Rental Investment: Everything You Need to Know!

Do you have investment projects, and are you thinking about rental investment? However, before you start you ask yourself questions and that’s normal! Investing in stone is a financial commitment that must be considered with caution! This is why we are going to answer all your questions: What are the advantages of investing in rental property? How to succeed in your rental investment? What is the rental return of a property? How to invest in rental property?

With our guide, you will have all the keys in hand to get started on your real estate project!

Why Invest in Rental Property?

Real estate investment remains the preferred investment of the French. Indeed, the acquisition of goods is always a safe bet. But why invest in rental property?

Of course, you are building up a lasting heritage. In addition, investing in real estate is sometimes more secure than financial products and it is often more interesting than savings products.

Real estate is in fact less affected by variations in the economic situation. There is therefore little risk that the property will lose its value.

But beyond the constitution of heritage, we are going to explain to you why buying a property and renting it has many advantages!

Real estate to prepare for retirement and receive additional income!

Indeed, given the economic situation, it is better to anticipate and build up your own retirement savings. Real estate is a good solution that will bring you additional income that will be welcome. Especially since if you have applied for a mortgage, it is often reimbursed when you retire.

A need for liquidity? You will always be able to resell it. In addition, if you hold the property for 30 years, you will be exempt from tax and social security contributions on any capital gain.

Invest in real estate to shelter your family!

Unfortunately, we are not immune to the vagaries of life. Real estate can therefore be an alternative pension solution. In addition, thanks to certain tax exemption schemes such as the Pinel law, for example, you can house your relatives on low incomes and benefit from a tax reduction.

Invest to reduce your taxes.

Indeed, in order to preserve the French real estate heritage or to develop new housing in so-called tense geographical areas, the State is implementing various tax exemption systems. So by investing in real estate you can optimize your income taxes while building up your assets!

We detail all this a little later!

Enjoy a profitable investment with limited risk!

A rental investment can actually be profitable, depending on several criteria. Go below to find out how the rental profitability of a property is calculated!

Thus, you can put the odds on your side by investing in a property, namely:

Use the means of tax exemption available to you, such as the LMNP status (non-professional furnished rental company) for example.
Investing with the help of a loan will be partly reimbursed by the rent.

Especially since thanks to unpaid rent insurance, you protect yourself from the vagaries of life and possible bad payers! Discover all the help to get started in rental investment, this will be the start of a successful investment.

How to Succeed in Your Rental Investment?

You have understood the advantages of rental investment. But to reap all the benefits, you have to take into consideration several criteria to succeed in your investment and avoid the pitfalls!

Find a quality property!

We can never repeat enough, that location is the criterion to be favored when buying real estate. Even if it’s for a rental investment, you have to put yourself in the tenant’s shoes!

Thus, to choose a property, you must check:

The environment,
local shops,
schools,
Security,
Transportation.

In addition to these characteristics, the property and the building are to be taken into account such as the floor, the layout, the surface, the general condition, and the quality of the construction. Think that a building or an apartment in poor condition will require a lot of work in the short or medium term!

To know the market prices in the geographical area of the property. You can consult the website notaires.fr. Indeed, notaries must transmit to the Superior Council of Notaries, the elements relating to a sale and in particular the price.

It is also necessary to find out about the rental market. You must invest in an area where housing demand is high. Dynamic sectors are to be favored to hope for a good return and to avoid rental vacancy.

One last piece of advice, with the entry into force of the new DPE (energy performance diagnosis), check that the property is classified A, B, C, or D. Indeed, housing classified below will be gradually prohibited from being rented if renovations are not carried out.

Anticipate your costs and keep room for maneuver

Another important point during a rental investment, you have to anticipate the charges and any work. You must always keep some leeway and cash flow so that you don’t find yourself in a sticky situation.

Indeed, let’s take a condominium building, you will have charges to pay to the trustee. Even if part of the building charges is recovered from the tenants, the rest is not recoverable, but tax deductible.

Thus, tell yourself that you will have to make a savings effort to pay the charges.

In addition, study the minutes of general meetings to find out about the estimated budget, the work planned, and any upgrades to standards… so as not to be surprised!

Then, as a landlord, you have obligations toward the tenant. You must familiarize yourself with the list of repairs and works that are your responsibility as the owner. You are not immune to heating failure, cumulus, or water damage… Also, it is essential that you can ensure these hazards, especially if you have financed this accommodation with the help of a home loan!

Finally, you will be liable for property tax, which can sometimes represent two months’ rent!

All these charges must be taken into account in your investment and your rental yield!

Real estate loan and rental investment: Prepare a concrete file!

For a rental investment, your file will be scrutinized, so it is imperative to prepare it well!

What are the advantages of investing with a mortgage?

Before giving you the borrowing criteria to meet, a quick reminder of the advantages and disadvantages of using credit leverage to acquire a rental property:

The rent and any tax benefits partially pay the monthly installment of the loan
Loan interest is deductible from your property income.

However, you will have to make an effort to save, that is to say, that the receipts do not cover the expenses and charges of your investment.

However, to reduce the savings effort, you can either:

Borrow with a personal contribution: you will reduce the credit rate and mechanical interest and monthly payments.
Extend the duration of the credit: in this case, you lower the amount of the monthly payments, but the interest increases. However, you can deduct them from taxes.

What are the borrowing criteria to be met?

Covid 19 has been there, and even if rates have never been so low, banks are stricter with investors: contribution and duration are limited to 20 years!

Among other things, they want you to have savings to cover contingencies such as work and rental vacancy; especially if you do not hold real estate assets.

To put the odds on your side, you should present an effective financing plan. Indeed, your rate of effort must not exceed 35% of your income.

To calculate this effort rate, the banks take into account the monthly charges (rent or credit for your main residence, any consumer loans, taxes, etc.)

What profitability can be expected from a rental investment?

You are about to make your first rental investment. We have just seen how to succeed, however for the success to be perfect, it is necessary to know and calculate the rental yield of the property!

What is the average return on the rental investment?

The rental yield allows you to determine the interest of the rental investment. This calculation measures the income that the rental property can bring you in relation to its acquisition price.

The return on a property can vary between 2% and 7%. This variation is due to several criteria, namely:

The geographical location of the property: indeed, a property located in Paris will have an average profitability of 3%, the prices being higher. While a property located in Strasbourg, the rate can be as high as 7%.
The type of housing: indeed, the profitability is not the same between a studio, a car park, and a house. However, it is generally more profitable to invest in a small area. But here again, everything will depend on your real estate project (classic rental, Airbnb-type seasonal rental, etc.) and your future aspirations.

Thus, we can say that the average profitability in France of a rental investment is around 5%.

Even if, as we have seen previously, real estate remains a reliable investment, with a limited loss of value. You don’t have to think about the capital gain in the return calculation. Both the added value and the tax benefits are bonuses!

How to properly calculate the profitability of a rental investment?

There are several methods to calculate the rental profitability of a property. You have the gross rental profitability based on the rent and the price of the accommodation and the net rental profitability where you include the non-tax charges! Indeed, the rental profitability, tax included, depends on the profile of each investor and his tax!

Gross profitability: initial information for your investment!

Let’s start by calculating a gross rental yield. This is the first indicator that allows you to quickly compare the interest of the investment with other properties. It is calculated from the annual rent and the price of the property.

Gross rental yield = 100 x (monthly rent x 12) / property price

For example, the purchase price of a dwelling is €150,000, and monthly rent envisaged excluding charges of €600

Gross rental return = 100 x (600 x 12) / 150,000 = 4.8%

Net rental profitability: a realistic indicator for your investment!

For a more precise idea, it is advisable to integrate the charges: property tax, co-ownership charges not recoverable from the tenant, and miscellaneous costs (management, insurance, fees, etc.). This is called the net rental return!

Example: Let’s imagine that you have 1000 € of property tax, and 600 € of non-recoverable charges.

100 x ((600×12) -1600) / 150,000 = 3.73%

So you already have a more precise idea of the profitability of the property. Indeed, this calculation takes into account income and expenditure. However, to know exactly the rental profitability of a dwelling, it is necessary to include the taxation, the expenses of a notary, and a forecast of works. In this case, you will get net profitability!

Also, to help you not forget anything in the calculation of the net return, we have prepared a summary of all the possible charges you should think about when investing in rental property.