If you have additional cash on hand and you are considering if you should buy real estate or not, you have 3 choices.

1. Renting, put money in the investment.

2. Buying a property then live there

3. Buying a property and rent it out. You keep living in a rental property.

Let’s go through the pros and cons of each scenario and it will be clear which option is the best, money-wise.

1. Renting and put money in the investment

In this scenario, your cash flow will be like

1. pay rents

2. Returns from investments of the money which you could have used for the downpayment.

The net cash flow is the sum of those two. Why not putting money in the bank? I assume that since the interest rate of the bank in Switzerland is close to 0%, it makes no sense to lay your money around, instead, you should put it into the market and let it make money for you, either as capital gain or dividends income. In my other article <Why the Poor Are Poorer, the Rich Are Richer> I have explained that investing long-term in an index fund has proven to generate a good return, thus why would I put the money in a Swiss bank and let inflation eating it up? You can use an assumption for your investment return, like 6% — 8% depends on your investment type.

Add those two together, the al payment is negative, and the investment return is positive. Then you get your net cash flow.

2. Buying a property then live there

1. pay for interest, cash outflow

As the current 10-year mortgage interest rate is as low as 0.8%, I assume you will borrow as much as you can up to 80% of the purchase price from the bank. Why? Because it is like the bank lending you money for free, why not using up all your capitals?!

So the first cost is interest costs. That is a cash outflow.

2. pay for utilities or maintenance (Nebenkosten)

This could be less than 1% of the purchase price as a yearly cost. If you ask for specific building projects, the cost might vary.

3. pay for the opportunity cost of investment return

This number is the same as in scenario 1 cash inflow. The reason being if you do not use the money for the down payment, this amount could generate cash for you. So I add this opportunity cost to the calculation.

4. Pay for additional income tax

Now it gets a bit interesting. In Switzerland, property owners have to add a ‘rental income’ to their taxable income. Your property will be evaluated by a government staff, which government department? I forgot. Based on the market price, if you were rent your apartment to someone else, you will receive a rental income. Then they use a ratio, again depends on which canton you live in, typical Switzerland, you will use a ratio to times this rental income. That part will be a taxable income. Imagine your apartment can be rented for CHF2000 per month, then in Canton Schwyz, you use 65% x CHF2000 x12 months= CHF15,600, which is the additional taxable income.

BUT

It is not finished yet.

There is also a deductible ratio, again, depends on the canton. If your apartment is less than 10 years old, you can deduct 10% off from the taxable income (CHF15,600 x 90% = CHF14,040is taxable income). If the apartment is more than 10 years old, then you can deduct 20% (CHF15,600 x 80%=CHF12,480 is taxable).

The result of this ‘imagined’ rental income will incur additional income tax.

5. Save from taxes paid to interests

You have a mortgage, you pay interest on the mortgage, the interest paid is deducted from your income. Because interest payment is tax-deductible. Then you pay less income tax compared to without interest payment. But in the end, his saving could underweight item 4, the additional tax from imputed rental income.

6. Unrealized gain from property appreciation

You can use an assumption, such as a 2% growth rate or so, depends on the historical property market price change. According to SNB data, I checked that in Zurich area, the price increased by around 4% per year from 2020 to 2019.

This is a killer factor. Even if the price increases at 2% per year, due to the leverage effect, your total value of unrealized gain will be much higher than all the other costs together.

The last step is to add every cost and income together.

When you add items 1 to 4, those are cash outflow amount.

Then you minus items 5 and 6, you will get the net cash flow in this scenario.

I didn’t include amortization in the calculation, even though you have to pay the amortized amount each month, but the money is not going away from you, it is not a cost. You are buying back the actual apartment from the bank bit by bit. When you sell it, you get all your amortized money back. So it is money from the left pocket to the right pocket.

3. Buying a property and rent it out. You keep living in a rental property.

You might like the area where you live now, but there are no suitable apartments available on the market. Or you are not sure where you will live in the next years but want to have an investment property to offset your rental expenses. In either case, this is a scenario you should look at.

Imagine you keep renting your apartment, you make a down payment and borrow the maximum from the bank. Here are your incomes and costs:

1. pay rents, cash outflow.

2. pay for interest, cash outflow

2. pay for utilities or maintenance (Nebenkosten)

3. pay for the opportunity cost of investment return

4. Pay for additional income tax

In this case, your rental income will be charged at 100% as taxable income. Add it to your yearly income and see how much more tax you need to pay.

5.Pay for the opportunity cost of investment return

6. Earn from rental income

7. Unrealized gain from property appreciation

Again, I didn’t include amortization, same reason as in scenario 2.

Add up items from 1 to 5, those are costs or cash outflows.

Then minus items 6 and 7, those are savings or cash inflows.

Comparison

So now you should have numbers from scenarios 1, 2, and 3. You will see clearly which scenario is the best.

In my own calculation, the property appreciation part plays the most important role because the number is so much bigger than other costs. So buying to rent out or live yourself are better than not buying. But those two scenarios do not differ too much.

Again, please do your own calculation to see the differences.

Uncounted items

Here is a wealth tax, the tax rate also depends on the cantons. But you need to see what is your total assets value including the property. The apartment value might not be the same as the evaluation by the government. For example, an old house might have a CHF1million market value, but the book value in the government is the CHF300,000. Then if you have a CHF800,000 mortgage, your net value of the house is actually -CHF500,000. This can offset your other assets.

Naturally buying a home is not just about the numbers. There are many other uncounted factors.

For rental property, your downpayment could be higher than 20%, it depends on the bank. If so, the opportunity cost from the investment will also be higher. And if you want to be more precise, you can use pillar2 return plus investment return to calculate opportunity cost. For residential property, you can use 10% from pillar2 and 10% from cash.

There are so many decisions to be made with property buying. If you are interested, you can read <Buying a Property: Direct or Indirect Amortisation?>.

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<How to Create Wealth with Your Pillar 3a>

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