Investing in residential property: potential returns, landlord obligations and more

Whether you want to buy and rent out residential property as an investment depends on the economic context, the real estate market and your personal financial situation. Real estate financing is easier when interest rates are low.

At first glance, higher interest rates appear to reduce the profitability of an investment. Yet, at the same time, rising rents boost returns.

If you want to invest in residential property, you should first carefully examine the demand for rental properties and check price trends on the real estate market.

Investing in private real estate is a trend. Many private individuals are purchasing condominiums as a future retirement home long before they retire. Real estate promoters commercializing new properties have observed similar trends: A surprisingly high number of property buyers are purchasing real estate as an investment. Their children, or even the buyers themselves, might move into the property at a later date. Another group of property owners acquired residential property long ago, but ended up not moving in themselves for personal reasons – for instance, because they changed jobs or moved abroad. Instead of selling the property, they rented it out.

Condominiums

Investors can buy an individual unit in an apartment building and rent it out. However, they are not only buying the apartment itself, but also a share in the communal facilities (stairwell, façade, etc.). This is known as condominium ownership.

Single-family houses

Single-family houses only have one residential unit, which is often larger than an individual apartment. A single-family house is rarely considered an appropriate investment property because the costs are higher compared to condominiums, and the investment is less profitable.

Multi-family units

Of course, you can also buy an entire multi-family unit and rent out the individual apartments separately. Since you own the entire building, there is no need to coordinate with the other owners, unlike when buying a single apartment. You can make particularly efficient use of the property, and the costs per residential unit are lower than for a single-family house.

Vacation properties

Vacation properties acquired for investment purposes are usually only rented out on a daily or weekly basis. This often results in vacancies, which must be considered when calculating returns. The short rental intervals also entail higher administrative costs. Their attractiveness depends more on the location than with a traditional residential property.

As vacation properties have been limited to 20% of the available living space in Switzerland for several years now, there is a shortage of supply in many vacation regions.

Many people regard investments in rented residential property as a safe bet. This may be true in comparison to equities, but there are also risks associated with residential property as an asset class.

It is no longer possible to finance property purchases as cheaply as it was during the low-interest phase. Results in individual cases can vary significantly, depending on the location, the real estate market, structural strengths and weaknesses.

“Anyone buying an apartment must be aware that real estate prices are cyclical,” says one expert from the Swiss Homeowner Association (HEV). At the moment, real estate prices are quite high.

However, high property prices reduce the returns generated, as rents have risen less than property prices. Many analysts and market observers assume that following the long boom phase, real estate prices could stagnate in the near future rather than continue to rise. Falling prices are likely in some regions. And if a property loses value, the business plan no longer looks so rosy.

It is important to ask to what extent the property and location are suitable for renting. Central locations and most big cities or attractive tourist locations have a stable demand for apartments. Your conclusion will be different than in economically underdeveloped, poorly connected areas.

Sometimes, it is not easy to work out what sort of tenants you should be targeting. Is a certain location or district more suitable for families or for singles? Will it attract students, or high-income households? If the scenarios you imagined do not materialize, you should have a plan B ready – or have sufficient financial reserves to bridge any vacancies.

Renting out residential property requires a great deal of know-how and time, as the maze of legal and formal regulations is full of pitfalls. At the start of the lease, it is important to be clear about the contractual conditions, ancillary costs, rental deposit, inventory and handing over of the keys.

A number of cantons require you to submit certain forms: When a new tenant moves in, you have to disclose how much rent the previous tenant paid. A rental deposit may only be demanded as security if this has been specifically agreed upon.

Ancillary costs must also be stipulated by contract. When determining the rent, the landlord can use the figures typical for the location and district as a guide or claim their actual costs and expenses. It is important to always clarify which costs can and cannot be passed on to the tenant by law.

The right way to calculate as a landlord

The landlord should include mortgage interest and interest on the invested capital in their calculations, as well as making allowance for the cost of maintenance, amortization, taxes and insurance.

Tax implications must also be considered: the value of the apartment or house must be declared as an asset, while the revenue from leasing the property counts as income (deducting mortgage interest and certain maintenance and ancillary costs).

Attention: If in doubt, the owner must be able to prove that they are not generating exaggerated income. In many cases, it makes sense to seek advice and have the rental value estimated by an expert. Costs for renovations, structural adaptations, etc., should always be factored in.

If your property is empty, you will miss out on income but certain charges will still be due. The portfolio of a private individual often consists of only a few properties, or even just one. This means that a vacancy can have serious consequences – unlike when investing in an entire apartment building.

Rights and obligations as a landlord

In Switzerland, the rights and obligations of landlords are governed by tenancy law. The landlord has the right to set the rent. However, the amount should be appropriate and in line with the market.

Information about the parties, rental property, rent, rental conditions, duration of the tenancy, rules for terminating the lease and other relevant agreements should be recorded in a contract. The landlord can stipulate in the contract that a rental deposit is required to protect against possible damage or arrears in the payment of rent. The tenant must allow the landlord to inspect the property if this is necessary for maintenance, sale or re-letting. The landlord must give reasonable notice of inspection. In urgent, exceptional cases where there is imminent danger, for instance in the event of a burst pipe, the landlord may enter the apartment without the tenant’s consent. However, it is still advisable to inform the tenant first.

The landlord is obliged to keep the rented property in a habitable condition and is responsible for its upkeep and any necessary repairs. This includes performing maintenance work to ensure that the apartment can be used in accordance with the contract. The landlord must establish clear rules for the division and settlement of ancillary costs. If the property has defects that impair its use, the tenants are entitled to a reduction in rent depending on the circumstances. Landlords must rectify these defects.

Overall, tenancy law in Switzerland is very detailed, and additional provisions may apply, for example at cantonal level. If you are unsure about anything or have complex questions, you are advised to seek professional advice, for instance by consulting an attorney.

Of course, a rental property can simply be paid for outright. However, many investors cannot avoid a mortgage when buying residential property to rent out.

The rules are somewhat different to those that apply to owner-occupied properties. In general, buyers of residential property in Switzerland must provide equity of at least 20%. Unlike with owner-occupied properties, however, withdrawals from a pension fund cannot be used for this purpose. Anyone buying a vacation property must provide as much as 30 to 50% of equity.

There are basically two different types of mortgages. The first is a fixed-rate mortgage, where the interest rate is fixed for several years. This protects investors against the risk of interest rate changes and allows them to make better calculations.

The second option is a SARON mortgage, where the interest rate changes in line with the market. Investors run the risk that interest rates will rise, which will mean that their calculations are suddenly no longer correct. However, they benefit as soon as interest rates fall.

A mortgage is often taken out in various tranches with different terms in order to protect against rising interest rates over a longer period of time. However, it can also make sense to include SARON mortgages, depending on the financing strategy.

This type of mortgage is suitable for anyone who regularly follows events on the money and capital markets. It is important to ensure that the investor can financially absorb any interest rate fluctuations. At UBS, this type of mortgage can be converted into a fixed-rate mortgage at any time.