Switzerland: How buying real-estate can kill you financially and two reasons to go for stocks instead
tl;dr Houses are bad investments due to foreign millionaires inflating real-estate for the rest of us. Stocks are better: There is zero tax on capital gain and an interesting estate tax treaty with the US, so one can buy cheap ETFs.
Almost three years passed since I wrote “8 reasons why I moved to Switzerland to work in tech” and I want to update on some things that are on my mind right now . In 2014, I just moved to Zurich and started my first job after college. Now, I worked here for three years as a software engineer, quit that job to start my own tech recruiting agency.
Ad: If you are a software engineer looking for a new job, or if you can refer one, shoot me an email at firstname.lastname@example.org.
This post is supposed to give an update on how life in Switzerland developed for me in the last three years and what I can recommend anyone to do who moves here or lived here for some time.
If one is willing to work in a normal job and have a modest lifestyle, one can become half a millionaire within a short time. Check out this five min video where I talk about how reducing spending has a bigger impact on your financials than making more money:
After living frugally for some time the question arises how to keep and grow wealth. The two main investments most people can do are real estate and stocks. It turns out Switzerland clearly deters people from buying real estate and incentivises in instruments on Wallstreet on many levels. First, let’s talk about how you are punished to own a house and then how you are incentivised to buy stocks.
Switzerland: Prices for real-estate are highly inflated
While in the US you have regions where people make $50k a year and a house costs $50k — $100k (like in Milwaukee, Dallas, Pittsburgh, Kansas City, San Antonio, Houston, see property investment rankings) in Europe and especially in Switzerland it is not like that. Old, crappy 3-bedroom apartments located on the edge of Zurich-city can cost 500k CHF — and that would be considered cheap. However, such an apartment can be rented for 1600 CHF, so the price-to-rent (P/R ratio) is 30 (600k / (1600*12)). A financially rational person would consider buying a house if the P/R ratio is 15 or lower.
The reasons for this high price-to-rent numbers are manyfold. One reason is that pension-funds are pouring money into real-estate due to low (well, negative) interest rates, another one is that foreign multimillionaires buy real estate in Switzerland for fun. Even when the ROI is zero or negative, they just want to diversify their portfolio by backing it with Swiss houses.
A Swiss real-estate consultant told me that the last thing he would put his own money in, is local real-estate because the market is one of the most irrational ones he has ever seen. One story he told was this: A rich Russian couple bought an overpriced house because the wife liked the fact that the kitchen was painted green. This was all the due diligence they did. Such irrational buying behaviour inflate prices for the rest of us.
On top, it is easy for wealthy people to move here. I called German/Swiss migration offices asking for a friend who saved some money, if he can move to Europe:
Switzerland is “renter-friendly”
Everyone who comes to Zurich complains about its high rents. Adjusted for income and house-prices, rents are actually low due to rent-control. They stay more or less stable (rent sometimes even go down, if the nation-wide “reference interest” decreases. This happened 1. June 2017 for the last time — I pay 50 CHF less rent since then). I advise everyone in Zurich to become member of mieterverband.ch. For 100 CHF a year you get important news on tenancy regulations, free legal advise on lease agreements and legal costs insurance.
How buying real-estate on the countryside can financially kill you
Not only rich Russians but also average people are irrational. Especially when they want to buy a house on the countryside aiming for building up wealth for their children arguing that “land always goes up in value”. A simple calculation shows how this is usually a bad investment:
Let’s say you buy land worth 100k CHF with a new house on top of it worth 400k CHF. After 30 years, the land doubled in value and is worth 200k CHF but the house now has an old kitchen and the roof has to be renovated. So, the value of the 30-year old house is only around 200k CHF. Within 30 years you managed to turn 500k CHF into 400k CHF. Everyone who invests in stocks during these 30 years will laugh at you — here is why:
The average return on stocks in every 30 year period since 1928 is 10%. In such along period, due to compound interest, 500k CHF would have turned into 8.7 million CHF — calculate it yourself, if you don’t believe me.
Investing in stocks means you give your money to companies that sell goods or services and deliver value. The only way the value of real-estate can go up is due to shortage — this happens only cities (when dodgy neighborhoods transform into good ones).
Value-increase of real-estate never happens on the country-side, yet most people want a “house with land” to save for retirement. There are good other reasons, why people may want to buy real-estate, but living in it (=not be able to deduct big repairs from your taxes) to “save for your children/retirement” is wishful thinking.
Swiss law-makers know that on average, people are shitty investors. So they introduced a law that actually punishes you if you own a house — there is a thing here called “Eigenmietwert”: You pay taxes on the hypothetical rent you could make renting out your own property. So if you buy a 500k CHF home that can be rented out for 1600 CHF a month, a whopping 19’200 CHF (12*1600 CHF) is added to your yearly income tax.
While in Switzerland, use unique chances to invest in US stocks and ETFs
Switzerland’s capital-gain tax is zero as long as you don’t count as a “professional investor” (there are 5 criteria that the tax authority look at to check for this). In most countries, stock-winnings are always added to your income and can be a huge burden (you pay taxes if the market goes up but no one reimburses you if the market goes down). Hence, in Switzerland, if you invest in stocks “as a hobby”, you get the opportunity to preserve and increase wealth nicely.
I have researched on stocks and ETFs in which I want to invest in long-term (=not having to check my portfolio more than once a month — I am not a trader but a recruiter after all).
People say that no mutual fund can outperform the market over the longterm. Also, I don’t want to give away 1–2% of as management fee for actively managed funds, because in this case the only people guaranteed to get rich are the ones managing the money. Remember, the first rule of Wall Street: “Nobody knows if the stock is gonna go up, down, sideways or in fucking circles”.
Stocks themselves are too volatile for me at this point and I might invest in some companies in the future, but not now. So, I am left with investing via passively managed funds that follow stock-indices and spread over thousands of stocks and take only 0.05%-0.11% in management fees.
I started to invest most of my net-worth in two ETFs: 50% in SCHB and 50% in VEU. They are the cheapest available instruments that capture the total, worldwide stock market. I use Interactive Brokers; they have a CH-IBAN I can use to transfer CHF for free. (Also, I can take my stocks that wherever I move in the world — try doing this with a house).
I am not associated either with Interactive Brokers, Schwab nor Vanguard. Also, this is no investment advice; we are 10 years past the last recession and the stock market might make a downwards-correction anytime. In a recession your money might be locked for 3–7 years , so be aware. (Although, if you ask me, that is still better than locking money in real-estate for 30 years.)
Be aware of US estate tax liability
Be careful! Investing in US-based financial instruments has a catch. It turns out ETFs are also “situs assets” and the default exemption limit from US estate tax for non-US residents/taxpayers is a mere $60k — that means if the investor has more than $60k in US instruments and dies, it is hard to pull the money out of the US — that is called “estate tax liability”. This is why my friends from Germany can’t easily invest in these funds unless they do some hacks, like setting up a company to do the trading (since companies “never die”).
Fortunately, Switzerland and the US have concluded an estate tax treaty which raises the limit to $5.49M (at the moment). So unless you’re multimillionaire already, US estate taxation doesn’t concern you. So, being able to use these cheap financial brokers and instruments can be seen as another reason why it is so awesome here.
Summary — investing while in Switzerland:
- Don’t buy a house
- Buy stocks or ETFs (but beware of a potential upcoming recession)
- If investing over the long-term, use cheap instruments with low management fees.
Regardless whether you have money to invest or not. If you can code, or if you can refer someone who can, shoot me an email at email@example.com. We match software engineer with SMEs and venture-backend startups located in Zurich, New York and Munich.
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