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Real estate investments
Different requirements for equity and affordability apply to financing investment properties than to owner-occupied homes. Selecting the right mortgage for an investment property is also crucial.
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Equity, amortization, affordability, mortgage – if you want to use real estate as an investment, you’ll need to carefully look at the financial conditions. In addition to a property’s return profile, there are other crucial aspects you have to consider.
At a very early stage, you need to decide what type of investment property is a suitable option for you – for example, a multifamily unit, an office building or a commercial property. The type of property influences the risk, the earnings prospects and the financing requirements. No matter which option you choose, it’s vital that you carefully weigh up the opportunities and risks.
When it comes to selecting a property, the valuation is crucial. This is usually based on the capitalized income method and takes into account factors such as the year of construction, condition of the property, location, as well as current and potential rental income. These last two have a direct impact on yield calculation and significantly impact a property’s affordability. The more transparent the income side is, the more easily a realistic purchase price can be determined for both investors and lenders.Â
In Switzerland, investment properties can be financed up to a maximum of 75% through a mortgage. This means that at least 25% of the purchase price must be equity. Capital from pillar 2 and pillar 3 can only be used to a limited extent for investment properties. Using retirement savings as equity is generally not permitted. An exception to this rule is if the owner actually lives in one of the apartments in a multifamily unit. In that case capital from pillar 2 and pillar 3 can be used (but only for the portion relating to that apartment).
Stricter deadlines apply to reducing the debt for an investment property compared with mortgage debt for a home. The mortgage debt must be reduced to two-thirds of the property’s market value within 10 years. In comparison: The deadline for owner-occupied properties is 15 years. In general, annual amortization for residential property is around 1% of the mortgage amount. These guidelines should definitely be taken into account when planning the financing to ensure long-term affordability.
Our experts not only support you in choosing the right mortgage, but also provide comprehensive advice on financing, affordability, tax aspects and long-term planning.
Calculating affordability for investment properties differs significantly from calculating it for owner-occupied homes. While affordability for owner-occupied homes is calculated based on the income of the mortgage borrower, the calculation for investment properties is based on rental income.
The following factors are decisive in the affordability calculation:
These costs are deducted from the annual net rental income. It is important that the total costs do not exceed the rental income. The goal is to achieve the highest possible surplus to ensure the property remains affordable in the long term.
Are you interested in buying a multifamily unit as an investment property and do you want to calculate the affordability? You’ll need to consider the following costs:
Financial item | Financial item | Costs in CHF | Costs in CHF |
|---|---|---|---|
Financial item | Purchase price | Costs in CHF | 3,000,000 |
Financial item | Mortgage (70%) | Costs in CHF | 2,100,000 |
Financial item | Equity (30%) | Costs in CHF | 900,000 |
Financial item | Annual net rental income | Costs in CHF | 200,000 |
Financial item | Mortgage interest costs at an imputed interest rate of 5% on CHF 2,100,000 | Costs in CHF | 105,000 |
Financial item | Amortization: 1% of CHF 2,100,000 | Costs in CHF | 21,000 |
Financial item | Ancillary costs: 15% of net rental income | Costs in CHF | 30,000 |
Affordability for a multifamily unit is calculated as follows:
CHF 200,000 (net rental income)
= CHF 44,000
The annual surplus is CHF 44,000.
An imputed interest rate of 5% is used to assess affordability, regardless of the current market interest rate. This is how we ensure that the financing remains affordable, even if interest rates rise. In this example, amortization is 1% of the mortgage debt and this will continue until the loan-to-value ratio has been reduced to 65%. Ancillary costs include maintenance and administrative costs as well as provisions for renovations. The annual surplus shown reflects how much remains from the net rental income after all running costs have been deducted.
We have already seen that there are many aspects to consider when financing an investment property – from the amount of equity needed to amortization deadlines and affordability. However, it is crucial to find a financing solution that is optimally tailored to your individual needs and your financial situation.
Whether you want to buy a multifamily unit, an office building or a mixed-use property, choosing the right mortgage not only affects how profitable your investment is but also your long-term financial flexibility. Factors such as the interest rate, term, repayment terms and possible adjustments to future market conditions play a key role.
Our experts are here to help you develop the right financing solution.
Start your financing request for your investment property directly online – free of charge and with no obligation. With ÃÛ¶¹ÊÓƵ key4 mortgages, you’ll quickly receive a personal offer tailored to your project and your financial situation.
When considering financing, you also need to think about taxation. This is because rental income generated from an investment property must be taxed as income. However, some or all of the mortgage interest and maintenance costs, such as renovation expenses, can be deducted.
If the property is owned by a legal entity, tax on profit is payable. In this case, the cost of depreciation on the property can also be accounted for, which can lower the tax burden.
Financing investment properties requires careful planning and comprehensive examination of all relevant aspects. The first step is to clarify what type of investment property – for example, a multifamily unit, an office building or a mixed-use property – is a suitable option for you. Before you calculate the required equity, amortization and affordability and start looking for a suitable mortgage, you should carefully examine the property and its value before you put down your money. A professional appraisal of the property is essential.
Other financial factors, such as upcoming renovations or refurbishments, also play a crucial role in determining the future return. In addition, you should include tax aspects in your deliberations, as they can significantly impact how profitable your investment is.
To ensure that the investment pays off in the long term and generates the best possible return, it’s important to consider your overall financial situation. If you don’t want to bear the responsibility alone, it’s advisable to rely on the expert knowledge of professionals. With thorough planning and professional support, you are laying the foundation for successfully investing in real estate.
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