Investing in residential property in France - pros and cons

The French real estate market is developing dynamically. Buying real estate has historically been a favorite type of investment for the French.

The benefits of purchasing a primary residence are obvious for the following reasons:

1. Low lending rates.
2. Tax benefits on capital gains.
3. Benefit for inheritance.
4. Saving on rental costs.

Source

Purchasing residential property for investment purposes

Let's look at investment property, if you already have a main residence (Résidence principal), and you plan to purchase residential property for rent in order to receive “passive income”, let’s say in retirement.

The return on investment in real estate depends on the rental period:

• long-term;
• short-term.

Short-term rentals bring higher income, but you can’t call it “passive”. The premises need to be advertised, guests need to be welcomed and settled in, prepared for the next occupancy, etc. This is a job, not “passive income”.

Therefore, we will consider long-term rent.

What are the advantages of long-term rental

Based on the economic context, we are seeing an increase in prices, this is due to:

1. A record reduction in lending rates.
2. Rising rental costs, despite loi ELAN, which came into force on October 16, 2018, which regulates the increase in the cost of rental housing.

Let's look at the return on investment in residential real estate by district of Paris.

Typically, net income (including maintenance costs) is approximately half the gross income.

Source

As we can see from the table above, net profitability is 1.38%, which is on average higher than inflation. Therefore, we will write down the third plus as protection against inflation.

What are the disadvantages of long-term rent?

Now let's look at the disadvantages, which are not always obvious, but if you think about it, there are more of them:

1. Expenses

• Costs for processing a transaction – from 7%;
• Depreciation of the premises;
• Management costs, searching for tenants;
• Expenses for repairs, maintenance, improvements, preservation;
• Communal payments;
• Insurance premiums;
• Loan interest costs associated with the purchase, repair, improvement, and preservation of the property;
• Frais de notaire – 3% when transferring property by inheritance.

2. Taxes

• Tax on rental income at a progressive tax rate, depending on the tax regime you choose;
• Tax on the increase in value when selling an object;
• Property tax (Taxe Foncière);
• Inheritance tax is borne by the heirs, depending on the degree of relationship;
• Wealth tax, if the total value of all real estate properties is more than 1.3 million euros, more details about IFI.

3. Additional risks

• Risk of downtime. As the recent history of the COVID 2019 epidemic has shown, many landlords are faced with long periods of downtime due to border closures, crisis, travel bans and sanitary measures.
• Low diversification. This means that when buying real estate for 400–500 thousand euros, you invest all your money in “one basket”, and therefore, bear all the risks associated with the purchase of this unique property.

What are some alternatives that I can suggest?

Capitalization contract with Assurance Vie tax benefit. Within the framework of such a contract, there is an automatic strategy that allows you to balance your capital into various financial instruments; this will allow you, within one portfolio, to invest, among other things, in industry-specific real estate funds.

For example,

• OPCVM AGIPI Immobilier – collective investment, based on active management, in shares and bonds of public companies around the world, in the real estate industry.
• OPCI AXA Selectiv' Immo – This fund invests in shares and bonds of public, government and over-the-counter international companies included in the MSCI World Index that specialize in real estate. Such high diversification and management flexibility allows you to reduce risks and potentially achieve higher profitability.

Here is a link to the post in which I described in detail OPCI AXA Selectiv'Immo

What are the advantages of such collective investments:

• Regular income from property management is reinvested, thereby generating compound interest and potentially higher profitability.
• The increase in the value of real estate over the long term is also taken into account in the return on investment.
• Low threshold for access to the high-quality real estate market, you can start investing with 1,000 €.
• High diversification and liquidity.
• Competencies of real estate market experts in property selection and management.
• There are no expenses or inheritance taxes, since the funds invested within the Assurance Vie do not fall into the estate.
• Tax benefits under the dispositive Assurance Vie.
• There is no “headache” in finding a property, a tenant, a loan, taxes, insurance and other hassles.

The experts managing the fund have already taken care of everything for you. At the same time, the profitability is no lower, and often even higher, than independent efforts to find investment property. Market professionals manage your portfolio, minimizing risks and maximizing returns.

In short, for me the choice is obvious. If this applies to you too, sign up for a consultation, where I will tell you the details, answer your questions and help you draw up documents for an investment contract.

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