 12.04.2019, 16:18
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Re: investing in real estate vs buying property

6% interest on real estate investment that goes on "indefinitely" is by no means a sure thing. It can easily go into the negative zone. Between 1989 and 2009 house prices dropped and it took 20 years to recover. Since 2009 it's been positive, but looking back I would by now means assume real estate as an investment will bring in 6%.
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Old 12.04.2019, 16:32
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Re: investing in real estate vs buying property

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6% interest on real estate investment that goes on "indefinitely" is by no means a sure thing. It can easily go into the negative zone. Between 1989 and 2009 house prices dropped and it took 20 years to recover. Since 2009 it's been positive, but looking back I would by now means assume real estate as an investment will bring in 6%.
look at crowdhouse.ch
but there is life outside of CH as well.
I'd say let's assume a 6% return for the sake of the comparison.
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Old 17.04.2019, 22:31
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Re: investing in real estate vs buying property

CrowdHouse just posted their 2018 report. 5.9% return across several dozen properties.
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Old 17.04.2019, 22:39
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Re: investing in real estate vs buying property

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CrowdHouse just posted their 2018 report. 5.9% return across several dozen properties.
You need to take property company accounts with a pinch of salt as the value of the properties is just an opinion of value of an illiquid asset. Plenty of companies restate profits...... Swiss pension funds are not making 5.9% compound on their property assets.
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Old 17.04.2019, 23:11
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Re: investing in real estate vs buying property

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You need to take property company accounts with a pinch of salt as the value of the properties is just an opinion of value of an illiquid asset. Plenty of companies restate profits...... Swiss pension funds are not making 5.9% compound on their property assets.
This is dividend paid out, not a magic number calculated.
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Old 17.04.2019, 23:12
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Re: investing in real estate vs buying property

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CrowdHouse just posted their 2018 report. 5.9% return across several dozen properties.
Do you understand why it is so unusually high? 3.5% would be a more realistic figure.
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Old 17.04.2019, 23:53
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Re: investing in real estate vs buying property

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Do you understand why it is so unusually high? 3.5% would be a more realistic figure.
Looks like the properties are mortgaged @60% so it's geared 150% of your investment Fixed rate mortgages of 5 years, what could possibly go wrong 20% fall in property price & you lose 50% of your investment.
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Old 18.04.2019, 09:58
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Re: investing in real estate vs buying property

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CrowdHouse just posted their 2018 report. 5.9% return across several dozen properties.
Stock in PSP, to pick one well-established 800-pound gorilla listed on the stock exchange, comes with 3.5% divi return. Their equity is a tad more than 50% of assets, meaning they use a tad less than 2x leverage. CrowdHouse uses 58-65% credit; 66.7% credit (I prefer simple calculations) means 3x leverage (while I'm at it: the typical private homeowner brings 20% equity thus uses 5x leverage). With an assumed 4.5% gross return (that's probably a bit too high) and 2% costs and charges (0.7% mortgage interest, 0.8% maintenance costs and accruals, 0.5% admin costs and fees by CrowdHouse) that would result in 7.5% return on your equity.

Adjust that a bit because these are just balpark numbers and you get something like the 5.9% reported by CrowdHouse. The same calculation with 2x leverage, as applies to PSPN, results in 4% return, roughly what you get as dividend. If the PSPN dividend is classed as a return of capital it's income tax free, in which case the after-tax return is roughly the same for both investements even though PSPN uses significantly less leverage.

Long story short:
The increased return can be fully explained by the leverage used.

But you seem to ignore the risks:

What follows is speculative because the devil may lie in the detail and any potential investor should want to enquire about this by themselves (I didn't), but the bank will definitely try to structure things as follows simply because it improves their position quite significantly.

Once prices fall, whenever that will happen, the increased leverage will result in significantly higher percentage of equity lost for your ownership via CrowdHouse, that's obvious and certain.

The real hammer however lies in the fact that, contrary to buying stock of a real estate company like PSPN or buying shares of a real estate fund, with CrowdHouse you're probably liable for the full amount of the mortgage, not just your initial equity or a part of the mortgage that's proportionate to your ownership of the property.

This is caused by the fact that you're listed in the land registry as co-owner (as claimed by CrowdHouse, something that would need to be verified). While that's desirable, it also increases your risk. If you're "Solidarschuldner", and you probably are, each owner of a portioin of the property is by default liable for the full mortgage amount. If the mortgage provider comes after you alone, that's their judgment call, you may have to pay 100% of the outstanding credit whereupon you will have to chase the money from all other co-owners individually, in a long-winding process with unclear outcome - the only certainty is that this would cost lots of money in lawyer fees alone, money that may be unrecoverable.

So you may be forced to inject additional equity of an unknowable (albeit limited) amount if the market value of your property falls low enough, and that is likely to happen at the most inopportune time because a real estate crisis (so far) has always occured when the economy itself was having the flu or needed intensive care.

Last edited by Urs Max; 18.04.2019 at 10:14.
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Old 17.06.2019, 13:38
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Re: investing in real estate vs buying property

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Looks like the properties are mortgaged @60% so it's geared 150% of your investment Fixed rate mortgages of 5 years, what could possibly go wrong 20% fall in property price & you lose 50% of your investment.
you lose the investment only if you cash it out. nevertheless, dropping prices are always a risk in real estate. I didn't really get your point with the 20% loss couples to 50% loss on investment.

Do you think that 20% loss on RE prices is a reasonable scenario in Switzerland with the whole country ticking on mortgages?

my train of thought goes like this:
- CrowdHouse is interested to keep their properties (and user base) permanent as they are living off property management. Without customers there is nothing to manage so they'll go bust
- if rates hike significantly, which mean real estete prices will also drop significantly, that also means the rents will be raised to provide better leverage on the tenants
- in this case the co-owners can just keep their property bits and keep renting until "prices have stabilized" (right, if ever)
- you can have a drop-out after 5 years, but it's not mandatory of course.

Looking at the Swiss market, a steady increase in real estate prices over the last 50 years is given, even if the one huge bump they had took more than 20 years to fix. https://tradingeconomics.com/switzerland/housing-index
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Old 17.06.2019, 13:48
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Re: investing in real estate vs buying property

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Long story short:
The increased return can be fully explained by the leverage used.
thanks a lot for the long story, appreciate the detailed explanation.

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But you seem to ignore the risks:

Once prices fall, whenever that will happen, the increased leverage will result in significantly higher percentage of equity lost for your ownership via CrowdHouse, that's obvious and certain.
if you stick to your own explanation, the question was whether to buy your own home or to buy-to-rent in smaller bits. With buying your own, you don't just expose yourself to a much bigger slice of financial commitment, but you also increase your leverage to 4:1 as you've rightly put. The risk exposure with C.H. is apparently much less in both capital and financial commitment.

The general risk of the real estate market is there in both ways. But it's there also if I rent, if I own, or if I own-to-rent, isn't it?

What would worry me, is if we assume(!) that the C.H. model is stable, and the market would not move significantly in any direction over time, is it more desirable to own your home or to chip in like this into a co-owning model and generate revenue (thus, taxable income) there.

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you're probably liable for the full amount of the mortgage, not just your initial equity or a part of the mortgage that's proportionate to your ownership of the property.

This is caused by the fact that you're listed in the land registry as co-owner (as claimed by CrowdHouse, something that would need to be verified). While that's desirable, it also increases your risk. If you're "Solidarschuldner", and you probably are, each owner of a portioin of the property is by default liable for the full mortgage amount. If the mortgage provider comes after you alone, that's their judgment call, you may have to pay 100% of the outstanding credit whereupon you will have to chase the money from all other co-owners individually, in a long-winding process with unclear outcome - the only certainty is that this would cost lots of money in lawyer fees alone, money that may be unrecoverable.
Thanks again for pointing this out. Question is, why would the bank go after a single owner with a claim that is clearly unrealistic by that owner? If I were a bank I'd go after the person who owns the biggest slice or just cite all involved parties to court and file a single case against multiple defendants.

Once again, this only happens if the 40% starting capital is eroded by massive price drops that I personally don't foresee happening in the next 5-10 years. Do you?
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Old 17.06.2019, 13:51
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Re: investing in real estate vs buying property

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you lose the investment only if you cash it out. nevertheless, dropping prices are always a risk in real estate. I didn't really get your point with the 20% loss couples to 50% loss on investment.

Do you think that 20% loss on RE prices is a reasonable scenario in Switzerland with the whole country ticking on mortgages?

my train of thought goes like this:
- CrowdHouse is interested to keep their properties (and user base) permanent as they are living off property management. Without customers there is nothing to manage so they'll go bust
- if rates hike significantly, which mean real estete prices will also drop significantly, that also means the rents will be raised to provide better leverage on the tenants
- in this case the co-owners can just keep their property bits and keep renting until "prices have stabilized" (right, if ever)
- you can have a drop-out after 5 years, but it's not mandatory of course.

Looking at the Swiss market, a steady increase in real estate prices over the last 50 years is given, even if the one huge bump they had took more than 20 years to fix. https://tradingeconomics.com/switzerland/housing-index
If Prices fall the Bank will make a cash call ir will not refinance at the 5 year point, property will be sold under the hammer.

Being salaries do not rise 6% a year, probably nearer 0.7% on average then I would expect rents to rise at a lower amount. The base mortgage referred to in my lease was 3.75% it will be a long time before the landlord could raise rents due to higher rates.

You are forgetting substantial falls in real estate in 1989, it took 20 years for prices to reach the 1989 levels again, so it's really not a given that property prices will rise, especially if interest rates return to normal rates. The interest rates since 2009 are not 'normal' even through you believe they are.
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Old 17.06.2019, 13:56
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Re: investing in real estate vs buying property

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you lose the investment only if you cash it out. nevertheless, dropping prices are always a risk in real estate. I didn't really get your point with the 20% loss couples to 50% loss on investment.
Lets say:

House worth 1.000.000,-
mortgage 600.000,-
investment 400.000,-

House loses 20% in value, which gives

House worth 800.000,-
mortgage 600.000,-
investment 400.000,-

Net result: 50% loss on investment.

This is besides interest, rent, maintenance, taxes etc...
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Old 17.06.2019, 14:01
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Re: investing in real estate vs buying property

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If Prices fall the Bank will make a cash call ir will not refinance at the 5 year point, property will be sold under the hammer.

Being salaries do not rise 6% a year, probably nearer 0.7% on average then I would expect rents to rise at a lower amount. The base mortgage referred to in my lease was 3.75% it will be a long time before the landlord could raise rents due to higher rates.

You are forgetting substantial falls in real estate in 1989, it took 20 years for prices to reach the 1989 levels again, so it's really not a given that property prices will rise, especially if interest rates return to normal rates. The interest rates since 2009 are not 'normal' even through you believe they are.
if your reference index is 3.75% you are overpaying your rent for quite some years.

I'm attaching the 50-yr chart of the housing market. We are on the higher end of the scale, but it doesn't seem to compare to '89 levels to me (plus there is no cold war, the Soviet Union is not going to just rupture, etc...).

But again, the question was not if prices could or could not fall, because they probably will plateau out or even decrease. The question is rent vs own vs co-own.
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Old 17.06.2019, 14:09
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Re: investing in real estate vs buying property

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if your reference index is 3.75% you are overpaying your rent for quite some years.

I'm attaching the 50-yr chart of the housing market. We are on the higher end of the scale, but it doesn't seem to compare to '89 levels to me (plus there is no cold war, the Soviet Union is not going to just rupture, etc...).

But again, the question was not if prices could or could not fall, because they probably will plateau out or even decrease. The question is rent vs own vs co-own.
Probably not, which is why I never asked for a recalculation as my rent would likely increase by 80% with a lower reference index.

Your graph show under 1% compound since 1989, you need to rethink
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Old 17.06.2019, 14:11
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Re: investing in real estate vs buying property

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Lets say:

House worth 1.000.000,-
mortgage 600.000,-
investment 400.000,-

House loses 20% in value, which gives

House worth 800.000,-
mortgage 600.000,-
investment 400.000,-

Net result: 50% loss on investment.

This is besides interest, rent, maintenance, taxes etc...

Has property actualy fallen by 20% in Switzerland ever ?


It may drop a bit, maybe 10% as happened back in the mid 90's but it climbs back up again.


The main problem with property is it is not really a very liquid asset and you maybe forced to sell at a time that is not good for you....
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