Most people need to take out a mortgage when they invest in property. Whether you go through your bank or a broker, that mortgage has to be repaid in the form of monthly payments. At the same time, you will be receiving rental income by letting out your apartment. But how can you arrange it so your rental payments are roughly the same as your monthly mortgage repayments? What conditions are necessary for you to structure your financing so the rental payments cover the full cost of the monthly instalments. Read on and we’ll explain it to you.
Rent and Yield
When you undertake an investment project, your aim is usually to rent out an apartment and receive rental income. Whether in France or elsewhere, rental values vary depending on the type of apartment, its surface area and the city it’s located in. But average annual rent corresponds to a percentage of the purchase price: and that’s the apartment’s gross yield.
That percentage varies depending on rental demand and the risk involved. It can vary from 3% for a low-risk investment to 7% for a property carrying a higher rental risk. So what sort of apartment should you invest in for the rent to “pay” your mortgage repayments?
Investments in buy-to-rent property are often financed through a combination of a deposit put down by the person investing and a mortgage. You provide the deposit and a bank provides the borrowed capital. You then have to repay the mortgage in the form of monthly payments, usually of a fixed amount (in the case of a fixed-rate repayment mortgage) which includes interest on the loan and the repayment of the capital the bank lent you. And of course, as with any financing arrangement, the higher the deposit you put down, the lower the amount you will need to borrow and therefore the lower your monthly repayments will be. In that case, what is the link between rent and the mortgage?
A well-balanced financing arrangement or a push for savings
Putting arrangements in place for a self-financing investment means rental payments being equal to monthly mortgage repayments, so there’s no need to top the repayments up or in other words, you don’t have to put some of your money in each month. But how can that be achieved? It all depends on how much deposit you can put down: the higher your deposit, the lower your monthly repayments will be and therefore the closer in amount the rent you’re getting will be to your monthly repayments. It’s that simple.
But how much do you need to put down as a deposit to achieve a well-balanced arrangement like the one described above? Rents and therefore yields are different in different cities, what you need to put down to achieve that “balance” will depend on where you’ve decided to invest. Calculations are a bit complicated, but to give you an idea, in Paris, you’d need to put down a deposit of 50% of the purchase price of the apartment, whereas in Lyon, a 30% deposit can be enough. Making a “self-financing” investment, therefore, essentially depends on what your deposit represents in relation to your budget. It is obviously vitally important to thoroughly prepare your project beforehand, especially in terms of structuring its financing.
Are you planning to invest in a buy-to-rent property? Get in touch to discuss it with us – we’ll take a look at the best way to structure your investment based on your circumstances.