How much rent to charge for your apartment

Author: Bernhard Bircher-Suits, FundCom AG

Before property owners calculate their costs or return targets, it’s worth taking a look at the local rental market. In many cases, it quickly becomes apparent there is a clear range of possible rental prices. Comparable apartments in the same neighbourhood provide a good point of reference. Tip: only compare your apartment with similar properties. Location, year of construction, condition, number of rooms, balcony/garden, ground floor or not, parking space and rental standard can make a big difference.

Use property portals to get an overview of the market

Property portals provide an initial overview of the market. On platforms such as Homegate, current asking rents can be compared easily. In addition, the Federal Office for Housing regularly publishes analyses of the Swiss rental market and sometimes also provides rental price statistics. Data like this helps to define a realistic price range.

The cost perspective: your expenses must be covered

To make renting out worthwhile, you need to know what costs will be incurred. Typically, this includes:

• Mortgage interest rates
• Maintenance and reserves
• Administrative costs
• Insurance and levies
• Potential value-enhancing investments

Many property owners underestimate the cost of maintaining a property. As a rule of thumb, this will be 1% to 1.5% of the building’s insured value per year – depending on the age of your property.

Legal framework: how much are you allowed to charge?

In Switzerland, you are not entirely free to set your rent as you wish. According to the Swiss Code of Obligations (CO) 269 and 269a, the rent must not be “abusive”. It is considered abusive if it brings you excessive revenue or is not justified by cost increases.

3 common justifications:

• Cost/return calculation: In principle, you are allowed to achieve a reasonable net return – according to the Swiss Federal Supreme Court, this is around 1% to 2% above the applicable reference mortgage interest rate. The rate is determined by the Federal Office for Housing (FOH) and published quarterly. It applies to all rental agreements in Switzerland.
   
• Comparable rents typical in the local area: This is often a decisive factor for new-builds or extensive renovations: you need to prove that the rent you are asking for is within the range of local market prices. At least 5 comparable apartments must be referenced.
   
• Absolute method for first-time rentals: In the case of initial letting after a new build or complete renovation, the rent is considered permissible if it is within the range of market prices. Owners often rely on online real estate data for this purpose.

The question of returns: what’s left for you at the end?

A property should have a positive return on investment in the long term. A simple calculation goes like this: return on equity = (annual net rental income less running costs) divided by the equity you invested.

An example calculation

• You rent out an apartment for CHF 1,800 per month (CHF 21,600 per year).
   
• After deducting maintenance or reserves, administrative expenses, mortgage interest and insurance, this leaves CHF 12,000 per year. 
   
• If you have invested CHF 300,000 in equity, this results in a return on equity of 4%. 

That’s a solid return. However, higher maintenance costs, vacancies or rising mortgage interest rates can change the effective return.

Limits and pitfalls in setting the rent

Watch out with renovations

Have you modernised the apartment? Then you can increase the rent – but only proportionately, for example for value-enhancing investments (e.g. new kitchen). Value-preserving work (painting, repairs) cannot be fully passed on via your rental prices.

Beware of inflated initial rents

In the event of a new tenancy, tenants can dispute the initial rent within 30 days of taking over the apartment. A challenge is possible, in particular, if the tenant was forced to enter into the rental agreement due to personal or economic circumstances (e.g. housing shortage), or if the rent has been significantly increased compared to the previous rent.

In such cases, the relevant arbitration authority can check whether the asking rent is abusive and, if necessary, order a reduction. Cantonal arbitration authorities regularly handle disputes of this kind.

The practical way to determine your optimal rent

You’ll find the right rent by combining 3 perspectives:

• Market prices: What are other landlords asking for comparable apartments?
   
• Cost basis: What return do you want to achieve – without it being excessive?
   
• Legal framework: Is your rent within the legally permissible range?

The more transparently you document your calculations – condition, ancillary costs, renovations, rent index – the easier it will be to justify your rent later. This is exactly the kind of documentation that is also important when it comes to selling. 

Ancillary costs – often underestimated, but legally tricky

Ancillary costs may only be charged if they are expressly mentioned in the rental agreement. They must also be incurred according to actual use – flat rates are allowed, but risky for you as the owner. Energy prices in particular fluctuate greatly. Some owners therefore prefer to make payments on account with annual, detailed billing, which is the fairest, but also time-consuming.

In summary: your rent should be fair, in line with the market and well justified

A properly determined amount of rent is not just a number, but the result of a well-thought-out process. If you estimate your costs realistically, analyse the market carefully and comply with legal requirements, you’ll find a rent that suits both you and your tenants. And that’s exactly what leads to stable tenancies in the long term. Rental agreements that last for many years are the best guarantee of sustainable returns.