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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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