Renovate, replace or sell – what are your options for investment property?

According to the Swiss Federal Statistical Office, just under 52 percent of the approximately 481,000 multi-family units in Switzerland were built between 1946 and 2000, which means they will be between 22 and 76 years old in 2022. This is significant in that the first repairs to multi-family units are usually necessary after 20 years – and comprehensive renovation work is generally required after 50 to 70 years in order to preserve the building fabric.

Similarly, just over half of these multi-family units are privately owned and held as investment properties. Private individuals are usually unable to finance comprehensive renovation work from their own funds; it takes years or even decades for the investment to be amortized. How much does a viable renovation project cost and is it financially worthwhile? What factors does this depend on? What are your options, and are there any better alternatives? We explain the basics so that you can make an informed decision.

You carry on renting without carrying out any renovation work, be it partial or total, and keep the building in a habitable condition with as little effort as possible. Any action you take is limited to touching up the paintwork or similar maintenance work (see also “Refurbish, renovate, modernize … what’s the difference?”)

• With this option, the focus is clearly on optimizing returns rather than on preserving value.
• You are aware that by foregoing value-preserving investments, it’s not only the living comfort that will suffer, but also the building fabric. The building will age faster and will need to be fully renovated or even demolished sooner.
• By adjusting your rent to take into account the lower level of comfort, your risk of vacancies will remain low: you will always find tenants who prefer to live as cheaply as possible rather than as comfortably as possible.
• There is a fine line between low investment in maintenance and scruffy or even dilapidated. The former is to be aimed for, the latter to be avoided at all costs.
• If you know you will be demolishing the building in the foreseeable future or selling it as a condemned property, you can change your strategy from continuation to demolition management. You can optimize your returns even more by no longer maintaining the building, but simply carrying out urgent repairs as cost effectively as possible. For instance you can replace defective equipment not with new, but with used devices, and repair defective cables surface-mounted rather than flush-mounted.

This option includes the maintenance and repair of the building or individual components of it by means of partial or total renovation work.

Maintenance preserves the target condition, i.e. the functional capacity of the building or its individual components by means of simple, regular measures. This is different from repair, which restores usability by mending or replacing defective components. This also helps to maintain the value of the property.

The purpose of renovation is to restore all or part of your property to like-new condition. As part of a renovation project, modernization work can also be undertaken to sustainably improve the utility value of your property. This also includes energy-efficient renovation work.

Partial renovation is usually carried out while the building is occupied. Depending on the extent of your renovation plans, it may be more interesting to complete the work in multiple stages over a period of several years. Due to tax progression, it is financially more attractive to deduct the construction costs spread over several years rather than all at once.

• If you opt for partial renovation, you will still receive (reduced) rental income during the construction work. Depending on the degree of interference of the work, your tenants may be entitled to a reduction in rent – so it’s in your best interest to get the work done as quickly as possible, yet thoroughly.
• When a construction project is divided into stages, it is advisable to work out a renovation plan with a construction specialist. The first stage usually involves renovating the building shell (facade, windows, roof), then you move on to the interior and heating system during the second stage. The tenants will be able to use their apartments without restriction while the exterior renovation work is being carried out; the reduction in rent – if any – will therefore remain low.
• When renovating a building in stages, certain basic costs are incurred twice – such as fees, preparatory work, scaffolding and construction cranes. Although these costs end up being higher, on the other hand you will save taxes and can adjust the rent in two stages as the property value increases.
• The partial renovation of an occupied property will cost you less than the total renovation of a vacant property. However, you will also have less scope to adjust the current leases: replacing existing components – for example a kitchen – with new ones helps to maintain value and not to increase it; it is therefore not possible, or only partially possible, to reflect the costs in the rent you charge.
• Modifications to the building fabric, such as adding floors or changing the floor plan, are very costly in an occupied property. Total renovation therefore usually requires a vacancy notice.
• The costs of total renovation work are considered as added value and can be financed to a large extent through rent. However, you should keep in mind that after total renovation, your property may seem as good as new, but will nonetheless be 50 years old. To recoup your costs, you will need to raise the rent to a level where you will be competing not with other 50-year-old buildings, as previously, but with first-time rentals or very new multi-family units with more modern floor plans, more attractive kitchens and bathrooms, more flexible spaces, and so on.
• The rulings of arbitration boards for rental disputes indicate a conflict of interest between tenants and landlords, especially in the case of energy-efficient renovation work. As a landlord, you want to prepare your property for the next 30 years and, if possible, benefit from Minergie funding and subsidies. The Swiss Homeowner Association (HEV) is convinced that tenants are not prepared to dig deeper into their pockets for energy-efficient renovation work. According to the HEV, tenants are willing to pay significantly higher rent for a more modern kitchen or a larger balcony after renovation work – but not for measures related to energy efficiency.
• Total renovation down to the shell is only possible if the building is unoccupied – which usually requires a vacancy notice. Consult a construction law specialist for advice on what deadlines and formal requirements you must observe.
• A vacancy notice creates a litigation risk: A single tenant can delay the construction project by up to four years by requesting an extension. In order to conserve some rental income during this period of uncertainty, you will need to sublet your property – risking further delays. You will need to submit a new planning application and recalculate the renovation costs – without knowing whether further objections could delay the project even more.