Buying a Apartment Building in Switzerland: Pros and cons
Investing in an apartment building is considered a high-yield and solid capital investment. Especially in the current low-interest-rate environment, real estate and land in good locations enjoy a high level of popularity. A fully let apartment building is music to the ears of every investor. However, the strong demand also has its disadvantages. Prices for apartment buildings, for example, have risen sharply in recent years and yields have fallen. This makes it all the more important to check the condition of the building, the features of the apartments as well as the location and rental value of the property when looking through the prospectus. You should also keep your eyes open when financing the purchase or choosing a mortgage.
Apartment building – an attractive investment property:
Residential, commercial and industrial properties via which the owner wishes to generate income are classified as investment properties. They are not used by the owners themselves and are instead rented out and produce so-called “yields”. The term “yield” basically translates as “income”. A distinction is made between gross and net yields. The gross yield is calculated by expressing the net annual rental income as a percentage of the purchase price. The net yield additionally takes into account all running costs incurred in connection with the property. These include expenses for maintenance, energy costs, fees, insurance, administrative costs and also loss of rent.
Success factors for an apartment building:
1. Structural condition
Regardless of whether you are interested in buying an apartment or a house, it is always advisable to involve a construction expert in the buying process at an early stage. The older a property is, the higher its maintenance costs and the need for renovation can be. Our tip if you are interested in an apartment building is to commission a professional surveyor to carry out the initial inspection of the property. They can quickly tell you whether the building’s structural condition is still up to date or whether you will need to carry out cost-intensive renovations in the near future. Sooner or later, you will have to renovate any property with outdated heating technology, poorly insulating windows and ageing sanitary facilities. If additional structural defects are discovered, such as a damp cellar or mould, the supposedly attractive offer can quickly turn into a very mixed bag. Even if you are interested in a new building, we recommend that you do likewise as construction defects in new properties can be detected early on by an independent expert.
2. Amenities
The amenities of the building as a whole as well as the individual apartments for rent will also influence the success of your investment. Do the characteristics of the property meet the current requirements and needs? How many rooms and how much living space do the apartments offer? An expert can also answer these questions based on the floor plan and after a joint inspection.
3. Location
Another success factor is the location of the property, which also determines the price. Is the apartment building located in a rural area of Switzerland or in a central location in one of the major Swiss cities? An apartment building in a central location with good public transport connections will attract more prospective tenants than a building in a socially deprived neighbourhood or in the countryside. In the latter cases, the chance of finding solvent tenants for the apartments is rather low and the risk of vacancies and rent arrears increases.
4. Rental value
The long-term potential of an apartment building is reflected in the rental value of the apartments. In general, the population in Switzerland has grown in recent years and so has the demand for new homes to buy or rent. Some regions are more successful and more in demand, while others are less dynamic. When buying a residential building, not only is the property’s location relevant, but also the future plans for the neighbourhood, municipality or city. For example, is a motorway planned in the vicinity of the property or will other circumstances affect the quality of life there in the future? In this case, as a landlord you may have to consider reducing the rent. Find out about planned projects and development forecasts from the municipal authorities, the Amt für Stadtentwicklung (Office of Urban Development) or the Stadtplanungsamt (Urban Planning Office).
Financing an apartment building
Determine the value using the capitalised earnings method
Unlike an owner-occupied home, the value of an apartment building is calculated using the capitalised earnings value method. A capitalisation rate is calculated for this purpose, which consists of the risk-free interest rate and a surcharge for the market or vacancy risk of the residential building, management costs, depreciation due to age and the maintenance costs for the property. Depending on the condition of the building this can range from 4.5% to 8%. If you divide the number 100 by the capitalisation rate and multiply the result by the annual rental income, you will get the value of the property.
Don’t underestimate the ancillary purchase costs
As a buyer of an apartment building, you can expect attractive yields. This fact may leave you thinking that income from several tenants in a building is a safer bet than depending on one party. For this reason, most prospective buyers prefer to invest in apartment buildings rather than renting out single-family houses or single apartments. Note, however, that the purchase price and ancillary purchase costs are higher for apartment buildings. In particular, it is a mistake to underestimate the ancillary purchase costs, as these are calculated as a percentage of the purchase price in each case and are due in addition upon completing the purchase.
Plan your financing
Finding the right property, correctly determining its value and calculating the ancillary purchase costs are all key factors when determining the attractiveness of an investment. In addition, however, the financing and the associated choice of the mortgage product must also be right. As a rule, you can assume that banks will finance up to 75% of the purchase price and that you will need to contribute at least 25% of your own funds. As a rule, the higher the proportion of your own funds, the higher the yield. The mortgage that suits you best will depend entirely on your needs and your risk tolerance. In our Financing real estate and Mortgages sections you will find a variety of relevant information that can also be applied to the financing of a single-family house or a single apartment.
Conclusion and tips: Whether you are looking for your own home, a plot of land or a lucrative investment property, find out about your options in advance, think about your needs and, above all, keep an eye on the real estate market and the related developments concerning mortgages and interest rates. And don’t forget to set up property alerts on real estate portals like newhome.ch to make sure you don’t miss any offers.