One aspect of a real estate project to which very considerable thought must be given is financing. In the case of a buy-to-let, we talk about an investment being self-funding. A lot of investors find the self-funding option highly appealing, since it makes the job of repaying the mortgage much easier for the owner(s) of the property. Find out how your buy-to-let can be self-funding.
What does being self-funding mean exactly and what are the different elements you need to take into consideration?
A self-funded investment is an investment not requiring savings. In other words, owners earn rental income in an amount that is equal or higher to any expenses incurred. That includes monthly repayments for the loan taken out with a mortgage lender, but also any other additional charges, including water, maintenance (upkeep and repairs), co-ownership charges, tax as applicable to real estate revenue.
For a rental investment to be self-funding, the following formula should be applied: Rental income earned – costs = 0
Self-funding: Not just a question of high yields
It is important to turn to a partner you can trust for self-funding advice, given that some sources will merely encourage you to invest in high-yield properties. It is worth noting, in that respect, that higher yields also entail greater risk, thereby increasing the chances of your self-funding project not being a success.
The first step is to calculate how profitable your real estate project is. For high-yield investments, you will need to focus on the less dynamic cities. You run the risk of demand being lower in those cities, which in turn means increased chances of rental void and a lower profit if you sell the property.
It is more advisable to choose a dynamic growth market, like Paris, Bordeaux or Lyon. There are different criteria you should take into consideration, which are the geographical location, how dynamic the city is, the city’s population and employment growth and the demand for rental accommodation.
You should put yourself in the position of the tenant to find a real estate asset that ticks all the boxes, close to shops, schools, public transport. Buying a nicely decorated and cosy apartment, even if it is small, will increase your chances of attracting tenants and of ensuring you are making a sound investment.
How do I balance out earnings and expenses under this strategy?
As we have already explained above, for self-funding to work, you will need to balance out the two sides of the equation: earnings and costs. To do that, there are two solutions:
- Increasing the amount of capital you bring to the table when you take out your mortgage;
- Increasing the duration of the mortgage. That will give you smaller monthly repayments, which can be covered by the rent you receive.
Our teams can provide you with help and guidance in calculating and balancing out rental revenue and costs, so that you can put together a robust self-funding strategy.
A few tips on implementing a self-funding buy-to-let by reducing costs
There are 4 main points to be taken into consideration if you want to reduce your expenses and make a success of your self-funding strategy: tax, rent, insurance and financing.
In the context of a buy-to-rent, it is important to choose the right status as a lessor because there can be certain tax advantages for the owner. For example, the status of non-professional lessor of furnished real estate, or “LMNP”, means that under the flat-rate regime only half the rental revenue you receive is subject to tax and under the actuals regime you have the possibility of deducting expenses and amortisations.
You are advised to revise the rent each year, basing the revision on indexes issued by the INSEE. If you carry out works, be it renovation works or replacing furniture, that may justify a rent increase. The amount of any increases in rent must, however, be reasonable so as not to incur rent voids and to avoid tenant turnover which may make self-funding more difficult. The price of the rent you charge should include certain expenses like residence tax, utility charges and charges for household waste removal, for instance.
An owner who is offering their property for rent is obliged to take out non-occupying owner insurance, known as “PNO”. The cost of this insurance depends on the property, but is usually somewhere between €60 and €180 per year. The cost is borne by the owner of the property, so it is better to negotiate and obtain the best possible rate.
You should also try to negotiate the best deal on financing, to benefit from conditions that are favourable to self-funding.