Don't Dwell on the Past: The Modern Approach to Real Estate Investing

“Landlords grow rich in their sleep without working.” - John Stuart Mill

Real estate has long been an avenue for building and maintaining wealth. Over the last 15 years, the SXI Real Estate® Broad Total Return (SREAL) index has outperformed the Swiss All Share Index Total Return (SSIRT) with almost half of its volatility (7.89% vs. 12.92%). Real estate is also one of the few assets wealthy families pass down through generations. Further, unlike Bitcoin, it is a tangible asset with an intrinsic value.

Comparison of Swiss real estate vs. equity market performance
Source: SIX Group

If you don’t own any real estate yet or are looking to build up your real estate portfolio, there is always a way to enter. However, haven't the standard techniques of investing in real estate outlived themselves?

Despite the strong advantages of REITs to provide a stable source of income with an easy way for investors to buy and sell their holdings on a public exchange, like any publicly listed asset, a REIT is susceptible to the daily volatility of the stock market and mainly focuses on providing a regular income stream instead of returns from capital accumulation.

On the other hand, with direct ownership, the second most common form of real estate investment, you have full control over how you manage your investment. For instance, you can choose the location, target market, timeline, and investment focus: rental income or capital accumulation.

However, not everyone has the capital to purchase real estate directly. Even fewer have the capital to diversify across several properties. This concentrates your risk and limits your diversification. Further, real estate management takes a lot of time and energy; difficult tenants are draining! While these tasks can be outsourced, you cannot escape the mortgage and insurance payments.

Speaking of the modern investment option, flipping houses has many of the benefits of direct ownership but with better liquidity. Here, the goal is to identify the real estate in markets with speedy capital accumulation prospects. It is the classic “buy low and sell high” strategy. Speed is key because a quick exit minimizes your exposure to mortgage payments, insurance, and other expenses, creating a significant risk for house flippers to get into trouble when the expected capital accumulation does not come and they are unable to exit quickly or forced to exit at an overall loss.

Additional Resources:

5 Ways to Invest in Real Estate in Switzerland

The good news is that in today’s market, there is an alternative.

Real estate business

This is something similar to direct ownership, except that investors are buying a share in a limited liability company (specifically set up to invest in real estate) or a project curated by that company. But what makes it the better option than the traditional ones?

1. Reduced legal liability

Direct ownership can expose your wealth to lawsuits from tenants or creditors looking to recover their debts. Investing in a limited liability company puts a cap on your potential exposure and also transfers any potential legal headaches to the company.

2. Fully operational business

Further, with all its hassles, property management is typically outsourced by the business. Imagine: you're a co-owner of real estate and don't need to manage the cleaning, catering, and concierge services.

3. No property maintenance

Real estate companies also have the scale and expertise to make property maintenance easier and more efficient. For example, they can build relationships with maintenance providers or even employ maintenance staff. Moreover, they can better plan for known future maintenance costs and draw on a larger pool of rent.

As an individual investor, each maintenance issue will be a unique headache that forces you to search for several tradespeople. Some direct investors might even try to fix maintenance issues themselves. Think of the amount of time wasted! You would have to try to save for maintenance issues in advance – some advise that you put aside 50% of the rent or even 1% of the property value every year.

4. No dealing with difficult tenants

In line with this, you don't need to face the hassle of dealing with difficult tenants that most property owners face at some point. This can include tenants who stop paying rent, damaged property, or even tenants who refuse to leave.

5. Lower entry threshold

Unless you have a small fortune lying around, it is challenging to create a diversified portfolio of properties in prime locations. Most investors will start with a single property and a large mortgage. However, by investing in a real estate company, you are adding your capital to a large pool of capital from other like-minded investors. So instead of investing in only one property, the company can invest in a real estate portfolio. Further, it will be able to obtain better financial terms from the bank compared to an individual investor.

6. Better cash flow

Real estate expenses often occur unexpectedly and are expensive, such as water damage or replacing a bathroom. Unless you are putting some of the rent aside every month, it is easy to run into cash flow problems as an individual investor. However, when you invest in a real estate company with a portfolio of properties, it is unlikely that all the properties will need repairs at the same time, and you will be able to draw on a pool of rents, resulting in a lower liquidity risk.

And that's all without taking into account the tax deduction benefits that you receive in some cases. Sounds amazing, right?

Le Bijou is an alternative

We are a Swiss real estate business that has established a luxury rental business in competition with leading hotels. Our competitive advantage lies in our use of the latest real estate technology, including contactless check-ins, dynamic pricing, smart appliances, and modular rooms. This adds to the aura of luxury and eliminates the initial and ongoing costs of employing hotel staff.

Our target market is HNWIs in short-term to long-term rental markets and corporate event hosting. This helps us generate superior returns compared to regular rentals, thanks to revenue streams flowing in from multiple sides. Also, this results in a small contingency risk in case of a market crash and high resilience even during worst-case scenarios like a pandemic.

“Success has proven Le Bijou right: rates of return from which classic hotels and other companies can only dream of.” – Neue Zürcher Zeitung.

Our development projects are located where tenants and guests want to be – in the heart of the city. By joining Le Bijou, you get the opportunity to choose to invest in an unbeatable location in the Swiss capital at Schauplatzgasse, Bern, as well as at the doorstep of Zurich's most exclusive address, Bahnhofstrasse, and so much more.

While direct real estate investments are pseudo-illiquid and take longer to sell, Le Bijou is an exception. This is due to our partnership with Moonshot, a Swiss investor network focused on alternative investments, which can help you sell your assets on its secondary market.

Further, thanks to our synergy with Moonshot, we offer up to 50% interest-free capital through our partner Moonshot as a loyalty bonus for investors. How is that important? Well, a simple example: let’s say you invested CHF 150’000 in real estate by putting in CHF 100’000 of your own money and borrowing the other CHF 50’000 via the 50% interest-free capital. Assuming an annual return of 10%, your investment would increase to CHF 165’000 in a single year. After paying the borrowed CHF 50’000 back, you would have CHF 115’000, earning a 15% return on your investment. On the other hand, the same CHF 100’000 investment without the leverage would bring you only a 10% return, which is 50% less than in the aforementioned example.

Investing in real estate may be easier than you think. So don’t settle for the old headaches of direct real estate investing. In the 21st century, real estate businesses not only make it easier to invest in and maintain real estate but also offer greater diversification and higher returns than you could get on your own.