How to invest in foreign property from Switzerland – The Story of Iain| Updated: |
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Recently, I had the chance to discuss Real Estate investments with Iain. Iain came from the United Kingdom to Switzerland 14 years ago. He is now a Swiss citizen.
He has been investing heavily in several properties, especially in the United Kingdom. I thought it would make a very interesting story for this blog.
We are currently considering buying a house to live in, but not yet investing in property. But diversification being very important, this may be something we will do in the future.
So, let’s learn together how Iain build his extensive property portfolio.
Can you tell us about your situation?
I grew up in the NW of England, studied economics in Nottingham before continuing to work for one of the big five management consultancies. This work took me down to London, which, on the one hand, was great, but it was not really the life for me, at least for the long term.
Therefore, after spending many weekends flying over to the Alps to pursue my outdoor hobbies, I finally made the decision after five years to quit the consultancy job and move to Switzerland. After 14 years in Switzerland, I am now also privileged to be a Swiss citizen and resident in the beautiful Canton of Zug.
How did you start in property?
On my first consultancy project, I had a manager who had bought a property.
This originally planted the idea in my mind, and sometime later, I went out and bought my first apartment. I had no clue what I was doing, but I liked the color of the walls, and back then, the banks were willing to offer large mortgages, so I needed very little of my own money. Fortunately, I got lucky with the market and the property.
Within a few years, the price had increased a huge amount, and I saw here potential. Unfortunately, rather than investing in my education, I bought a property in Bulgaria – a heavily marketed hotspot in Europe.
How did the journey develop from there?
The journey went from bad to worse, as seeing the prices increase in Bulgaria, I bought some more off-plan deals. A friend was also investing here, and we were convinced that this was the next big thing. As it happened, this was just a huge boom based on the fact that many Brits were remortgaging their own houses to pull out money for investing abroad.
There was no sound economics behind it, and these good days came to an end. Luckily, we saw this before many people, and I was able to sell all my units there at just a small loss. It hurt, of course, but it was an excellent education. It was at this point that I decided to stick to a country and market that I knew well and then bought my 2nd property in the UK – this time in my home town in the north.
Why do you invest in property?
Ultimately, I invest in property for the financial freedom which it gives me.
Beyond this, however, I also find property interesting as it is a physical asset that you can touch and comes in all shapes and sizes. I enjoy having property renovated and creating comfortable spaces and homes for my tenants. This is very satisfying, and I never forget this important social aspect and responsibility.
What do you look for in a property?
Properties come in many different types. Personally, I concentrate on the residential sector and, now, within my portfolio, have apartments, houses, and HMOs. An HMO is short for ‘House of Multiple Occupants’ whereby individual tenants live together in a house with shared communal facilities. Each of these property types offers different benefits.
An apartment generally will have a service charge for the communal parts of the building. They are also often simpler because the general parts of the building, such as the roof or the outside walls are taken care of with the service charge and will hence require less maintenance for the owner.
The houses in my portfolio are all semi-detached and rented to working families. They have small gardens and are freehold, which means I also own the land on which they are built. There are, therefore, no ground rents or service charges, but here I am responsible also for maintenance of the building structure.
The HMOs are a lot more effort, to begin with – there are usually 3 / 4 months of refurbishment to convert a standard family home into a house with 5 or 6 bedrooms and suitable communal areas. There are many regulations to follow, and the target group of young tenants also have high expectations to meet. Once up and running, the total rent is higher than a single-family home, but the maintenance and the management are also more intensive, with such tenants generally not staying for more than 12 months.
Is property not a lot of hassle? Do you not mind fixing toilets?
Right from the outset, I have always employed a management company to look after my properties.
It took a while to find good companies, but once you have done this, a property should offer no more effort than answering an email once in a while. There are now many, many regulations in the industry, and it is important to have a good company that ensures that these are followed, and the rental setup complies with the law. They will also find and credit check tenants and step in when things go wrong.
I give my management companies the authority to arrange any repairs up to £200, which covers most things, and for these, I am only aware of them when I receive my monthly statement. I am informed of any larger items by email and normally just confirm my acceptance for the company to do whatever needs doing – maybe replacing a broken oven, for example.
Ultimately, I am an investor and not a landlord. My specialty is not in fixing toilets!
What returns can you expect?
Returns in property are made up of 2 aspects – capital gains when you sell and income from your monthly rent. When purchasing a property, it is important to know what your end goals are, as this will determine the sort of property you invest in.
City center apartments often have a low yield but can offer larger capital growth whereby at the other end of the scale, an HMO is not a capital growth play but offers a much higher yield. My portfolio is set up around 80% towards the income side and 20% towards capital growth, as it is my primary aim to replace my salary.
When calculating returns and comparing with other investors, it is important to know how you want to calculate these. Many companies selling ‘investment property’ will not factor in repairs or voids in their headline figures. Other investors may not consider other items or some of their purchase costs.
I always work on a formula of considering every purchase cost (even the stamp for posting the contract) and every ongoing rental cost. I track every penny spent on all my properties and hence have a good picture of these figures from over the years. I also do not consider finance in my’ net yield’ figure as this can make big differences and does not necessarily give a true reflection of the performance of a particular property. Therefore, my net yield is calculated as follows:
Net yield = (Annual rental profit (ignoring mortgage) / Total Purchase price + costs) * 100
In my portfolio, my yields are typically around 5% for a single-family house and 7-8% for an HMO.
I consider capital growth as a bonus and do not calculate this into my returns.
As my properties have mortgages, the figures above do not reflect my actual returns – which in all cases are much better! This is where the aspect of leverage makes property, in my opinion, such an excellent investment. If we were to play with some typical figures, we can illustrate this.
- Purchase price = £120,000
- Purchase Costs (legal, stamp duty etc) = £5000
- Monthly rent = £650
- Annual Rent – Costs (30%) = £5460
- Return = 5460 / 125000 * 100 = 4.37%
Let’s now get a mortgage on the property of 80% of the purchase price and a 3.5% interest rate – £96,000
We now must pay interest monthly on this which is £280
Our new annual income is, therefore, £5460 – (£280×12) = £2100
However, our return on investment is now 2100 / 24000 (amount in the deal) *100 = 8.75%
In this typical example, by getting a mortgage, we have now doubled our return on investment!
Once you have owned a property for several years and the price has increased, it is possible to remortgage, and if the bank will lend 80% of the value, you may now even get the chance to pull out all your own money that you originally used to buy the property. Once you have done this, your rental returns will be infinite as you personally do not have any money tied up in the investment. This is clearly an excellent situation!
What happens if prices fall?
When purchasing a property, it is important to get a good deal and always buy below market price. There is always some opportunity where people need a quick sale for reasons of maybe a divorce or needing a quick sale to purchase their next dream property.
By acting swiftly and professionally, you can take advantage of these situations. In doing this, you can lock in some instant equity, which can act as a buffer if prices do fall. There is also a property cycle by which prices, just like with many other assets, rise and fall over time. It would be important not to buy at the top of this cycle.
Over the long run, however, prices do increase, and property is something for me with a long horizon. Rents go up with inflation, and the consistent rental yield is not affected by any house price fluctuations, and so I do not worry about this.
Why do you not invest in Switzerland?
The market in Switzerland is a lot less liquid than in the UK, and there are far fewer deals here. Also, the yield and ROI is a lot less, despite the interest rates being lower. Finally, it is also way more expensive and requires a much larger investment of your own capital.
I would like to buy a house in Switzerland to live in, but not as an investment.
Should everybody invest in real estate?
Real estate is not for everyone.
It will come with many ups and downs, and if you are the sort of person who worries when problems arise, then property investing is not for you. Almost inevitably sooner or later, you will have tenants that do not pay rent, leaking roofs, broken washing machines, and other problems. If these things may cause sleepless nights, then it is better to steer clear of property.
Do you have any advice for people wanting to start out in property?
One of the classic motivational books for property investing and passive income is Rich Dad Poor Dad. Some of the concepts described are outdated and virtually impossible in many markets. But the book otherwise explains very well the possibilities in property investing.
There are many other free resources out there where you can learn about property and the laws and regulations surrounding it. This is a good way of educating yourself rather than making the stupid expensive mistakes that I made at the outset of my journey.
Thanks a lot to Iain to share his great story with us!
I have learned a lot by discussing property investing with Iain. It is always interesting to learn from someone who did the job! Since I have never invested in property, Iain is much more able than I.
I am not planning to invest in property soon. We will buy a house to live in, but this is not an investment. But after that, once we have replenished our stock portfolio, we will consider alternative investments. And investing in property is one of the things we will consider!
If you are wondering how to decide, I have an article about renting vs. buying. And if you are renting, I have a guide about renting in Switzerland.
What about you? Do you invest in property?
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13 thoughts on “How to invest in foreign property from Switzerland – The Story of Iain”
Just two general comments:
1. When getting a loan make sure the bank allows you to rent that property. That is not always the case.
2. In many countries your rent income is taxed, so your return on investment is reduced.
3. Extra costs / hidden costs: house insurance, high rotation of tenants, house & municipality taxes.
That’s three ;)
These are good points! The loans for renting it out may not be the same as for living in.
And I would add that on the best case, real estate has really good returns, but you will still have to pay fees even if you do not have a tenant, so there are risks that many people ignore.
Thanks for stopping by!
It is an interesting article and thanks Iain for sharing your personal experiences. I also invested in a condo in Manila many years ago, now it is a rental property with capital gain as well. I am constantly looking for opportunities to invest abroad but I find there are 3 risks:
1. Foreign exchange rate. It could fluctuate and eats up 3-4% gain.
2. Getting a loan from bank.
3. Finding a reliable and professional agency to manage the rental property for you.
I’d be happy to exchange more information on this with the others.
Thanks for sharing your story!
I completely agree with the points 1 and 3. Exchange rates can ruin your returns. And as Iain said, it’s difficult to find a good agency, but once you get a good one, you can keep it for a long time.
But I am not sure about 2. What do you mean? How is getting a loan from a bank a risk there?
Thanks for stopping by!
It could mean a risk or challenge. In Manila, the interest rate was like 8% at the time and it is very high. The economy is still very unstable and the interest rate could change a lot. That I see as a risk. Actually what I want to say that getting a loan is a challenge. In some of the countries where I looked into, it’s not possible to get a loan locally as a foreigner, especially I don’t live there. I am referring to some markets in Asia. I assume it is also not easy or possible to get a loan in some European markets for property.
For point 3, I had a bad agency for some time, as I had to leave Manila, I trusted her to manage the property for me. It was not the case at all, they couldn’t find a tenant and don’t have a lot of connections. When I switched to another agency, I had to forfeit some fees I paid upfront for the first one. As a foreign investor, I don’t fly to Manila often and it’s very problematic when the agency is not good enough. I got lucky the second time.
Thanks for expanding :)
Yes, I understand it can be a big challenge to get a loan in another country, especially if it’s far away.
And it’s a good point about the unstable economy. Interest rates can vary a lot in some countries. This is a risk :)
I am sorry to hear about your first agency, but it seems you got lucky with the second one which is good!
Thanks for sharing!
You said “I have always employed a management company to look after my properties”.
What are the main characteristics of a good management company? If you are not familiar with the real estate market of the country in which you invest, what should you pay attention to?
Hello, thanks for the interesting topic!
where does he get the mortgage? in UK or CH?
Is it possible to get a mortgage in Switzerland and purchase a flat in another country? Did you discuss about this topic as well?
Good question :) I do know.I asked him to take a look at these questions.
At the beginning, I would expect in the UK, now probably in CH.
However, there are some laws against that in the European Union, I do not know if they apply to Switzerland.
For instance, you cannot get a loan in France to buy a house in Germany. But from France, you can get a loan from a German bank to buy a house in Germany.
Some big banks have partners in other countries, so they can definitely help you get a loan abroad, but most of the transactions will be done from the foreign bank.
Thanks for stopping by!
It is certainly not possible to get a mortgage in Switzerland to buy a property in the UK. If so I would be first in line for factors of efficiency and low interest rates!
How it is between other countries I don’t know.
I was fortunate that I was already an established investor when I left the UK, so getting finance now as a non resident is quite simple. Otherwise as a first time buyer and non resident you are looking at much higher rates until you can also show a track record.
If UK property is a potential investment for you, my advice would be to speak to a good UK based mortgage advisor.
Very interesting. Is Iain buying & renting under his name or under a company (sole trader/Limited)?
There is a lot of taxes implications behind this choice, in UK and in Switzerland.
Thanks, considering doing the same since quite some time.
Great question! I have no idea :) I will ask him to take a look at the comments :)
Thanks for stopping by!
This is indeed an important consideration in terms of not only tax (income / capital gains / inheritance) but also accessibility to finance. In my personal situation, it makes more sense to buy in my own name up until the point of becoming a higher rate tax payer and then switching to a limited company. Buying in your own name may make sense to take advantage of the UK personal allowance if this is available for your situation as well as the allowance on capital gains when you come to sell it.
Another tax to be aware of if investing in the UK is the stamp duty land tax. It was confirmed last month that from April 2021 all non residents will pay a 2% surcharge on residential property.
My advice would be to do your own research and consult a tax advisor. Like you say, setting this up correctly from the start could save you thousands down the line.