Buy-to-let has long been a popular concept and, despite the economic downturn is for many a great way of generating an income. Buy-to-let generally means buying a property to let out on a long-term basis to permanent tenants but it can also mean letting a property on a short-term basis to holidaymakers. Generally, investors in the French property market have preferred to let out their property for holiday lets capitalizing on the popularity of the country with tourists. Having a holiday let in France can be an easy and reliable way to make money, if the property is in a good location and well marketed.
However, as more and more gîtes come onto the market, getting bookings has become increasingly competitive. Holiday lets are also labour-intensive and the investor must find someone to clean and maintain the property on a regular, if not a weekly, basis.
Therefore, for property buyers wanting to generate the maximum income with the least effort, a long-term let is worth considering. Longer term lets can ensure a regular stable income, have fewer advertising costs, no changeover fees, lower agency costs (if you use an agency), and the property is less likely to be damaged.
Is it worth it?
Buy-to-let investment can reap outstanding monthly returns, but should you expect to generate a monthly income or just cover costs?
You can potentially turn €20,000 into €100,000 in real terms. For example, if you buy a €100,000 property with a €20,000 mortgage deposit, that’s €80,000 borrowings in year one. In year 20 that property in relative terms (ignoring capital increase or decrease above or below inflation) will be worth €100,000 and you’ll have no borrowings. If you buy the right property, it will be cash positive throughout the 20-year-period and so will effectively have cost you nothing.
Generally on a 20-year term the interest element of the mortgage should be covered by at least 130%. So if you buy a property at the total cost of €100,000 with €80,000 borrowings, at a 3% rate of interest, over 20 years the approximate repayment is €458 per month; the interest element of this is roughly €220. The property therefore should be yielding at least €286 net profit.
The only thing that really matters in property investment is the income the property generates. Location, property type, tenant profile, market value, personal taste, are all important aspects, but it’s about cash flow too. It has to cost less than what it brings in. Figures do not lie and if you are too busy to do the maths then property investment is not for you.
In France you can get fixed rates of 2.5% on mortgages. Well-sourced city centre properties with tenants will yield 7.5% gross, which equates to 6% net roughly. Banks are paying savers about 1.5% for their money.
Where and what to buy?
To ensure a successful return from a buy-to-let property many factors should be taken into account. But your top priority should be location. If you are looking for long-term tenants, buying a city-centre apartment is a sensible option. The safest places to invest are, not surprisingly, Paris and the Mediterranean coast. In more general terms any major town in France is a safe bet for rental income. Lyon, Bordeaux, Toulouse and Marseille will generate a good income for less initial capital outlay than the likes of Paris, Nice or Cannes.
There are ultimately two types of investors: those who require maximum income and see the property as a pure investment and those looking for a good income but keen to use the property from time to time.
The first type of buyer should concentrate on finding a studio, one or two-bedroom apartment in an urban area with good employment opportunities. The second type should be focusing on finding a pleasant environment for holidaymakers and willing to give up their flat or house during high season. In this scenario, a leaseback property could be an interesting option.
In France, tenants have more rights over the landlord than in the UK. While in the UK it is normal for a landlord to give a tenant two months’ notice, in France, if a tenant has paid their rent and looked after the property (i.e. there is no reason to give them notice), they are entitled to rent the property for as long as they wish. Bit, if the landlord wants to sell the property, tenants must be given first refusal. If the landlord wishes to move back in, they must give tenants six months’ notice for an unfurnished rental and three months’ notice for a furnished property.
It is also harder for a tenant to rent a property in France. More paperwork is required by letting agencies, who will ask for three years’ tax returns, amongst other things. For this reason, some landlords choose to rent the property out privately or use British estate agents in France.
For buy-to-let investors looking for minimal work, some estate agencies can not only sell you a suitable buy-to-let property but also manage finding and maintaining tenants for that property. A good agent can be paramount in making sure your property yields the return you want. They understand all the rental regulations, what is a good lease and what is critical to build into the tenancy contract.
An important aspect of purchasing a buy-to-let property is arranging the mortgage. Unlike in the UK, where a buy-to-let mortgage can be obtained for a property solely on the predicted rental income, in France lenders want the buyer to prove that the property they are purchasing will generate an income. This can be difficult, especially if it has not been used as rented accommodation before. It is therefore advised, when looking to purchase a buy-to-let property and if not going for a leaseback or other buy-to-let scheme, to buy a property which has previously been used for this end. If the previous owner has been correctly declaring their income from the property to the taxman, then it is a bonus if the buyer can prove the vendor’s income to the mortgage broker. Property investment in France is not seen as a ‘career’ as it is in the UK and it is therefore much easier to obtain a buy-to-let mortgage if you have another source of income.
“If the buyer can prove the level of income that the property has previously achieved, the lender will be more favourable,” adds Annick. “But there are many factors to be reviewed and a buy-to-let application will always be considered if the buyer has found a suitable property in a sensible location. If you are looking to generate a better return from your savings than the current low interest rates offer, now could be the time to benefit from the current low French mortgage rates and a potential upturn in the French property market, and purchase that French property investment.”
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