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-   -   Raising of maximum allowable ROI on rental property from 0.5 to 2% (https://www.englishforum.ch/finance-banking-taxation/301355-raising-maximum-allowable-roi-rental-property-0-5-2-a.html)

EPMike 22.11.2020 12:06

Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
According to a recent decision of the Swiss Federal Court, the allowable net ROI on rental property has been increased from 0.5% to 2% above the reference mortgage rate (now 1.25%)

as an example: the maximum allowable net ROI of a 1mil apartment has been raised from 17'500CHF to 32'500CHF per year. Which after the generous allowable deductions and Nebenkosten might mean a rate of maybe 45'000 CHF for a 1Mil apt.

I wonder, will this decision have any effect on the rents, after all - as discussed on this forum already - the rental return is very low in Switzerland as compared to other countries - of course the prices are high.

http://relevancy.bger.ch/php/aza/htt...20-4A_554-2019

newtoswitz 22.11.2020 12:21

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Looking at it from a purely business viewpoint, the logic makes sense - nowhere else would you be able to rent an item for 1.75% of its value. But housing is a bit different due to the limited supply, so competition is limited and you could argue it isn't a normal market so pure market rates can't apply.

I can't see how it could be implemented without causing chaos if lots of landlords suddenly try to put rates up that much.

Also perhaps this impact is only because property prices are too high, but the result of this decision is likely to just be even higher prices!

fatmanfilms 22.11.2020 16:11

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by newtoswitz (Post 3241658)
Looking at it from a purely business viewpoint, the logic makes sense - nowhere else would you be able to rent an item for 1.75% of its value. But housing is a bit different due to the limited supply, so competition is limited and you could argue it isn't a normal market so pure market rates can't apply.

I can't see how it could be implemented without causing chaos if lots of landlords suddenly try to put rates up that much.

Also perhaps this impact is only because property prices are too high, but the result of this decision is likely to just be even higher prices!

London rents have an appalling net ROI, probably sub 2% but then prices may fall significantly.

It's probably to allow capital values to fall, rather than anything else, most people pay as much as they can in Rent already.

EPMike 23.11.2020 08:12

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by newtoswitz (Post 3241658)
Looking at it from a purely business viewpoint, the logic makes sense - nowhere else would you be able to rent an item for 1.75% of its value. But housing is a bit different due to the limited supply, so competition is limited and you could argue it isn't a normal market so pure market rates can't apply.

I can't see how it could be implemented without causing chaos if lots of landlords suddenly try to put rates up that much.

Also perhaps this impact is only because property prices are too high, but the result of this decision is likely to just be even higher prices!

Indeed, the mere fact that mortgages don't need to be repaid maket it already quite a distorted market. Looking at the ROI on invested capital (vs. purchase price) gives a much better picture, albeit with a 3-4x leverage.

Quote:

Originally Posted by fatmanfilms (Post 3241727)
London rents have an appalling net ROI, probably sub 2% but then prices may fall significantly.

It's probably to allow capital values to fall, rather than anything else, most people pay as much as they can in Rent already.

I am not sure the current decision would affect purchase prices (if that is what you meant by "allowing capital values to fall").

Phil_MCR 23.11.2020 09:02

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
prices are high because rates are low. bond yields are negative and alternative investments are also already at high prices.

since you can lock in rates for 10 years or more, you can calculate the profit from the spread and discount it back and subtract this from the purchase price to give an adjusted price net of the implicit saving from low interest rates.

It's probably still high because I suspect buyers are doing a similar calculation assuming rates stay low forever.

If rates stay low for 25 years, then you can have the mortgage paid off and re-couped your initial investment within that time (or less if you buy at a more reasonable price).

HickvonFrick 23.11.2020 16:22

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by fatmanfilms (Post 3241727)
London rents have an appalling net ROI, probably sub 2% but then prices may fall significantly.

It's probably to allow capital values to fall, rather than anything else, most people pay as much as they can in Rent already.

My property and my wifes combined comes to about 650k. Our net monthly rental income minus service charges is around 3000.

So for us closer to 5% than 2%.

fatmanfilms 23.11.2020 16:26

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by HickvonFrick (Post 3242079)
My property and my wifes combined comes to about 650k. Our net monthly rental income minus service charges is around 3000.

So for us closer to 5% than 2%.

Whats the area? Zone 1/2/3 or within M25, hard pressed to get anything close to that in Central London.

My parents house in Highgate N6 was not even in London in 1961, it says Middlesex on the deeds!

HickvonFrick 23.11.2020 16:42

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by fatmanfilms (Post 3242081)
Whats the area? Zone 1/2/3 or within M25, hard pressed to get anything close to that in Central London.

My parents house in Highgate N6 was not even in London in 1961, it says Middlesex on the deeds!

Hers is in Westferry - 5 minutes walk north of canary wharf. Zone 2

Mine is half way between East Putney and Southfields tube stations. Zone 2/3.

Have to say FMF - I never had you down as an Highgate type :p - proper muesli belt territory!

I presume the house is in Haringey given that it was outside London in 1961 - most of Highgate (Camden and Islington bits) would have been in London much earlier than 1961.

fatmanfilms 23.11.2020 16:51

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by HickvonFrick (Post 3242092)
Hers is in Westferry - 5 minutes walk north of canary wharf. Zone 2

Mine is half way between East Putney and Southfields tube stations. Zone 2/3.

Have to say FMF - I never had you down as an Highgate type :p - proper muesli belt territory!

I presume the house is in Haringey given that it was outside London in 1961 - most of Highgate (Camden and Islington bits) would have been in London much earlier than 1961.

Yes in Harringay, I think the cut off point was probably 'The Gate House', which is now a pub. Looks like it became part of Greater London in the 1960's.
Highgate was where I was born, my first flat was in Blomfield Rd W9, Second flat in Kensington Gardens Square W2 so Zone 1 & first stop in Zone 2.

HickvonFrick 23.11.2020 16:58

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by fatmanfilms (Post 3242100)
Yes in Harringay, I think the cut off point was probably 'The Gate House', which is now a pub. Looks like it became part of Greater London in the 1960's.
Highgate was where I was born, my first flat was in Blomfield Rd W9, Second flat in Kensington Gardens Square W2 so Zone 1 & first stop in Zone 2.

Dread to think how much flat 2 would cost now.

My wife spent her teenage years in Bayswater - Lancaster Gate (the street)

fatmanfilms 23.11.2020 17:14

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by HickvonFrick (Post 3242103)
Dread to think how much flat 2 would cost now.

My wife spent her teenage years in Bayswater - Lancaster Gate (the street)

My first time purchase aged 21 cost 40k, I paid above the asking price, sold it 18 months later for 95k. I had done sone DIY upgrades. Mouseprice values at 880,000 The second (a duplex) is valued by mouse price 1,610,000. Had I not come to Switzerland the mortgage would have been paid off in 2010! My entire stock portfolio would also be in ISA's as well so zero tax liability!

Edit
To put price changes into perspective I don't think I ever paid less than 11.5% mortgage rate, the highest being 17%. Fixed rates were very unusual, until 25 years @ 9.9% was offered that appeared to be a bargain!

Phil_MCR 23.11.2020 19:32

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Biggest regret re: property was not selling my London property at the top of the market. I got the agents in etc. and was looking to sell since the market was at the top, but in the end, I didn't have anything in mind to put the money into (I wasn't investing so heavily into share back then) and the property was cashflowing well and tax-advantaged so in the end, I didn't go through with it.

That was before Brexit and the huge drop in GBP on top of the overall weakening market. On top of that, a couple years later, the roof leaked and had pay for those costs and related hassles.

CPDM 29.11.2020 18:39

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
switching back to Switzerland - does it make sense to invest in rental property here in Switzerland?
my quick insights so far : bank will need your own equity of say 25% to even 30%
you can not bring your 2nd or 3rd pillar chf for this

so wondering for example for a property of 850k , with potential rent 2200 chf/month would it even make a reasonable investment? (considering no major renovations in the coming 5 yrs at least... and assuming other (if any) criteria as normal... at least not extremely odd

newtoswitz 29.11.2020 18:47

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by CPDM (Post 3244356)
switching back to Switzerland - does it make sense to invest in rental property here in Switzerland?
my quick insights so far : bank will need your own equity of say 25% to even 30%
you can not bring your 2nd or 3rd pillar chf for this

so wondering for example for a property of 850k , with potential rent 2200 chf/month would it even make a reasonable investment? (considering no major renovations in the coming 5 yrs at least... and assuming other (if any) criteria as normal... at least not extremely odd

250k deposit and 600k mortgage @ 1%

assume maintenance costs of say 8k per year

--> costs = 14k per year

--> rent = 26k per year

--> 12k / year return on 250k + growth in property value

So without property value increase, a fairly poor investment. You can work backwards from what growth you think is reasonable to see what the property growth has to offer to make it a good investment.

You could also make some assumptions like reducing the costs or increasing the rent - which increases your risk.

Dandy 30.11.2020 13:24

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
4.8% pa - a poor investment ?? :confused:

HickvonFrick 30.11.2020 13:42

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by Dandy (Post 3244597)
4.8% pa - a poor investment ?? :confused:

As it's leveraged and thus high risk and an administrative nightmare I'd say yes it is quite poor.

Phil_MCR 30.11.2020 14:56

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by Dandy (Post 3244597)
4.8% pa - a poor investment ?? :confused:

unleveraged it is only 12/850 = 1.41% return

newtoswitz 30.11.2020 15:11

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by Dandy (Post 3244597)
4.8% pa - a poor investment ?? :confused:

SMI over the last thirty years grew at ~6% p.a. on average.

An investment with 4x leverage and zero diversification returning less than that doesn't look good.

Dandy 30.11.2020 17:30

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by newtoswitz (Post 3244643)
SMI over the last thirty years grew at ~6% p.a. on average.


that is 6% on CHF, inflation exposed central bank money


4.8% is on inflation protected real estate.



At least CHF is a "hard" currency whereas GBP has a fall in value like a third world currency

Phil_MCR 30.11.2020 17:36

Re: Raising of maximum allowable ROI on rental property from 0.5 to 2%
 
Quote:

Originally Posted by Dandy (Post 3244696)
that is 6% on CHF, inflation exposed central bank money


4.8% is on inflation protected real estate.



At least CHF is a "hard" currency whereas GBP has a fall in value like a third world currency

inflation and deflation exposed.

it's important to remember that the mortgage is also exposed to inflation/deflation of chf.

with a long term trend of lower interest rates, i wonder whether a scenario will arrive to remind people of the dangers of holding debt during deflationary environments.


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