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Old 24.06.2017, 01:53
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Parametric Analysis of Rent v. Buy

I’m heading to Basel City from the US in a couple months and am weighing whether I should purchase or rent an apartment. I created a moderately detailed spreadsheet to parametrically analyze the financials of the decision. I’m sharing it here to get thoughts from forum members on whether I missed any important taxes / fees, if my assumptions are a reasonable, and in case someone else finds this useful.

The metric I’m using to assess the decision is “Return on Downpayment Investment per Year”, such that I can compare investment performance to alternative investments (e.g. average S&P 500 return over the last 70 years is 7%). At the bottom of the spreadsheet there are plots looking at the Downpayment ROI per year vs Years Owned, vs Appreciation %, vs Mortgage Interest %, and vs Comparison Monthly Rent.

It’s a google sheet, before you go around modifying the parameters (in the blue boxes), be sure to create your own copy of the sheet first. Go to File > Make a Copy > OK (if someone screws it up, I have a backup)

https://docs.google.com/spreadsheets...it?usp=sharing

The input parameters are below, they can all be directly modified. The taxes and fees I’ve assigned are for Basel Stadt. Use whatever currency you want, just be consistent.
  • Apartment Cost - 645,000
  • Downpayment % - 20.00%
  • Mortgage interest rate [%] - 1.00%
  • Years to 33% Ownership (sets the amortization rate) - 15
  • Years living in Property - 3
  • Years of Property Ownership - 10
  • Notary fee - 0.40%
  • Property Transfer Tax Part 1 - 1.50%
  • Property Transfer Tax Part 2 - 1.50%
  • Land Registration Fees - 0.10%
  • Property tax (none in Basel Stadt) - 0.00%
  • Tax Changes with Property Purchase (e.g. interest deduction) - -4,000
  • Management Fees per year - 0
  • Maintenance Costs per year - 5,000
  • Utilities per year - 3,000
  • Building Insurance per year - 500
  • Household Insurance per year - 300
  • Appreciation per year - 3.00%
  • Property Transfer Tax at Sale - 1.50%
  • Property Gains Tax [%] - 30
  • Real Estate Fees (% of save value) - 4.00%
  • Comparison Rent including fees and utilities per month - 2100
  • Rent rate increase per year [%] - 1.5%
  • Total Property Management Fees (% of gross rental income) -5.0%
  • Taxes on Rental Income - 15.0%

Let me know if you see any mistakes, I'm certain I made some. I'm neither an accountant nor a Swiss real estate wiz. If something isn't clear, feel free to ask.

P.S. The Property Transfer Tax Part 1 and Part 2 is Basel Stadt specific (it might apply to some other Kantons as well?). As explained by a local notary: If the purchased property is your primary residence you'll pay half of the Property Transfer Tax (part 1) upfront. If you live there for 6 years then the other half of Property Transfer Tax (part 2) is waived. If you move out before 6 years, you'll be responsible for the 2nd half of the tax.
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Old 24.06.2017, 02:19
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Re: Parametric Analysis of Rent v. Buy

Wow! Here's someone who takes this much trouble and then both invites criticism humbly and freely offers the work to anyone else who'd like to use it.
I like you already.

I hope others who know more about property will be along soon, to comment on your spreadsheet.
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Old 24.06.2017, 05:20
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Re: Parametric Analysis of Rent v. Buy

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The metric I’m using to assess the decision is “Return on Downpayment Investment per Year”
NPV / IRR is a more principled approach to analyze this as there are rather large additional cash flows spread out over many years

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[*]Tax Changes with Property Purchase (e.g. interest deduction) - -4,000[*]Taxes on Rental Income - 15.0%
Totally depends on how highly taxed you are. 30-40% marginal tax rate is entirely possible for a reasonably good paying job in Switzerland alone, not to mention uncle sam taxes that you'll be paying.

And you'll need to pay swiss taxes on fictional rental income (~50-70% of market rent) even if you don't rent out the house. Amounts can be comparable to mortgage expenses. It sort of substitues property taxes which otherwise don't officially exist in most cantons

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[*]Household Insurance per year - 300
You'll pay it regardless whether you buy or rent

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[*]Appreciation per year - 3.00%
Unrealistic. House prices have been fueled for a decade or so by low interest rates and easy money, but the tide may turn direction any time. Swiss multifamily house prices are already declining. Fed's to start schrinking its balance sheet later this year and ECB, while still intending to print money like crazy, omitted a reference about lowering rates in recent guidance statement... If rates stay about the same, i'd expect appreciation not much above the inflation rate, 0-0.5%

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[*]Rent rate increase per year [%] - 1.5%
Probably will be zero or even negative in near future. Current swiss rental reference rate is at 1.5% and needs to catch up to market mortgage rates or the rates needs to rise enough before we'll see any increases.

Last edited by ivank; 24.06.2017 at 07:57.
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Old 24.06.2017, 07:42
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Re: Parametric Analysis of Rent v. Buy

This all makes sense and was exactly the type insight I was looking for. Thank, I appreciate the feedback.
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Old 24.06.2017, 08:01
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Re: Parametric Analysis of Rent v. Buy

And keep in mind that the market is slow so often you will not have a quick sale (when you move back, that is)
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Old 24.06.2017, 09:07
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Re: Parametric Analysis of Rent v. Buy

As a "new" American here, you may find it very difficult to find a mortgage so quickly, they may also demand far more than 20% down payment.

Buying and selling here is not so easy as elsewhere.

I would rent first, see whether you actually like Switzerland and see if the Swiss actually like you. take time to look around before you buy and get to know which area you would like to live in, then maybe buy.

Depends how long you will be here too

Not always best to judge by your own standards, money is not everything and if you buy in haste you are almost certain to lose far more than you can ever gain.
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Old 24.06.2017, 09:53
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Re: Parametric Analysis of Rent v. Buy

I get the feeling that people who try to calculate things to the "Nth" degree tenf to come off the rails when things inevitably go wrong, just ask the military; "the first casualty of war is the grand plan"
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Old 24.06.2017, 10:13
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Re: Parametric Analysis of Rent v. Buy

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And keep in mind that the market is slow so often you will not have a quick sale (when you move back, that is)
Although that does depend upon price and location somewhat.
We know we can find a buyer relatively quickly and get a reasonable price for our flat.
Our neighbour moved into an old people's home and her flat (practically identical to ours) had a buyer after just 3 days of it being advertised online. Another flat (owner deceased) in an adjoining block was bought up by the same buyer. We then discovered (via the minutes from the Eigentümerversammlung) that it was an investment company snapping them up, they actually bought 4 within a year.

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Buying and selling here is not so easy as elsewhere.

I would rent first
I did not find buying difficult. I think selling and rebuying is going to be a bit more stressful though.

As for renting, most people do rent first, yes. But why wait to get onto the property ladder if you have the 20% available? Pointless!
We did not wait and are pleased with the decision. Carrying on renting is only throwing away money long-term and does not make sense.
It's rarely the case that you can't get back what you paid for a flat in CH. Plus whilst you have been an owner-occupier you have not paid any rent and so are getting your money back out again ready to reinvest.

True, you might say 'but there's the capital gains tax to consider'. Alright, there is. And? Firstly if you purchase again in CH within 2 years (this may vary, check with your canton) of your last sale then you don't have to pay it. Secondly, anything you have invested in the property can be deducted from the amount due anyway, so even if you don't repurchase in CH, you can still reduce the amount of capital gains tax due.
We have calculated that we will still be in profit even if we sell and do not repurchase in CH and pay the capital gains tax for example! And this simply because we have not only invested in the property in the meantime, but also because prices have risen.

Last edited by koblenz; 24.06.2017 at 10:59.
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Old 24.06.2017, 10:18
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Re: Parametric Analysis of Rent v. Buy

At 645k for the apartment in Basel that could be anything from best buy of the century to worst decision ever, so with out details it is impossible to comment sensibly on the resale possibilities.

If you are new to Switzerland then in my opinion it would be sensible to see if the country fits and where you would like to live which is very difficult to determine by a visit or a short stay. Renting for a year and then buying is not throwing money away, but making a wise decision based on knowledge.
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Old 24.06.2017, 11:01
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Re: Parametric Analysis of Rent v. Buy

While my experience has been that buying was far sounder move from a financial perspective, do keep in mind the intangibles.

The market here (SZ) is largely illiquid. If you do not know the neighborhoods and your neighbors you could end up in a bad situation that could be very expensive to remedy. Neighbors have a significant power over your ability to use your property here, something those coming from places where 'my home is my castle' is the norm might not expect. Getting out of a bad situation when you own the property can be expensive - and take a long time. A bad situation takes a huge toll on your whole experience of Switzerland - do not underestimate this.

(Been there, done that by buying next to the wrong neighbors... it's been extremely painful, both financially and more importantly in terms of our quality of life here.)

Far better to rent first, get to know the area, make buying decisions from first hand knowledge.

Besides - what you think you want now may change radically once you start to live 'the Swiss way'.


Also factor into your calculations the chunk Uncle Sam may take out of any profit from the sale of your house. The IRS sees sales of foreign property not only as a property transaction but also as a currency exchange. Depending on the movement of the franc while you own, you could be in for a surprise.

ETA:

Don't forget the anti-speculation penalty that is added to capital gains tax on sales occurring within X years of purchase. 'X', and the rate, varies by canton.


---

Ultimately - yes, buying makes sense for many people. But not until you have lived here a while, had a chance to understand the intangibles.


Good luck with the move.

Last edited by meloncollie; 24.06.2017 at 16:17.
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Old 24.06.2017, 11:20
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Re: Parametric Analysis of Rent v. Buy

  • Mortgage interest rate [%] - 1.00% (future renewal rate?)
  • Notional rent subject to tax - 2.00%
  • Maintenance Costs per year - 1%
  • Utilities per year - same for renting
  • Appreciation per year - 0.00%
  • Comparison Rent including fees and utilities per month - 1600 (2%-3%)
  • Rent rate increase per year [%] - 0%
  • Taxes on Rental Income - at your marginal rate. does withholding tax apply when non-resident?
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Old 24.06.2017, 12:27
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Re: Parametric Analysis of Rent v. Buy

I think it is excellent when immigrants do their homework thoroughly before they leave their home country. Many do not, and end up much more confused by the new country's systems than they need have been.

Even so, I think Slammer's point is worth bearing in mind.
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I get the feeling that people who try to calculate things to the "Nth" degree tenf to come off the rails when things inevitably go wrong, just ask the military; "the first casualty of war is the grand plan"
Whatever you research and calculate, there will always be some factors which you forget, or couldn't know about, and which those trying to answer your questions will overlook, or not realise you need.

Changing country is best done when one is prepared to face the fact that, no matter how much you've planned, some things about Here are going to be very different from There. If you're happy with that, you'll be able to apply your reserach selectively, once you're here.

Last edited by doropfiz; 24.06.2017 at 12:46. Reason: typo
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Old 24.06.2017, 13:05
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Re: Parametric Analysis of Rent v. Buy

plus, you're not realistically going to buy before you rent anyway. you'll rent stay here a bit, learn the lay of the land at the same time look for buying opportunities.

looking to buy without having spent any time on the ground is asking to make a huge financial mistake. Don't forget, we're not in a non-recourse utopia - you can run up huge debts that you can't walk away from.
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Old 24.06.2017, 13:18
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Re: Parametric Analysis of Rent v. Buy

If you are American you will not likely get a 1% interest rate and the longer the mortgage the higher is goes.

You're looking more like 1.5% or a a bit more.

Not that that's going to be the deal breaker.
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Old 24.06.2017, 14:21
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Re: Parametric Analysis of Rent v. Buy

Lots of excellent feedback.

In my mind it's illogical to assume for rents to rise 1.5% vs house price by 3% as that implies a falling return for ownership/rent out. In the (very) long run, and based on net unchanged interest rate levels, the two will move roughly the same, be that up or down.

What's misisng is the cost of a poor decision. If you look around the forum you can't miss those who's purchase caused lots of trouble, and just as importantly who overpaid for a multiple of reasons.

Not being familiar with the country, prices in the area, laws and regulations, customs, as well as the people you're dealing with, you're prone to overpay. Just like someone used to Basel city prices is prone to overpay if he buys in the countryside. In an unknown market you'll be the rookie regardles of your age and experience abroad. Although, considering your approach, you may already be aware of that and have the mindset to bypass these pitfalls.

Add the possibility of a poor decision in and of itself and you may be well advised to write off 5-10-15% upon signing the deal. Wanting to sell fairly quickly afterwards, for whatever reason, can easily make a price difference of 10% alone.
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Old 24.06.2017, 15:08
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This all makes sense and was exactly the type insight I was looking for. Thank, I appreciate the feedback.
Maintenance costs shall be 1%/year. That's the rule of thumb that pretty much everyone that deals with real estate financing or investing uses.

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I get the feeling that people who try to calculate things to the "Nth" degree tenf to come off the rails when things inevitably go wrong, just ask the military; "the first casualty of war is the grand plan"
Not really... You can do a sensitivity analysis on a real estate excel like that one from the OP and have a good range of certainty.

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As for renting, most people do rent first, yes. But why wait to get onto the property ladder if you have the 20% available? Pointless!
We did not wait and are pleased with the decision. Carrying on renting is only throwing away money long-term and does not make sense.
Not true. If you invest wisely "your 20%" plus the difference between the mortgage payments and the rent, you can have a considerably higher net worth in a long period (+10 years).

Last edited by 3Wishes; 28.06.2017 at 22:03. Reason: merging consecutive replies; please use multi-quote (to the right of quote)
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Old 24.06.2017, 15:32
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Re: Parametric Analysis of Rent v. Buy

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Not true. If you invest wisely "your 20%" plus the difference between the mortgage payments and the rent, you can have a considerably higher net worth in a long period (+10 years).
But only if you are able to invest wisely, if you know what you are doing and if things go as planned and hoped with that investments. It won't always come out that way... I think it also depends on the amounts involved.

I'd rather have more say in the way I live by being an owner-occupier rather than stuck with some rental contract where you have fewer rights, but of course that is another matter.
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Old 24.06.2017, 16:19
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Re: Parametric Analysis of Rent v. Buy

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I'd rather have more say in the way I live by being an owner-occupier rather than stuck with some rental contract where you have fewer rights, but of course that is another matter.
If you are leveraged - that is you have a mortgage - then you could say that you are exposed to considerably more risk than being "stuck with some rental contract". Note that if you have enough cash to fully capitalize your loan in case of issues, that's fine, but the vast majority of people don't. Unless you can buy the roof above your head outright, do not make the mistake of believing that you are somehow in control or better off than renting, particularly if you don't do the research OP did. Furthermore, saying something like: "Oh we bought a property as soon as we had the cash and it worked really well for us", is unhelpful because we don't know your precise circumstances, you are one data point (which is *ehm* difficult to extrapolate), and there is no guarantee that your story is truthful (I'm not making any accusations).

The OP did it correctly and they get two thumbs up from me. They did the analysis to the best of their ability. I believe any attempt at a making an informed decision is better than firing blind. It is impossible to cover every edge case and produce a foolproof plan, but it is possible to minimize the risk of a bad decision. This stuff should be taught in high school. Think about opportunity costs before making big decisions, just because something looks better intuitively, it doesn't mean that it actually is better.

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But only if you are able to invest wisely, if you know what you are doing and if things go as planned and hoped with that investments. It won't always come out that way... I think it also depends on the amounts involved.
This can be said about anything and everything. You can just as well make an unwise decision with property as with anything else. The proper way is to compare the options. Unless you have done the analysis, you have no evidence either way. It is a highly personal thing, some people prefer the "feeling" of owning their own home, and even if they'd be better off investing the cash into something else, they don't want to do it.
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Old 24.06.2017, 16:21
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Re: Parametric Analysis of Rent v. Buy

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Not really... You can do a sensitivity analysis on a real estate excel like that one from the OP and have a good range of certainty.
Still, it´s like throwing the chicken bones, and what if your sensitivity analysis thingy gets it wrong and you are in country trying to figure out where it went pear-shaped, you can look at the numbers in the analysis all day till the cows come home, it ain´t gonna get you prepared for the reality.
All the same it is nice to have at least some form of guide line, just don´t lose your head when or if it crashes.
Apart from that; no risk, no fun.
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Old 24.06.2017, 17:15
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Re: Parametric Analysis of Rent v. Buy

OP, you sound like you are really wanting to buy, but since it is unlikely that you would be able to do it right away, as soon as you arrive, you are, in fact, likely to rent first, at least for some months or so, while you are looking for property to buy.

I'd advise you to be very sure you understand the German of any rental contract.
I write this specifically because others have mentioned being "stuck with a rental contract", and you need to understand what that can mean, in the Swiss context.

Some tenants sign contracts with a fixed duration of, say, a year.
More usual, though, is an ongoing contract with a notice period of several months, sometimes permitted only on some few specified dates per year. The only way to get out of that is to supply the landlord with equivalent tenants who are willing to take over the rental contract.

Having said that, there is a shortage of accommodation, so you are fairly likely to be able to find replacement tenants when you want to leave. That is, unless you have rented someting totally awful or with an exhorbitant rent (for what the property is).
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