The best way to finance income properties

What is an income property

An income property is defined as a property acquired for investment purposes. The investment allows for a stable, secure capital investment and ideally yields a regular profit. The premises of an income property are often rented out. The following properties can be counted as income properties:

• Apartment buildings
• Single-family houses or condominium
• Office buildings
• Commercial properties
• Mixed-use properties (residential, commercial and office)

What investment opportunities do I have?

Investing in properties offers various advantages:

• As an anti-cyclical asset class, income properties provide a stable, regular return and are suitable for diversifying an existing investment portfolio.
• You generate monthly revenues from the rental income. This is a great advantage, especially for people of retirement age.
• Properties are more stable in value than securities and are subject to fewer market fluctuations. They therefore offer a certain degree of inflation protection.
• In addition to the rental income, you may achieve an increase in the value of the property.

What risks do I take?

However, when buying an income property, certain challenges must also be considered:

• The costs for maintenance and renovation of the property are often underestimated. Depending on the condition of the property, renovation costs that have not been taken into account are incurred shortly after the purchase.
• The property must be managed. If you do not want to take care of the tenants and the administration directly, you can hire a property manager.
• You bear the risk of empty apartments. As the owner of an income property, you are affected by developments over which you have no control (e.g. reduced demand, changes in tax rates, etc.).
• When you buy an income property, you normally run a certain cluster risk, as usually a large part of your assets is invested in the property.
• If the real estate market changes, it can be difficult to sell an income property quickly. If the rental income develops negatively, this leads to a loss in value of the property. In the worst case scenario, the mortgage lender may downgrade the value and demand additional equity.

How do I find the right property?

In order to keep the risks as low as possible and to benefit from the many advantages of an income property, the selection of a property should be carefully considered. There is no single, universal recipe to help you choose the right property. It is important to think carefully in advance about what you want and which decisions will have which consequences. The location, rent level, condition, purchase price and yield have an influence on the valuation of the income property.

• Location: An attractive location is essential. Public transport connections, the view, but also the economic strength of the region, the tax rate and socio-demographic aspects influence the value of the property in the long term.
• Rent level: The rent level in the municipality of the property should definitely be included in the analysis. Are the rents already rather high, or do they still have potential for increase?
• Condition: The need for renovation is often underestimated. The condition should be carefully checked at the time of purchase and the renovation costs should be calculated before the investment decision is made. Renovations can usually be tax deducted. If the renovation costs can be passed on to the rent, and if the market is still open for higher rental rates, a property in need of renovation can also be of interest.
• Purchase price and yield: The value of an income property is often determined on the basis of the earnings value, where the rental income is extrapolated using a capitalization rate.

Be sure to have an independent property valuation carried out to verify the purchase price. MoneyPark will be happy to do the valuation for you.

What financing options do I have?

The financial viability of an income property depends strongly on its characteristics: The need for renovation, use, location or vacancy risks are just a few of the factors that influence the volume of financing required. Ideally, 80% of an income property can be financed through a mortgage. The remaining 20% must be brought in via own funds. Pension assets from the 2nd and 3rd pillars may not be used - unless the owner lives in one of the apartments himself.

The affordability calculation for income properties differs from that for owner-occupied residential property. The relevant factor here is not the mortgage borrower's income, but the rental income. In addition to the net rental income, all costs incurred are included in the affordability calculation. These costs include mortgage interest, which is calculated at an imputed interest rate of 5 percent, as well as ancillary and amortization costs. The annual net rental income less the costs incurred should result in the highest possible profit.

Affordability calculation for an income property

• Purchase price: CHF 1'500'000
• Mortgage (80% of the purchase price): CHF 1'200'000
• Annual net rental income: CHF 100'000
• Interest costs at an imputed interest rate of 5% on 1'200'000: CHF -60'000
• Amortization 1% on CHF 1'200'000: CHF -12'000
• Ancillary costs of 15% of the net rental income: CHF -15'000

Annual profit: CHF 13'000

In addition to calculating the surplus, certain mortgage lenders also look at the gross yield of a property. This relates the annual net rental income to the purchase price. In the above example, the gross yield would be 6.7%, which is quite reasonable by Swiss standards. However, depending on the provider, canton and location of the property, each mortgage borrower defines their own guidelines.

Due to the different valuation methods, the interest rates can also vary considerably. In the case of income properties, it is particularly important to obtain several offers and compare the interest rates. Your MoneyPark specialist will help you find the best interest rate for you.

What are the financial consequences?

The purchase of an income property entails tax consequences. The rental income generated must be taxed as income. However, paid mortgage interest, maintenance and certain renovations can be deducted. The tax implications for your personal situation are best calculated by an independent financial specialist.

Summary of the most important facts

Investing assets in an income property is a good way to diversify your portfolio, generate regular income and hedge against inflation. There are, however, a few points to consider if this investment is to be financially successful.

Take your time in the search for the right property. Check the property and its value carefully and arrange a valuation of the property. Calculate the optimal mortgage amount for you by taking into account your entire financial situation (assets, taxes, pension plans).

MoneyPark not only finds the best interest rates for you with independent and personal advice, but also defines an individual strategy for financing your income property in Switzerland. In this way, you ensure that you achieve an optimal return over the long term.