New or Old? That’s usually the first question that occurs to someone who wants to invest in a rental property. In this post, we will show you why, as an expat investor, the answer is… old! Discover why you should Invest in an Older Property.
Let’s get one small but very important point straight before going on: if a building has been standing for more than 5 years, it is considered “old”. “New”, therefore, corresponds to recent constructions (built within the last 5 years), and that includes old buildings that have been redeveloped and undergone major renovation works.
Review of the Tax Situation as applied to Old versus New Buildings
The main argument for investing in an old property, i.e. the purchase price per square metre which is approx. 20% lower than new properties, is almost always countered by the same argument: tax advantages.
It is true that applicable tax rules (also) vary depending on the completion date of the property. It is also true that notary fees are lower for new-builds: around 3% as opposed to 8% for older properties. What we incorrectly call notary fees are, in fact, really acquisition costs made up of taxes collected by notaries on behalf of the French Treasury.
Become a Property Owner: at What Cost?
Other than that, the tax arguments put forward in favour of new properties don’t hold up since, logically, the main tax schemes the State has put in place to stimulate rental properties are reserved for those individuals who are French residents for tax purposes. So, an expat investor cannot take advantage of the tax exemption measures set out in the Loi Pinel, which is the main tax advantage.
Conversely, if you invest in an older property, it is possible to significantly reduce the amount of tax you pay by undertaking works, and that applies whether you are an expat or not. In practical terms, it means that carrying out works out in the property you acquire can allow you to create a real estate deficit which is deductible from taxable revenue, and that can have a considerable impact on your investment financing budget.
Old Properties have Swiped the Best Spots
You do, of course, find some new buildings in city centres. They are, however, few and far between and their price is often prohibitive to the average investor. The most sought-after neighbourhoods in towns and cities are full of older properties. The same districts boast the best transport links and local services. For investors, that translates into higher rental demand and the guarantee that you won’t have any problems in finding tenants. Also, whereas new-builds will have more to offer in terms of functionality and performance (especially in respect of thermal and acoustic standards), older properties have so much more character.
Location being one of the main factors in determining rental levels, it’s hardly surprising that ultimately, and despite the price per square metre of new properties being higher, there is actually little difference between rental levels for old and new properties (all else being equal). Gross profitability is even slightly higher where older properties are concerned.
Capital Gains on Resale of Older Properties are also more Favourable
On top of similar levels of rental income to a new property, are the higher increases in value on resale that an investor can expect with an older property. There are many reasons for this: it’s easier to find a “bargain” older property (whereas the margin for negotiating the purchase price of a new property is negligible). Renovation works, providing they are well thought-out and up to certain standards, can considerably improve a property and its appeal, and ultimately its price. Investing in new properties means taking out higher mortgages and therefore involves a longer repayment period.
For all these reasons, we believe that expats are better off investing in old, rather than new, properties. At the end of the day, however, beyond the more rational arguments, what an investor is really drawn to will obviously come into play.