Investment property: how to optimise your investment thanks to your mortgage loan
Are you considering purchasing a property to rent it and make a return on it? Is it a good investment? What are the risks? What are the conditions for getting mortgage financing? We explain everything you need to know in order to make a successful investment in an investment property and how a good financing strategy can help you to optimise your investment.
What is an investment property?
Definition of investment property
An investment property or rental property is a type of property investment which aims to generate regular rental income. It involves purchasing a property, such as an apartment, an administrative location or even an entire building, in order to rent it to third parties.
The property therefore generates rental income which can be used to pay off the investment costs, such as mortgage-related costs and maintenance costs, as well as to generate profits. In particular, this rental income can be used to supplement the pension received during retirement.
What are the advantages of investment in an investment property?
Property has always been considered to be a safe investment. The rental income generated can provide a regular source of passive income, which is of particular interest to investors who are seeking to diversify their portfolio and thus reduce their risks. As a matter of fact, this investment is considered to be secure because property in Switzerland very rarely depreciates and the vacancy rate is low. According to the Swiss Federal Statistical Office (FSO), it rose to 1.31% in 2022. Zug had the lowest rate at 0.33%, closely followed by Geneva at 0.38%. Additionally, the value of a property remains relatively stable over the years and it is a tangible asset which withstands economic crises.
An investment property can also allow you to take advantage of tax benefits such as deductions from taxable income for expenses in relation to the property and mortgage interest.
Finally, an investment property can provide added value in the long term because the value of the property may increase over time. Furthermore, it is an asset which can be handed down to your children.
With time, the investment property in which you have invested can also become your primary residence or second home if you so wish or if circumstances demand it. You might, for example, envisage investing in an investment property which you rent out until your children are old enough to live there. Or even renting out a property which you intend to live in upon retirement and which will be amortised in the meantime.
How do you finance the purchase of your investment property?
What are the differences between financing for a primary residence and for an investment property?
As with financing of a primary residence, there are a number of rules which must be observed in order to be able to get a mortgage loan to purchase an investment property.
Loan-to-value ratio
One of the big differences between financing of a primary residence and financing of an investment property lies in the loan-to-value ratio, i.e. the ratio of the mortgage loan to the value of the property you are purchasing. The loan-to-value ratio is generally lower for purchasing an investment property. It is around 80% for a primary residence, in comparison with 75% for an investment property. You therefore have to provide a minimum of an additional 5% in personal funds. Certain lenders may make exceptions, in particular if it is an isolated property.
Personal funds
It is not possible to benefit from pension fund assets under the 2nd pillar or the 3rd pillar (3a) in order to supplement personal funds, as is the case for purchasing a primary residence. Proportional recourse to pension fund assets is conceivable on condition that you live in one of the apartments in the building.
Furthermore, it is important not to forget to take the acquisition costs into consideration; personal funds must also be used for these.
Amortization
In the case of investment in a commercial property, the part of the loan to be amortised will be higher and the debt obligation will need to be reduced to 50% instead of the 66% for a primary residence. Sometimes also within a shorter period of time.
Interest rates
If the investment property is held by a public limited company or a real estate company, different lending terms may apply and interest rates may be slightly increased by lending institutions. Certain institutions refuse to finance public limited companies.
As with purchasing a primary residence, we are familiar with the conditions offered by various institutions in relation to investment property and we can help you to choose the lender from which you will get the best financing.
Find out more about financing an investment property
What are the lender rules for a mortgage loan?
Self-supporting property
In contrast to financing for a primary residence, which requires a minimum level of income on the part of the purchaser in order to support a maximum debt ratio of 33%, an investment property can be funded by its rental status. If the property is self-supporting, i.e. the theoretical expenses are covered by the actual rent, then the purchaser’s income does not have to meet the specific criteria for obtaining a mortgage loan.
Categorisation of a property as self-supporting may differ according to the lenders’ criteria. This is why it is important to compare multiple offers. Our online platform allows you to compare criteria from more than 70 lenders and our advisors can help you to break down the financing offers in order to choose the one which is most beneficial for you.
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Not self-supporting property
When it comes to a property which is not considered to be self-supporting, the lender will take the purchaser’s income as a basis in order to verify that the costs in relation to the mortgage can be covered.
How is the return on a property investment calculated?
The return on a property investment can be calculated gross or net. It is this calculation which allows you to determine whether the investment is profitable.
Calculation of the gross return
The gross annual return represents the ratio of annual rental income to the purchase price of the property. Thus, the gross return on an apartment purchased for CHF 800,000 and rented for CHF 3,000 per month is 4.5% (36,000 / 800,000). The calculation does not take financing into consideration and is not generally sufficient for determining whether a property investment is promising.
Calculation of the net return
The net annual return represents the ratio of net income in relation to the personal funds invested. This calculation is more complicated because it takes the costs, as well as the investment terms, into consideration. Effectively, the net income is calculated by deducting the costs from the rental income. These costs are:
- Mortgage interest
- Property tax
- Maintenance costs
- Ongoing costs (water, electricity, etc.)
- Insurance
- Any management fees
- Anticipated rental losses
The anticipated rental losses take into consideration, in a theoretical manner, the fact that a property may remain unoccupied for a certain period of time. They are a projection of the vacancy rate.
Calculation example of the net return for the same apartment purchased for CHF 800,000 and rented for CHF 3,000 per month:
| Annual costs | CHF |
|---|---|
| Mortgage interest at a rate of 2.5% | 15'000 |
| Property tax (1/1000 of the value for tax purposes) | 800 |
| Fees (6%) and insurance | 4'800 |
| Anticipated rental losses (15 days) | 1'500 |
| Total | 22'100 |
The personal funds required to purchase this apartment came to CHF 200,000 with an additional CHF 40,000 for the various costs of purchasing.
The net income is CHF 13,900 (36,000-22,100) and the net return is 5.79% (13,900/240,000). If it turns out that there are no rental losses, the net income increases by CHF 1,500 and the net return rises to 6.42% (15,400/240,000).
It is possible to achieve returns of up to 8%, even 10% in business real estate, but a more realistic range is between 2% and 5%, which is already more favourable than other types of investment.
We can help you to calculate the net return that your investment will generate, which will allow you to make a fully informed choice.
Calculate the return on my property investment
Net income after tax
Another indicator which can be used is that of net income after tax, also known as cash flow. This is the gross rent with costs, from which we deduct the same costs as for calculation of the net return as well as tax in order to calculate the cash flow generated by the property.
Risks to be taken into consideration for an investment property
What are the risks of property investment?
Like any investment, an investment property entails risks. For example, the return may fall in the event of an increase in interest rates. There may also be a risk in the event of a significant increase in the vacancy rate or decrease in the indexing of rents (CPI), but this remains unlikely in the coming years in Switzerland.
Another risk is that tenants may not pay their rent or that they maintain the properly poorly, or even cause it to deteriorate, in which case the property will lose value. Furthermore, administrative management of one or more tenants may be burdensome, but it is possible to make use of an external company to take care of this. Either way, the burden of management should not be overlooked. There is even an indicator for calculating it, the indice de tranquillité (IDT, peace of mind index), according to the time spent on management of the property.
How can you minimise the risks of property investment?
Rate risks can be minimised by opting for long rates. However, these rates are generally more expensive and will slightly reduce the return. It is therefore all about finding the right balance between risk and security. This balance is different depending on each individual’s personal situation and their aversion to risk.
Finding the right balance between risk and security
As with any property purchase, one of the most important criteria is the location of the property. Purchasing a residential apartment in Geneva city centre carries less risk than purchasing a commercial building in Jura, for example… but the budget required is very different!
When it comes to tenants, the risk is more difficult to minimise. However, you must be vigilant about the profile of the individuals selected, particularly if you only have one tenant. In any case, the costs of maintenance and renovation of the property should not be underestimated. You should therefore be sure to establish a renovation fund.
What are the benefits of a good financing strategy for your property investment?
Implementation of an optimal financing strategy for your property investment allows you not only to save money, but also to secure your purchase in the long term.
The expertise of Resolve’s advisors also applies to investment property. Our tool allows you to compare offers from different lenders on the market and, just like when purchasing a primary residence, our personalised advice allows you to find the financing option which is most suitable for you and most beneficial based on your profile and your needs.
Whether you want to acquire multiple properties or simply invest in an apartment, whether you have a performance target or are looking for a small amount of additional income, we present you with the various solutions which are available to you, as well as with the implications of your choice, particularly when it comes to tax.
