I bought a house with 2 units in Switzerland recently for $750k mainly for rental income and long term security.

The house returns $29,000/annum brutto rental and after deducting interest, amortization, tax, costs, and minimal renovation costs of the house netto return is $12,000/annum . Already have people interested to rent.

Now I received offer from the neighbour who has been too late to buy the house and he would pay $70k more which after tax and my expenses of paperwork is around $45k return.

Figured in 10 years if the house keeps the current value and in case I want to sell, need money or something, I made 120k + what I amortized let's say $200.000, calculating in a $80.000 maintenance that's still a possible $120.000 at the end of 10 years.

Do you know what data/information I could look at to decided to keep the house or sell with a good profit? (don't yet know if Coronavirus(COVID-19) will trigger a fall of house prices here or maybe causes inflation and boom in long term). Based on the charts I checked prices in general are going up, there have been two adjustments though.

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1 Answer 1

I bought a house with 2 units in Switzerland recently for $750k mainly for rental income and long term security. The house returns $29,000/annum brutto rental

Easy. Sell!

In the very long term, house prices appreciate by inflation (2% per year). However, that's for a portfolio of houses part of which are demolished and part of which are newly built. So, a year from now, the average age of houses has stayed the same because some old houses were demolished and new houses were built. The age of your house is 1 year more after 1 year from now.

If you want your house price to appreciate, you need more than minimal renovation costs. In fact, you should spend about 2% of the construction cost of a new house (not including cost of land) for renovation. I don't know how much of the $750k is land and how much is the building on the land, but let's be generous and assume 50%/50%. So, you should spend $7500/annum for renovation based on that.

The real yield is $29 000 / annum rental minus $7500 / annum renovation, giving $21 500 / annum.

You have to subtract heating costs, management costs and taxes too. I don't know what those are for you so let's be generous and assume all are $0 (unrealistic assumption).

Even given this unrealistic assumption, the real yield is 2.866%.

With a more realistic assumption, I suspect the real yield would be below 2%.

For a well-diversified stock portfolio, you get about 4% dividend yield plus about 2% economic growth in the long term giving 6% real yield.

In contrast to a well-diversified stock portfolio that is almost guaranteed not to fail, an individual property is subject to many risks. For example, what are you going to do if a water damage and mold problem destroys the value of your investment? An investment to an individual asset always has risks. With houses, you cannot diversify with minimal money; with stocks, you can.

Also, house prices can and will crash.

The largest decline in real prices was from 317.9 (in 1778/9) to 68.1 (in 1814/5), meaning the real price went 79% or approximately 80% down. Note that's for a well-diversified house portfolio. An individual house can decline 100% in value quite easily.

With stocks, the largest decline (during Great Depression) was similar, 80% down.

So, having established that the risk in a well-diversified house portfolio is the same as in a well-diversified stock portfolio, and having established you obtain 2-3% real yield from your house as opposed to 6% real yield from stocks, I'd say the answer is pretty clear.

Your property investment does not make sense even given the $750k price

You can more than double your real return AND reduce your total risk by obtaining a well-diversified stock portfolio as opposed to house investment in this very overheated housing market you are currently investing in.

I would sell the investment immediately, no questions asked, even if someone offered me only $500k.

You got a very good offer. Now is the time to exit.

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