Purchasing a home usually represents a significant milestone in a person’s life, even more so when the purpose is for renting it out. After diligently accumulating your savings for several years, you’re finally ready to embark on this journey. But are you? Before you take the plunge, we recommend that you keep reading. After all, acquiring a home will probably be one of the biggest investments you will ever make.
“Success occurs when opportunity meets preparation.” — Zig Ziglar
“Risk comes from not knowing what you are doing.” — Warren Buffett
Why do you want to buy a house? Is it primarily an investment or do you intend to actually live there?
Owning and living in your own home imparts a profound sense of security. Your home becomes your sanctuary and castle, a place where you can feel safe.
Nonetheless, from an investment standpoint, it may not be a logical choice. When a house serves as your residence, it doesn’t generate income. As Robert G. Allen once said, “In todays uncertain economy, the safest solution to be wealthy, be in total control and enjoy freedom for you and your family is to have multiple streams of income”, which is what you cut by foregoing this passive income source.
When looking to invest in real estate, the time horizon is the second most important thing to consider. If you are looking for a short to medium-term return, real estate is probably not for you. Indeed, it can take months or even years for a real estate investment to become cash flow positive. Moreover, capital appreciation follows a non-linear trajectory and requires patience.
“If you buy for a short period of time, when you factor in all costs, you will almost certainly lose money.” — Ramit Sethi, How to get rich
Notary fees, property transfer fees, real estate acquisition taxes, realtor costs, bank fees, utility fees, repairs, furniture, and moving services are some of the expenses that may not be expressly hidden, yet they often go overlooked when finalizing a deal or arranging a loan.
You can expect to pay about 5% of the property value for fees and charges, including property transfer tax. For instance, if the value of your house is CHF 1’000’000, you can expect to pay an additional CHF 50’000 in fees. Therefore, when assessing what you can afford, make sure you meticulously incorporate these costs into your calculations.
You’ve probably heard over a thousand times the saying that “paying rent makes your landlord rich.” However, what most people don’t realize is that with a loan, you are making your bank rich. This stems from the substantial amount of interest you end up paying over time, applicable to both the non-amortized and amortized portions of your mortgage.
To illustrate this in a simple way, let’s focus on the amortized part of a mortgage, as it includes a fixed payment period. In Switzerland, the amortized or second part of the mortgage represents 15% of the property value which needs to be repaid within 15 years. So, if you had a loan for CHF 800’000 (80% of 1’000’000, deducting the first contribution of 20%), the amortized part of the loan would be CHF 150’000 (15% of 1’000’000). With an assumed interest rate of 2%, your total monthly interest costs would be CHF 2’166 ultimately ending up paying over CHF 389’000 in interest. In the case of a 3% interest rate, the total monthly interest costs would be CHF 2’833, and the interest paid would increase to nearly CHF 510’000.
In an environment where inflation is still high, and interest rates may still go up, the impact of different interest rates is an important factor to think about. Additionally, when considering the non-amortized portion of your mortgage, it is crucial to assess the advantages of tax deductibility against how much interest you will be paying your bank over time. The key here is to minimize the amount allocated to both the bank and the tax authorities.
Houses are called a “money pit” for good reasons, as the expenses associated with maintenance and unforeseen repairs often surpass initial expectations. Contrary to popular belief, older properties do not necessarily entail higher maintenance and repair costs than newer properties.
As a matter of fact, newer properties often imply a settling down period that extends beyond their warranty period. Furthermore, purchasing advanced climate systems or state-of-the-art kitchen appliances can lead to significant maintenance and repair expenses.
In addition to the financial implications, the time cost that comes with maintenance and repairs should also be taken into account. Very few of us work in the building industry and have a ready-to-use network of trusted building and maintenance professionals on hand. Merely finding an available and reasonably priced plumber can consume hours of your time, not to mention that ensuring the quality of their work is a whole other task in itself.
To mitigate both the financial and time costs, make sure you conduct thorough due diligence on a property before you purchase it. Also, engage with local property investor groups and establish connections with people who have already invested in the area. This can provide you with valuable insights and recommendations for trustworthy professionals.
Many investors fail to recognize that investing in a property requires a certain understanding of human psychology. Although some tenants prove to be ideal, causing no damage and making reasonable requests while consistently paying rent on time, this is not always the case. On the other end of the spectrum are tenants who may vandalize your property and refuse to vacate. While you may have the patience to deal with your tenants on your own, many people choose to delegate this responsibility to realtors for professional management. Of course, as is the case with all things, this comes at a cost.
Traditional real estate investment often implies a substantial capital commitment over an extended period of time. Even if you borrow a significant portion of the property's value, your deposit, mortgage payments, and accumulated equity carry an opportunity cost. If your capital is all tied up in your property, it becomes unavailable for investment elsewhere, limiting your ability to generate returns. Unavailable capital may also mean needing to cancel your yearly family vacation or giving up on the idea of a new car in the foreseeable future.
Even when you live in your home, the anticipation of making a profit upon selling the property in the future is a common expectation. This is based on the assumption that property prices will increase over time, ideally outpacing the rate of inflation.
However, it is essential to recognize that while house prices generally rise over time, capital appreciation is not always linear and can experience periods of negative or slow growth.
On top of that, real estate markets demonstrate varying growth rates across countries and cities. A house bought in Sydney or Zurich 30 years ago will have a very different return than a house bought in Detroit or Tokyo during the same period. The chart below illustrates the differences even within well-performing real estate markets such as Australia, Canada, and Switzerland.
Real residential property prices for Switzerland, Canada, and Australia (2010=100)
Source: Federal Reserve Bank of St. Louis
If you have reached this point in the article and feel disheartened about investing in traditional real estate, let us introduce you to an alternative approach that addresses many of the concerns mentioned above.
At Le Bijou, we offer investors the opportunity to invest in high-quality Swiss real estate located in Zurich and Bern, with a minimum investment of as little as CHF 25’000 and returns ranging from 10% to 22% per year.
We carefully select prime locations and create tech-enabled apartments that generate consistent cash flows throughout the year from various income sources. Our properties cater to hotel guests, high-margin long-term tenants, and esteemed corporate executives. We also handle all marketing, tenant management, and maintenance responsibilities on your behalf.
We provide you with the ability to invest in a top real estate market without the interest cost of a huge mortgage and the opportunity cost of tying down a large amount of capital. You will also not have to deal with all those upfront and hidden costs or have to deal with tenants.
In order to cater to your specific needs, we offer the flexibility to invest deal-by-deal, in a portfolio of our properties, or in one of our fixed income bonds.
Visit invest.lebijou.com/investments/ to make your real estate dream a reality rather than a nightmare.
