If you want to invest in an investment or income property, it is advisable to check several aspects before making a concrete purchase. Not all properties offer the same returns. The profit you can make depends on various factors.
First, you need to decide which type of investment property is right for you. An apartment building, office or commercial property, or maybe a hotel? An important factor in deciding how to invest is the capital you have at your disposal. That’s why we look at the most important characteristics of various investment properties first in our guide. We then provide a checklist with points you should consider when choosing what to buy.
When you purchase an investment property, you’re investing directly in real estate. In general, income properties are characterized by the fact that they are rented out to third parties. As the owner, you generate regular income in the form of rental payments by renting out the property.
Find out more about investing in real estate and the associated opportunities and risks in our article.
According to UBS key4 mortgages, an apartment building with at least three residential units can be classified as an investment property. Investing in an apartment building requires a relatively large budget; however, it has historically offered comparably high returns. It should be noted that, in addition to the financing costs, owners also incur running costs for (external) property management and any maintenance and renovation work, which in turn reduces the return.
An additional advantage of an apartment building is that you can receive rental payments from multiple different parties, which reduces the cluster risk: if a renting party cannot pay the rent or if an apartment stands empty, this only affects part of your total income.
In most cases the value of the property also increases over time, which is good news if you decide to sell it later on.
In the case of offices and commercial properties such as shops, hotels, restaurants and industrial buildings, as a rule, owners must reckon with more frequent vacancies than with residential property.
Demand for commercial real estate is more volatile, meaning you must accept a higher level of risk. Furthermore, in contrast to residential property, space in commercial real estate is usually rented out over a period of several years, which is why active tenant management plays an important role. Technical and energy requirements are also often high.
It is therefore beneficial if owners of office and commercial buildings already have some experience.
Investments in commercial real estate are demanding but can provide attractive returns. In addition, tenancy law is generally more landlord-friendly than for residential real estate, and market conditions for office real estate have improved again since 2022. Read more in our article.
Of course, mixed-use real estate that contains both apartments and commercial and/or office space is also suitable as an investment property. Here too, a certain amount of expertise is required due to the high administrative and coordination burden, and the various tenancy laws. One advantage is that you can counteract the risk of loss of earnings through diversification.
Demand is also increasing for small and micro apartments in Switzerland, especially in cities. They therefore represent a very promising investment for buyers. The high price per square meter of micro and 1-2 room apartments can lead to comparably high returns. However, at the same time they also entail risks such as high construction and investment costs. Find out what else you need to consider when purchasing this type of investment property here.
Now that you know the opportunities and risks of various investment properties, we will now show you a checklist of the most important factors you should investigate before concluding a purchase agreement. After all, these factors influence how high your returns will be.
The goal of an investment in real estate is obviously to amortize the purchase price through monthly rental income as quickly as possible. You can determine how long this will take with the help of the rental multiplier. This can be calculated easily by dividing the price by the net rental income. The rental multiplier indicates whether a property is good value or expensive in comparison to other properties. The lower the factor, the more attractive the investment. In Switzerland, the average multiplier is 25. You can also calculate the gross return using the purchase price and the annual net rental income. We divide the price by the rental income.
Rental multiplier: 4,500,000 / 180,000 = 25
Gross return: (180,000 / 4,500,000) * 100 = 4%
However, in order to be able to determine the net return, these calculations do not include administrative and operating costs. These costs are deducted from the net rental income.
Net return: (180,000 – 27,000) * 100 / 4,500,000 = 3.4%
You can find more information on the subject of returns here.
Our advisory team will be happy to help you.
If you buy a property, it is important to find out about the year of construction and the building fabric in advance and to inspect the potential investment property. Generally, you have a choice between a new-build, a second-hand property or an old building:
If you have little or no experience in assessing the condition of a building, it is worth calling in an expert and carrying out the inspection of the property together.
Does your dream property have a balcony, but no garage yet? Or could you create extra living space through a loft conversion? You should verify in advance whether such extensions and modifications are possible. A change of usage may also be possible – for example converting a former office building into a residence. These types of measures can increase the value of the investment property.
A good location is decisive for the value of the property in particular. When assessing this, we can distinguish between micro and macro location. Micro location indicates the direct surroundings of the property: in the case of residential property, this includes, for example, connection to public transportation, schools and shops, whilst for commercial property this would include vehicle access, parking facilities and footfall. Macro location indicates the attractiveness of the municipality, city or region, which depends on the following factors:
When judging whether an investment property is in a good location, you should also look ahead to the future. For example, are there plans to build a highway or a waste incinerator nearby? Those who are interested in purchasing an investment property can get an overview of the residential vacancy rates in the relevant region by consulting the Dwelling vacancy rate. In good locations – especially in cities – vacancy rates are lower and rental income is higher.
Last but not least, you should also check whether the property is located in a danger zone, for example in a location with a risk of flooding or landslides.
The rent level should also be included in the analysis of a property regarding the return to be achieved. In particular, you should check whether the price of the investment property to be acquired corresponds to the rent level of other properties in the municipality.
Property and property transfer taxes also apply in some cantons. Anyone who buys a property should inform themselves about this tax rate in advance.
Not just the current rental income, but also the income you can achieve in future is important. Concretely, you should check whether the rent can be raised to meet the current market rates when changing tenants. The same applies to renovations: as the owner, can you raise the rent on your property if, for example, you insulate the windows?
Of course, achieving a profit also depends on tenants. If the investment property is already rented out, you should obtain the relevant information in advance and check the rental contracts. How high is the rental deposit? Are there payment arrears, legal disputes or frequent fluctuations to contend with?
The goal should be to achieve long-term rental arrangements with stable parties, to reduce the administrative burden.
Regardless of whether you’re buying an apartment building or a commercial property: when financing an investment property with a mortgage, you must have enough equity to cover at least 25 percent of the purchase price. As a rule, you cannot use capital from pillar 2 or 3. There are also several things to consider regarding amortization and affordability. Find out everything you need to know about financing investment properties in this article.
At UBS key4 mortgages, you received several attractive offers with just one request.
When you take the factors mentioned above into consideration and plan your real estate purchase carefully, an income property is an investment you can benefit from in the long term. Our tip: when assessing the purchase price, the condition of the property or the tenant mix, in case of any uncertainties, consult an expert. This does involve costs, but checking carefully pays off financially in the long term.