What Are the Leasehold Costs?
As a hypothetical example of this cost saving, let’s consider a house built on a plot of 200 square meters. In Switzerland, the approximate market value of such a plot would be at least CHF 1’500’000, or CHF 7’500 per square meter. In premium locations like Zurich or Geneva, however, the value could attain over CHF 2 million, averaging around CHF 10’000 per square meter, nearly 1.4 times higher.
While a lessee avoids paying that CHF 1.5 million, they need to consider the ongoing ground rent. Typically, the owner of this hypothetical plot will charge the lessee around 5% of the land’s value annually, or CHF 75’000 assuming the property doesn’t appreciate in value over the lease term. Assuming that’s fixed, the cost will be an additional CHF 2.25 million over the course of a 30-year lease. Even after adjusting this outlay for inflation, the “real” cost is unlikely to be much lower than the cost of the land in this example.
What’s more, the ground rent may undergo annual adjustments, as is commonly the case. These adjustments can be tied to various factors such as an agreed measure of inflation, mortgage interest rates, or prevailing land values. Such variability introduces an additional, unquantifiable cost factor to a leasehold investor’s calculations.
All of this assumes the putative lessee is buying a leasehold with cash, so the cost of a mortgage has been ignored. If the buyer requires a mortgage, at current rates, it will cost around 2% annually. This expense must be deducted from the rental yield on the leasehold home, which currently averages around three percent nationwide. Additionally, this analysis overlooks the expenses associated with managing a property rented to third parties. Mostly, these expenses will consist of the maintenance of the structure and its fixed amenities (faulty wiring or a burst water pipe can be more costly), as well as property taxes, which vary widely between cantons.
Thankfully, maintenance costs and mortgage interest can be offset against income tax. Nonetheless, these expenses must be paid out of the lessee’s pocket beforehand and that will, in effect, reduce the cash flow generated from rental income.