If you invest in a buy to rent, you will need to decide whether you are going to let out the property furnished or unfurnished. At first glance, there may not seem to be much difference between the two, but they are actually very different in practical, tax and legal terms. To help you with your decision, here is a summary of the characteristics of both types of rental.
Unfurnished rental: advantages and disadvantages
From a practical point of view
Unfurnished rental involves letting out a property empty. It is up to the tenant to fit the apartment out using their own furniture. As the owner, you do not need to worry about investing in furniture, which you would have to maintain and replace when it is worn out.
The initial duration of the lease is three years and it can only be terminated early for three reasons: if you want to recover the property for your own personal use or the use of a close family member or friend, if you want to sell the property, or failure by the tenant ito comply with their obligations. In which case the notice period to be given by the landlord is six months. If the tables are turned, the length of the notice period the tenant needs to give is three months (reduced to one month in “zones tendues” (special housing control areas). Suffice to say that with the right tenant, the chances are that you will have peace of mind for some time. On the other hand, if you have a problem with that, it may feel like a long time…
As far as tax is concerned, rental income earned will be declared under the property income cateogry. As a non-resident, you can then benefit from real estate deficit, an advantageous mechanism for paying less tax. That means that if you renovate your apartment, you will be entitled to deduct up to €10,700 per year from your taxable income.
Furnished rental: advantages and disadvantages
From a practical point of view
Furnished rental involves letting out an apartment that is equipped with the furniture necessary for a tenant to live in it on an everyday basis. It follows that the main practical constraint with this type of rental is having to invest in furniture and equipment. Every time a tenant moves out, before another tenant moves in, you will need to check the condition of the furniture and replace it if necessary.
The length of the lease for a furnished rental is just one year (or even 9 months if you lease the property to a student). The notice period to be given by the landlord is 3 months as opposed to one month for the tenant. With such a short lease, you should be prepared for high turnover and an increased risk of void periods than for unfurnished rental properties. There are also more constraints linked to furnished rentals due to the fact that tenants change more frequently.
This is the biggest advantage of furnished rentals. Rather than declaring income from real estate, you become a non-professional lessor of furnished real estate and declare commercial and industrial earnings. With this status, you will only be taxed on half your rental income under the flat-rate regime. If you opt for the actuals regime, you can deduct expenses (works, interest on any mortgages, depreciation of furnishings, etc.) from your rental earnings and thus lower your taxable income. There is one thing to be aware of, however, i.e. that accounting requirements for the actuals regime are more stringent.
Which is the most profitable, an unfurnished or furnished let?
Even if furnished rentals have a reputation for being more profitable, it is important to be circumspect. It may be true that rents on furnished apartments are 15-20% higher than on unfurnished apartments (in Paris, the difference is only 10% because rents are controlled), but in calculating yields, you have to take into account expenses incurred. Higher risks of void periods, investment in furniture, and costs associated with frequent searches for new tenants all balance out the higher revenues. The greatest benefit for owners who opt for a furnished rental is, therefore, the tax advantage offered by “LMNP” status.
Lastly, in order not to get it wrong, it is very important to assess who your rental property is intended for based on its characteristics and geographic location. Furnished rentals are better suited to mobile tenants, especially students and business people, which means smaller apartments located near universities, “grandes écoles” and business districts.