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Acquiring and financing investment property.
Investment properties: Advantages and disadvantages at a glance
Stable yield: As an anti-cyclical investment class, investment properties enable a stable, regular yield and are suitable for diversifying an existing investment portfolio
Regular income: The rental yield allows you to generate a monthly income. This is a major advantage, particular for those of retirement age
Protection against inflation: Properties have greater value stability than securities and are subject to fewer market fluctuations. As a result, they provide a certain level of protection against inflation
Appreciation: As well as rental income, you may also see an increase in the value of the property
High maintenance and renovation costs: Depending on the condition of the property, renovation costs can accrue shortly after the purchase which are not factored in and are often underestimated
Managing the property: If you don’t wish to be directly involved with the tenants and managing the property, instructing a professional external management company is recommended
Managing the property: If you don’t wish to be directly involved with the tenants and managing the property, instructing a professional external management company is recommended
Risk concentration: Purchasing a property may involve a certain level of risk concentration, as a large portion of your assets are invested in the property
Depreciation: In the event of changes in the real estate market, it can be difficult to sell investment property quickly. If the rental income decreases, this leads to a depreciation in the property’s value. In the worst case scenario, the lender may downgrade the value and request an injection of additional capital
Mortgages for investment properties: which financing options are there?
The extent to which financing an investment property is viable depends on many factors: the level of renovation required, use, location and vacancy risk are just some of the factors that influence the amount of financing. In an ideal situation, you can secure financing for 80% of the value of the investment property; however, this figure is commonly just 70%. The remaining 20-30% must be paid in the form of a deposit. Pension assets from the second and third pillars cannot be used for this, unless the owner is to inhabit one of the properties themselves. In these cases, proportional recognition is possible.
Example of an affordability calculation for an investment property
The affordability calculation for investment properties differs from the one used for owner-occupied residential property. Here, it is not the income of the borrower that is relevant, but the rental yield. As well as the net rental income, any costs that are incurred are factored into the affordability calculation. These costs include the mortgage interest payments, which are calculated using an imputed interest rate of 5%, as well as the amortisation and ancillary costs. The annual net rental income minus the costs incurred should result in the highest surplus possible.
| Purchase price |
CHF 1,500,000 |
|
|---|---|---|
| Mortgage (80% of the purchase price) |
CHF 1,200,000 |
|
| Annual rental income |
CHF 100,000 | CHF 100,000 |
| Interest |
5% of the mortgage (CHF 1,200,000*0.05) |
- CHF 60,000 |
| Amortisation |
1% of the mortgage (CHF 1,200,000*0.01) |
- CHF 12,000 |
| Ancillary costs |
15% of the net rental income (CHF 100,000*0.15) |
- CHF 15,000 |
| Annual surplus |
= CHF 13,000 | |
| Gross yield |
Ratio of net income to purchase price (CHF 100,000 / CHF 1,500,000) |
= 6.7% |
Certain lenders also look at a property’s gross yield in addition to the surplus calculation. The gross yield is the annual net rental income in relation to the purchase price. In the above example, the result would be a gross yield of 6.7%, which is quite reasonable in a Swiss context. Depending on the provider, canton and location of the property, however, each lender will define their own guidelines.
The different valuation methods used also mean interest rates can differ drastically from one another. For investment properties, it’s particularly important to shop around and compare interest rates.
