Investing in real estate - Secrets to a well-balanced return!

As an energizing investment, real estate can add vigor to an estate. With its power to boost value and its stimulating effect on the rental market, it provides an opportunity to invest in a sector that is resilient to the attacks of the financial markets. Let's discover all the secrets of its composition, making it a most invigorating remedy for making your money grow. The magic potion of real estate profitability is based on the formula: rental income - charges and taxes / purchase price.

Strong in rental income

The success of a real estate investment naturally depends on the rental income it generates. While the market appears more than tense in major conurbations, more rural areas are suffering from a certain degree of disaffection. The areas with the highest concentration of economic activity are attracting the most people, and this has an impact on housing needs. The highest rents are still to be found in large cities, such as Paris at €28/m2. But larger cities also do well, such as Bordeaux at 13 €/m2 in zone B1 (see table below). As long as attractive properties are on offer, demanding tenants are willing to put their money where their mouth is. Here again, the law of supply and demand prevails, with the proviso that the rent control mechanism must be respected (see below).
However, the rental market is becoming increasingly regulated in major conurbations as a result of rising property prices. With purchase prices approaching €3,000/m2 in cities such as Nantes and Rennes, landlords are tempted to raise rents to maintain the profitability of their investment.
The question is how much rent to charge. The answer depends on whether the property is new - subject to a tax exemption scheme such as Pinel - or old - not subject to a rent ceiling.

AVERAGE RENT FOR APARTMENTS BY GEOGRAPHIC ZONE

Zone A bis - Paris and 29 communes in the inner suburbs: from €17.17/m2 under the Pinel scheme to €28/m2 for existing properties.
Zone A - Île-de-France, Côte d'Azur and the French zone of the Geneva conurbation: from €12.75/m2 under Pinel to €20/m2 for existing properties
Zone B1 - agglomerations of over 250,000 inhabitants, greater Paris suburbs: from €10.28/m2 under Pinel to €13/m2 for existing properties
Zone B2 (by agreement*) - towns with more than 50,000 inhabitants: from €8.93/m2* to €8/m2 for existing properties
Zone C - rest of France: 7 €/m2

Beware of rent control
This measure limits rent increases when a property is rented out or re-let, or when a lease is renewed. This regulation applies only in communes located in "zones tendues". This concerns 28 conurbations in metropolitan France, comprising almost 1,200 communes.
In Paris, Ian Brossat, the deputy mayor in charge of housing, is calling for a return to rent control, and speaks of an "imminent" publication of the decree. Under this measure, rents will be capped at 20% above their reference amounts, calculated by the State on the basis of median values defined according to geographical zones.

Lowest possible purchase price

The lower the purchase price, the more profitable the investment. However, in the current climate, property prices are riding an upward wave, especially in major cities. Under these conditions, it may be better to invest in medium-sized towns where prices have not yet soared. Rents can be around €10/m2, compared with €13/m2 in the biggest cities, but property prices are almost three times lower. Expect to pay €4,170/m2 in Bordeaux, compared with just €1,190/m2 in Limoges! It's clear that the profitability equation favors the porcelain capital. Here's an example to prove it:

REAL ESTATE PROFITABILITY: BORDEAUX VERSUS LIMOGES

Simulation for a 45 m2 T2 apartment

Rent :

- BORDEAUX: €585/month
- LIMOGES: €450/month

Property tax cost :

- BORDEAUX: €800
- LIMOGES: €600

Purchase price :
- BORDEAUX: €155,000
- LIMOGES: €85,000
Profitability: (rental income - charges and taxes) / purchase price :
- BORDEAUX : 5
- LIMOGES : 7

Lower taxes

Good news for 2019. The principle of real estate tax relief that benefited only new-build properties with the Pinel scheme has now been extended to older properties under the new Denormandie scheme. Indeed, in the case of partial renovation, no tax benefits could be granted to landlords. This new measure will authorize an income tax reduction of up to 21% of the purchase price (taken into account up to a limit of €300,000). In return, the owner must commit to renting the property for 12 years at a capped rent. As with the Pinel scheme for new-build properties, the tax advantage is limited to 18% for a nine-year rental period, and 12% for a six-year period. The reduction will be subject to the annual 10,000-euro limit on tax niches.
However, work representing 25% of the total cost of the operation must be carried out, up to a maximum of €300,000. As the Denormandie scheme is designed to meet the need for housing in tense areas, the property must be located in one of the 222 towns covered by the "Action cœur de ville" plan. This is a great way to build up assets while securing the real estate transaction.

TAX REDUCTION WITH A PROPERTY INVESTMENT

Purchase price: €150,000 for Pinel, €80,000 for older properties (Denormandie scheme)
Rental period: 9 years for Pinel and 9 years for older properties
Redemption rate: 18% for Pinel and 18% for older properties
Cost of work representing 25% of the purchase price: 0 for Pinel, €21,250 for older homes
Amount of tax reduction: €27,000 for Pinel, €18,225 for existing homes
Annual tax reduction: €3,000 for Pinel, €2,025 for existing property

Logically, new-build properties offer a better tax reduction, but the purchase price is still higher. When calculating property profitability, this saving can be deducted from the purchase price.

What work can be carried out under the Denormandie scheme?
To qualify for the Denormandie tax reduction, investors must carry out renovation work representing at least 25% of the total cost of the project. The work must involve modernization, conversion of living space, energy savings, sanitation, etc., as well as the creation of new living space by converting accessible attic space. This also includes garages in single-family homes.

Limited expenses

Since profitability also takes into account condominium charges, it's important to find the property that requires the least amount of maintenance. Naturally, new buildings offer the best energy performance and lower heating costs. What's more, apartments are fitted with individual boilers or electric convectors, so you don't have to pay for the community. Not to mention maintenance work, which takes a good decade to complete, and it's clear that newer homes are still the most economical.

Christophe RAFFAILLAC