Real estate is such a popular investment because it represents the ideal compromise between security and yield. There are, however, certain things to be aware of before taking the plunge, and rules that must be obeyed. Discover the golden rules of investing in a buy-to-rent.
Invest in a growth market
Where to invest That is undoubtedly the first question any investor will ask themselves. In theory, it is sounder to invest in big dynamic cities and more profitable to invest in the less swanky neighbourhoods. The subject merits a closer look :
It is decidedly sounder to make a profitable investment in a location where rental apartments are more highly sought after than in a small town or city or even in a rural area, where your apartment may remain empty at times, or you may not even manage to find any tenants at all (which is the worst-case scenario);
Then, within a city, short and medium-term yields are usually higher in the less-swanky neighbourhoods than in the swanky, more central ones. Provided, of course, that the neighbourhood is thriving, i.e. well served in terms of transport and with facilities for families (services and shops nearby) or students (within easy access of a university, for example).
Invest in a property you will be able to rent out easily
Most potential investors – needing a mortgage – do not have the means of buying a big apartment in the centre of town. That is not a problem because smaller apartments, like studio apartments, prove easier to rent out anyway (especially to students and young professionals). Obviously, if you are financing the purchase of a house with the aim of living in it one day, that does make a difference. It all depends on your ultimate objective: are you investing to build up your estate or to make capital gains.
Do not dismiss estate agents out of hand
Websites aimed at private individuals selling their own property have flourished on the internet, they seem all well and good and there are interesting deals to be found on them. But why limit yourself and ignore the ads issued by estate agents? Their detractors will always put forward the same argument: add in a middle man and they will take a cut of the purchase price. That is true, but if it helps you purchase your property at a better price, is it not worth it? And you can benefit from the experience and advice of the professionals, thanks to their help and support, investors can avoid numerous pitfalls and much disappointment.
Do not fall for tempting tax programmes
Tax conditions in France are less favourable than they used to be. That is due to the increase in “CSG” (French social security contributions) and the introduction of “IFI” (Real Estate Wealth Tax) which replaced “ISF” Wealth Tax in early 2018. The fact remains that investing in a buy-to rent is still sound and profitable. We would go so far as to add that investing in a buy-to-rent is a good idea if the property is, in itself, a good investment, by which we mean that it is not advisable to take the plunge simply to take advantage of a temporary tax “carrot”. It is better to see it as taking advantage of a helping hand.
Take advantage of the leverage effect
We are not saying that it is a sure-fire way of getting rich if you start out with no capital and no assets, but it cannot be denied that one of the reasons real estate is an interesting investment lies in what is known as the “leverage effect”. What is that exactly? When you take out a mortgage, it gives you a leverage effect, because you are taking on debt to increase your investment capacity and ultimately how profitable the investment will prove. A successful investment will see rental income from the property cover all the expenses linked to the investment and a very successful one will even generate profit.
Of course, you must do your sums very carefully beforehand, and there is one concept which must never be forgotten: profits generated by the investment must be higher than the cost of your loan. The low interest loans banks are currently offering are a sine qua non because without a good interest rate, there is no leverage effect. However, be aware that despite the current favourable climate (with low interest rates, high demand and tax incentives), it is extremely rare to obtain a mortgage without having a deposit to put down.
Be an opportunist
You often hear that the best time to invest in real estate is now. Behind what sounds a little like an advertising slogan, is the following message: in a dynamic real estate market that is flourishing, but tense and fast-moving, a good deal is often the result of someone knowing how to seize an opportunity when it arises. That definitely does not mean deciding to invest on a whim, not at all, an investor must know how to read the market, that is to say keep an eye on its main indicators, sometimes over long periods: rises and falls in property prices, rental rates and bank interest rates.
Those are the golden rules of real estate investment. Visit our blog for lots more advice and analysis.