Investing in a buy-to-let is an excellent opportunity as long as sufficient consideration and preparation go into the project. The advantageous interest rates being offered by French banks at the moment and the fact that certain French towns are thriving, are encouraging factors for investors. To ensure the success of your investment, it is important, however, to be aware of the pitfalls to avoid.
1st Pitfall: Investing for the tax advantages
In France, investing in real estate presents numerous advantages in terms of tax. These advantages vary depending on the type of rental (furnished or unfurnished). The Loi Pinel, for example, allows eligible owners to benefit from a 12-21% tax rebate. That said, the scheme was due to come to an end in 2017, but will now run until 2021.
Often, this type of scheme applies to new-build properties. They are not necessarily the best choice for several reasons, above all the price per square metre which is higher, and capital gains which are lower, meaning such projects are less profitable. As for where new properties are situated, they are often in a less strategic location than older buildings. That can have an impact on the letting and resale value of the property, which will be less advantageous.
In relation to furnished rentals, you often hear about “LMNP” status (non-professional furnished property lessor). It is a scheme granting tax exemption, providing that rental income does not exceed €23.000, nor represent more than 50% of overall revenue. That gives a buyer greater freedom in the choice of investment: indeed, the buyer can choose to invest in a new apartment or an old one, choose the town or city according to preference and is not obliged to commit to a specific duration.
In reality, as new laws take effect, others come to an end. What matters is that you do your research properly.
2nd Pitfall: Taking investment decisions based on rental yields alone
Rental yield is the ratio representing rental income earned from letting out the property over the purchase price paid for it. In France, average rental yield is around 5.9%. The figures, however, vary enormously between different towns. It is important to understand that high rental yields do not necessarily go hand in hand with avoiding rental voids. In towns like Bourges, Limoges and Brest which are not very dynamic, you run the risk of not always finding tenants for your property. In other words, periods during which a property owner does not earn rental income and has to deal with reduced yields.
In contrast, investing in towns with moderate yields like Paris, Bordeaux and Lyon means buyers can reduce the risks. In these towns, rates of rental void are lower, allowing an investor to receive worthwhile levels of real estate income.
3rd Pitfall: Buying directly from a private individual to save money
There are numerous platforms which encourage private real estate transactions between individuals. And certain investors turn to this solution when they buy a property as a means of saving money. Private individuals, however, often underestimate the price of their property because not being professionals mean they are not sufficiently familiar with market prices. Sometimes they even add the cost of fees that would have been payable to an estate agent to the price of the property.
By going through an estate agent, an investor can receive quality guidance and support from a professional and get access to a greater number of properties. Amazingly, the price at which a property is listed by an estate agent can be lower than the price set by a private individual. If your investment comes within the framework of a non-professional furnished property let (LMNP), agency fees are deductible. Learn more
4th Pitfall: Paying Cash
Obtaining financing is a particularly tricky stage in the process of buying real-estate. Buyers usually resort to taking out a mortgage with a banking establishment. That can be difficult, however, depending on an investor’s circumstances. If that is the case, an investor can buy the property with only to savings put down as a deposit or cash. It is advisable to opt for this solution only when it proves necessary.
Today, the very advantageous interest rates, at 1.05% over 15 years and 1.46% over 25 years, mean you have to put together a water-tight application if you are trying to obtain a mortgage from a bank.
5th Pitfall: Always waiting for a “better opportunity”
Making the decision to buy a property may seem daunting – investors wait for the perfect opportunity to come along. But waiting too long can also be risky. In France, the market is dynamic and evolving very quickly. And, obviously, property prices are following the market’s upwards trend. Actually, according to Standard & Poor’s estimates, real estate prices in France will increase by 2.4% in 2019 and then by 2% in 2020 and 2021.
An investor must be able to seize an opportunity when it presents itself. Instead of waiting for a “better opportunity”, buyers must be realistic and base their decision on market figures as they stand at the time they want to invest. In other words, if the price per square metre, the yield and other market indicators correspond to the investor’s real estate project, all systems are go!