Buy to let: opportunities and risks at a glance

Buy to let means purchasing in order to rent it out. This is a model of capital investment in which private individuals buy an apartment to rent to third parties and refinance the costs over the years through rental income. In addition to equity, such investors often use debt capital in the form of mortgages to acquire the property.

Buy to let was a popular investment for many Swiss people before, beginning in 2022, the Swiss prime rate was gradually increased after years at a constant low, and mortgage interest rates also rose. At the time, almost a quarter of all UBS mortgage clients used their loan to buy a condominium and refinance it by renting it out. Between 2015 and 2020, the number of condominiums added to the rental market in Zurich exceeded the number of new constructions – proof of the boom in “buy to let.” This development was also observed in Basel, Geneva or Lausanne, i.e., in cities where there was a high demand for rental apartments and no difficulty in finding tenants.

This strategy was very profitable until 2021. On average in Switzerland’s 50 largest cities, buy to let yielded a pre-tax return of 6% (excluding loan-to-value). Of this, 2.5 percentage points resulted from rental income and 3.5 percentage points from the increase in the value of the property. On average, even those who financed an apartment with borrowed capital (mortgage of 60% of the purchase price) were able to achieve as much as a 13% return on equity.

However, such high returns are now a thing of the past. This is due to the risks of the model, which have been fully realized since the turnaround in interest rates and weak demand: Property values are no longer rising as sharply and the increased financing and ancillary costs reduce the rental income. This means that buy to let based on the existing pattern is now often less attractive than it was a few years ago.

Buy-to-let investments require a lot of equity, a high credit rating and a suitable property that’s easy to rent. However, this is not all. The long-term success of buy to let requires a flourishing housing market in which prices are increasing. Significant appreciation is hardly to be expected after the price increases of the past. This means an important driver of this investment strategy is gone. Indeed, in some places, the potential for price corrections has arisen. This is why such investments should be looked at more critically than in the past – even if it is sometimes possible, depending on the location, to increase rental yields by increasing rent.

Another secondary condition for the success of buy to let is that the costs for financing, contractors and other accompanying costs of the rental remain manageable. However, mortgages as well as maintenance and energy sources have become more expensive. Passing on these price changes to tenants is easier said than done. Ancillary costs are often only settled with the tenant as a lump sum or as part of the net rent. As a result, when prices rise, there is a deficit that is borne by the landlord.

Landlords pay tax on their rental income as additional income. As a result, private investors may be subject to a higher progressive taxes. On the other hand, maintenance costs are tax-deductible. This also applies to debt interest on mortgages.

On the financing side, interested parties have the alternative of purchasing the property entirely with their own equity (if available) or taking out a partial mortgage. Usually, when financing investment properties, at least 25% of the property value is expected as equity. In contrast to owner-occupied housing, this must not come from the occupational or private restricted pension scheme. The amortization is at least 1% of the mortgage amount per year.

Whether a buy-to-let investment pays off depends not only on how the apartment is furnished and equipped but also on the location and municipality in which it is located. Not every municipality is attractive. Properties are not very lucrative in areas where there are a lot of vacancies. According to a study, the most attractive places for buy-to-let landlords in 2024 were Meyrin in the canton of Geneva, Winterthur in the canton of Zurich and Bulle in the canton of Fribourg. But Schlieren, Opfikon and Nyon are also considered particularly attractive areas to purchase an apartment to rent out.
Such rankings, however, only provide a snapshot. A comparison between June 2021 and June 2022 shows how dynamically the market has changed: While in 2021 it was cheaper to buy rather than rent an apartment in almost all Swiss municipalities, the reverse is now the case in 451 municipalities within just one year.

When purchase prices are so high that they are disproportionate to any possible rental income this is a warning sign. In the past, an imbalance in the relationship between purchase prices and rents has arisen in many places. To take Zurich as an example: Buyers of residential property there are paying 40% more in real terms today than in 2013, while rents have only risen by about 12%. Since price levels have not yet adjusted to the increased costs of financing, the Zurich housing market is at risk of a bubble.

When looking for suitable locations, you will get a rough overview from the market analyses of banks and institutions. For example, the Information and Training Center for Real Estate Ltd (IAZI) regularly determines in which Swiss municipalities and regions it is more profitable to buy than to rent. A web app also informs you about other location data.

With the turnaround in interest rates, buying apartments became more expensive than renting in 2022. This means: With the higher financing costs, renting a property is currently cheaper than buying it.

Nationwide, the number of building permits is falling significantly. The number of buy-to-let investments has also declined. Due to higher interest rates and collapsing profitability, some landlords have sold their properties. A sharp price correction in the housing market of Swiss cities such as Zurich is considered rather unlikely. Recently, the growth of rents has accelerated, outpacing the growth in house prices.

Compared to buy to let, other investment options are currently considered to be less risky and more attractive. However, if investors only consider renting out their investment property for a (short) period before moving into the apartment themselves, buying an apartment can still be a sensible option. In addition to having a place to live in old age, the planned inheritance of the property can also be a motive for buying.

Before private landlords decide to sell in the face of increased costs, they can try to reduce their costs. The Winterthur Region Homeowners’ Association (HEV) advises that anyone who has so far collected an all-inclusive rent or a lump sum for ancillary costs such as heating, hot water and electricity from their tenant should switch their billing to payments on account. This will at least make it possible to pass on future price increases to the tenant. A change in the contract will be required, which must be notified to the tenant by means of an official form on the earliest possible termination date. Landlords can proceed in a similar way if they want to increase the rent for their investment property due to the increased reference interest rate.

As a capital investment model, buy to let cannot currently compete with other forms of investment. Costs and risks have risen all too sharply after several years of almost ideal market conditions. However, if expected returns are not key to your decision to buy an apartment or house and rent it out for a while, there are still many options. More than ever, it is important for you to thoroughly consider the associated risks beforehand and to calculate their significance for your purchase.