You can invest your money in countless ways. The world of financial investing distinguishes between traditional investments and tangible assets. Traditional investments include shares and bonds, while tangible assets include material goods such as precious metals and raw materials. This also includes real estate, which you can invest in either directly or indirectly.
In this article we tell you what you should consider when investing in real estate. First, we cover the different forms of investment and the associated opportunities and risks.
Then we review the advantages and disadvantages of other common financial investments that are alternatives to investing in real estate.
In a direct investment, you acquire an income property or, more precisely, an investment property. This could be an apartment building, an office or commercial building, or could also be a hotel or restaurant. In general, income properties are characterized by the fact that they are rented out to third parties.
In contrast to financing your own home, direct financing of an investment property typically requires you to put up at least 25 percent of your own capital. All the capital must be “hard” equity, and you are not allowed to use your pension fund or pillar 3a assets.
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The purchase of a property offers many advantages to you as the owner:
However, direct investments are not risk-free:
If you want to invest in real estate but do not want to buy an income property, you can invest in real estate indirectly. You can do this with small amounts and have a variety of options:
You invest in real estate shares by buying shares in real estate companies. These companies earn their profits, for example, from the sale or management of properties. The return is paid out in the form of dividends.
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Risks
In real estate funds, the capital of multiple investors is pooled and invested in residential and commercial buildings, industrial properties or land.
For this type of investment, a distinction is made between open- and closed-end real estate funds. Open-end funds have the advantage that they manage several properties, and investors can trade their shares at any time. With closed-end real estate funds, on the other hand, the full investment is fixed from the outset. As a rule, ongoing deposits and withdrawals are not possible. Real estate funds are actively managed by fund managers.
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For the most part, real estate ETFs invest in real estate shares and in real estate funds.
This type of investment offers opportunities and risks similar to those from investing in real estate funds. In comparison, however, management costs are often lower because real estate ETFs are passively managed, i.e., they are not managed by fund managers. Their performance is automatically based on the performance of a specific index, such as the German stock index (DAX).
Another disadvantage is that only a few real estate ETFs exist in Switzerland, and foreign real estate ETFs are associated with a currency risk. ETFs are also strongly linked to developments on the stock market, because the investments are primarily in real estate stocks.
A REIT is a company that owns, finances and manages profit-generating real estate. REITs are generally traded on the stock exchange. However, they are not licensed in Switzerland, though they can be traded on stock exchanges abroad, for example, in Germany or the USA.
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Crowdinvesting, or crowdfunding, of real estate is an increasingly significant form of financial investment. Investors are able to support selected real estate projects while investing relatively small sums by jointly acquiring a co-ownership share. The money invested, including interest, is repaid after the project is completed, for example, after a property has been built.
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As mentioned at the start, there are many other ways of investing besides real estate. In the following, we outline the most common investments and spell out the associated opportunities and risks.
When investing in equities, analogous to real estate shares, you invest directly in a company. Popular sectors include insurance, banking, chemicals and pharmaceuticals, and luxury goods. Stockholders hold equity and participate in the company’s profits in the form of dividends. Stocks are subject to price volatility but are lucrative in the long term. A long investment horizon is therefore important. Nevertheless, stocks remain vulnerable to unexpected losses. There is also a risk that a company may go bankrupt.
Bonds, also known as debt instruments, are loans that can be traded or resold. Specifically, bonds are issued by the government or a company. Investors receive an annual interest payment, and the money invested is repaid at the end of a fixed term. Bonds are considered a safe investment but tend to generate lower returns than other investments.
Like a real estate fund, an investment fund pools and manages the money of several investors. This is also called a collective investment. Decisions to buy and sell are made by fund managers. This investment is generally characterized by a high degree of risk diversification. Funds can be associated with higher fees, which reduce the return.
Precious and base metals such as gold, silver and platinum are one of the oldest forms of investment and are considered resistant to crisis. In contrast to securities, physical forms such as gold bars are better protected against losses in value from inflation. In principle, however, investing in precious metals does not generate a return – unless the price rises sharply. In addition, you must pay the cost of storage.
Investing in real estate is generally considered to be a stable investment with low volatility. Land and living space are still finite commodities subject to high demand. Whether this type of investment is right for you depends mainly on your financial situation and your appetite for risk. The capital you have at your disposal is a decisive factor to consider when choosing an investment. As shown, a direct purchase requires at least 25 percent hard equity, but indirect investments are possible with smaller sums.
One good option is to diversify your portfolio with different investments, i.e., some combination of the investments discussed above. In any case, it is important to carefully weigh up which solution is best for you and your money.