Hidden Buy-To-Let Expenses in France
More Than Meets the Eye
The cost of purchasing a buy-to-let property may be far more than it appears at first sight. Initially, you will look at the purchase price, closing costs and fees, mortgage payments, and maintenance costs of a property. However, there are a few more things to consider.
While it is cost-effective to manage your own properties, it may not be practical. As any seasoned investor knows, anything that can go wrong will go wrong at the most inconvenient time. It can be difficult to respond to a heater that breaks down in the middle of the night or burst pipes on a Saturday when you live right around the corner and know the local handyman personally. What will you do when the basement that is flooding is in a different country and even a different time zone? Any investor at any time may seriously want to consider the benefits of hiring a property manager, but foreign investors have the additional obstacles of time and space that may make a property manager more of a necessity than a luxury.
A property manager generally takes care of everything. From finding and screening renters to property inspection and maintenance to payment collection, they can and will earn their keep. Speaking of earning their keep, they often charge up to 30% or more of the rental income. If you feel you will need the assistance of a property manager, do not forget to factor the expense into your financial plans.
Finding a Renter
Advertising your property to find renters can be expensive. If you hire a property manager, they will be responsible for finding renters for you, but may pass along the cost of advertisements. Either way, you pay. Depending on your market, you may only need to place a small ad in the local newspaper. Alternately, you may need to advertise nationally or internationally in multiple newspapers, websites, and magazines. Long term, unfurnished lets will obviously require advertisements less often for presumably less duration. Short term, holiday lets will require almost constant advertising in a variety of venues.
You might also want to consider advertising for research. By placing advertisements periodically you will have a good idea of the demand level for your property type. You can even place ads for your property at different prices to gauge what the market will bare.
Aside from advertising, you can hire an estate agent. An estate agent will find a tenant for you, but does not offer all the additional services or expenses of a property manager. While it may be good business for you to pay the cost of the estate agent yourself, French law offers a provision for the cost of the estate agent to be shared between the landlord and tenant.
Rental Income Tax for Non-Resident Investors
Non-residents are required to declare their rental income to french taxing authorities. Social levies will not be due from non-residents, but other tax liabilities may exist.
You will also need to declare those earnings to your home country. Some countries have signed double taxation treaties with France which will help protect you from paying taxes twice on the same income.
Additional factors will effect your tax obligations and the tax regime you must file under. Your total income, the length of time you rent, the volume of rental properties you own, and whether the property is furnished or unfurnished are all key determining factors. Your status as a non-professional landlord, professional landlord, or company will also influence your tax filing and obligations.
These complex tax situations are best assessed by an accountant or tax lawyer.
These complex tax situations are best assessed by an accountant or tax lawyer.
Furnished Units for Holiday Letting
Letting a property to individuals on holiday will have a whole host of expenses that unfurnished, long term lets do not. Furnished lettings, obviously, mean you need purchase all the furniture and house wears that one could possibly need while on vacation. However, furnished lettings also require more frequent replacements of said furnishings and flooring. Vacationers often fill a vacation rental with many more people then they would typically live with resulting in added wear and tear. Some individuals also show less respect to the furnishings of a rental property and will cause damage with little regard nor remorse.
Buy-to-let properties will be subject to, not only income taxes, but also property taxes. Furnished and unfurnished properties are subject to different taxes. Furnished lettings may be liable for Property Ownership Tax, taxe fonciere; Local Business Rates, taxe professionnelle; and Residence Tax, taxe d'habitation. Unfurnished lettings are subject to the Property Ownership Tax, taxe fonciere, however the residence tax, taxe d'habitation, is paid by the tenant. An additional expense of an unfurnished letting is the taxe d'enlevement des ordures menageres (TEOM) for the removal of trash.
The obvious expense, rental income tax, is not the only expense. Property taxes, surveys, survey-related repairs, and more need to considered carefully.
In France, landlords are required to provide certain statutory surveys to prospective tenants. These surveys are the Natural or Technological Risk survey, Energy Performance survey and Lead Paint survey.
The Natural or Technological Risks survey is required for any property located in a community where there is a risk prevention plan or an area at risk of seismic movement. The report reveals whether or not the property is at risk of damage or in danger from flooding, earthquakes, major storms, avalanches, land slides, or hazardous materials from factories or transportation routes. This report must be given to short or long term renters. It can be obtained from the local prefecture and is valid for six months.
The Energy Performance Survey provides a prospective tenant with an estimate of the energy consumption and heating costs of the property. This report must be given to all long term tenants and some short term lets. Drawn up by a professional, the report is valid for ten years.
The Lead Survey is used to determine the existence of lead based paint in older buildings. If your property is newer than 1949 or is found to be lead free, you never need to repeat the survey. If lead is found, you must take action to have it professionally and safely removed and be retested after six years.
The obvious expense of having the surveys completed is not the only expense. You must also consider the cost of lead paint removal, property improvements to improve energy usage, or enhancements to mitigate natural risk factors. Finally, you need to consider the intangible cost the impact of these surveys will have on decision of potential tenants to actually rent your property or look elsewhere.
In addition to the required surveys, a Condition Report should be prepared at the start and termination of each letting. While this report can be prepared by a joint effort on the parts of the landlord and tenant, it is advisable to retain the professional services of a huissier de justice or an estate agent. The huissier is a quasi-government official whose charge for preparing the report is determined by law. The fee is typically split between landlord and tenant.
Rent Insurance is an optional but well advised expense of buy-to-let properties. Insurance against the non-payment of rent will generally cost you from 3-5% of the rental but is a tax deductible expense.
Traditionally, investing in real estate is a fairly safe and profitable means of growing wealth, but the large sums of money involved create inherent risk. Mitigate your risk with a well thought out investment plan which factors in all foreseeable expenses and a cushion for the unknown.
Like any other investment, if planned well, investing in French Real Estate can be a lucrative endeavor, but don't be caught unaware.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.