How to invest in real estate?
How to invest in real estate?
Everything about real estate! The sums involved are substantial, so don’t miss it. Our speech is not necessarily “mainstream”, but it is objective and will have a good overview. Whatever your means (financial, but also in terms of skills and time available) and according to your tastes and goals, you will know how you can invest in real estate. And you will have the basics to later devour
The real estate sector is one of the few assets that can be acquired on credit, and therein lies its main interest. Because, to build and develop your assets, you need to optimize the two levers: the ability to save (to invest in life insurance and the stock market in particular) and the ability to borrow (for real estate investment). Therefore, when you have little ability to save, buying the main house is often the only way to generate wealth. But there are many other real estate investment solutions that we will compare: with credit leverage or not, in active management (conventional rental real estate) or passive (stone paper), commercial or residential real estate.
Comparison of different ways to invest in real estate.
French people who want to invest in real estate generally think of traditional “hard” rental investment. But there are other solutions to invest in real estate, starting with the “paper stone”: SCPIs (Civil Real Estate Investment Companies to become an associate owner of a real estate share and receive rents), crowdfunding (crowdfunding of real estate projects) and SIIC (listed real estate investment companies). Therefore, we will present the complete picture of classic “physical” and paper real estate investment.
invest in classic rental real estate
When you invest in traditional rental properties, you become a landlord with the responsibilities that flow from them to tenants. And you have rights and duties under the law. We must invest more and invest personally. Therefore, you are responsible for the purchase of your real estate, rental management (visits, inventory, regularization of charges, general meetings, etc.), tax returns, maintenance and work. And the risk (deterioration, unpaid rents, rental holidays, drop in the local market) is highly concentrated compared to stone and paper, unless it is easy enough to diversify across multiple buildings.
The range of possibilities is vast: bare or furnished rental? Tax exemption or not? Through a company (SCI) or on your own behalf? You must be well informed to make the best configuration, the most appropriate for your situation, because tax optimization is crucial for your property investment to be profitable.
Bare or furnished rental?
By default, if you don’t choose a tax system, you rent short. In this case, except for the land deficit, the taxes will be heavy. Fiscally, we are subject to tax on a 70% basis of property income (due to a 30% flat-rate reduction), or optionally on a property income basis less actual costs. And your tax rate can go up to 45% of this base, depending on your marginal tax bracket (TMI). Not to mention 17.2% of the social security contributions to be added. Finally, “default” rental investment is heavily taxed in France, to the point of reaching a net return of close to 0% unless optimized for tax purposes.
Alquileres amueblados (estado LMNP) para eliminar el impuesto sobre los ingresos por alquiler
The tax regime for furnished rentals is generally more attractive. This is the non-professional furnished rental tax niche (LMNP). In this case, rental income is treated as BIC (industrial and commercial profits) with a milder tax than that of basic rental property income. Fiscally, we can choose either the standard reduction (to be taxed on a 50% rental income basis) or actual costs (and generally get a € 0 tax base by including depreciation!)
In practice, furnished rentals will be suitable for studios and one-bedroom apartments in major cities for rent to students and young workers. In return, you must furnish the apartment, but the rent will be a little higher than the simple rent (and the more lenient taxes). In addition, management is more flexible: one year lease for furnished rent versus 3 years for bare rent.
Invest well with turnkey furnished LMNP?
We are not talking about LMNP administered in a service residence for students, vacations or the elderly. Too risky, because the lease is generally guaranteed for 9 years by a manager, but then the manager may demand work or a lower rent. On the other hand, a company specialized in turnkey rental investments can provide comfort and real added value.
Therefore, we discovered Immocitiz, a company created in 2012 that offers real estate investors looking for a discounted apartment with work to do a good business (return generally above 6% net). To rent well and with good prospects for added value, Immocitiz offers properties in dynamic cities with good potential in Île-de-France, in Lille, Bordeaux, Rouen, Caen. In practice, for 7.7% of costs, Immocitiz gathers all the skills to carry out a profitable rental project from A to Z:
- efficient apartment hunter (because the work to be done and the negotiation) according to your specifications;
- architect to reorganize the space and optimize the surface of the chosen property (to rent at the best price and give the best potential for resale possible);
- assistant to the contracting authority: for the works, Immocitiz has its own artisans in various trades (therefore, control of the schedule, budget and quality of the site);
- interior decorator to furnish with furniture and decorations at a good value for money (and to please as many tenants as possible);
- rental manager to entrust the rental and rental administration of the property (if the investor also wishes to entrust this mission after the purchase).
Finally, this turnkey furnished rental solution allows real estate investors to save time and obtain better profitability by delegating the project to specialists in rental investments.
Real estate tax exemption?
To reduce taxes, many investors turn to Pinel, regarding new homes. But it is not necessarily more interesting than a good property investment without tax exemption. Additionally, the LMNP is also a form of tax optimization. Therefore, you need to calculate on a case-by-case basis and keep in mind that you are buying real estate and not some vulgar tax-exempt product. Because the profitability of real estate investment depends on several factors and not only on tax exemption, in particular: the purchase price, the income received, the taxation of income, the sale price, the tax exemption.
In the first, the Denormandie system also allows tax exemption. With a lower purchase price (because the price of the old and not the new), it can be more profitable than the Pinel. For a complete description
That said, new properties do have some advantages. Including notarized fees reduced to 3% (vs. 8% in the first), 2-year property tax exemption, and compliance with the BBC (energy efficient building).
Be successful in renting real estate.
Becoming a landlord is like becoming a business owner. You have to have the same entrepreneurial spirit. To be successful in your rental investment, you must get involved to find the right property with good returns and good prospects. And you should optimize taxes and not be satisfied with a basic rental if you can choose a better and much more profitable plan: basic or furnished rental (LMNP), long-term or seasonal rental (Homeaway), in your own name or in SCI, Why not tax the old in Denormandie or the new in Pinel?
In summary, traditional real estate rental is not magic, to get a good return you have to invest and take some risks (property damage, unpaid rent, decline in the real estate market, etc.) AND it takes time and skills ( administration, taxes, laws, DIY) to make good investments. Be careful if you take a packaged rental through an administrator (such as LMNP senior, student or vacation service residences through an administrator rather than LMNP managing it yourself), then there is a risk of major disappointments because the commercial lease lasts a few years and then we find our hands and feet tied to the manager.
Otherwise, the “passive” investor can turn to stone-paper real estate to do just as well, or even better, with less time and less stress. Just like in the stock market, good managed management (or investment in passive funds and ETF trackers) will work better than the average investor.
Stone Paper Real Estate: Invest Easily By Delegating
The “paper stone” real estate sector is a family that brings together several types of investment (with somewhat barbaric names, we will explain in more detail later):
- REITs: civil real estate investment companies (for being a member of a “super LIC” and collecting rent, borrowing or not);
- real estate crowdfunding: real estate crowdfunding projects (to lend to a real estate developer and collect interest as a creditor);
- SIIC: listed real estate investment companies (to become a shareholder in a property company and receive dividends).
SCPI: Become an Associate Owner and Collect Rentals
Civil real estate investment companies (SCPI) have been around for over 40 years. There are around 200 different SCPIs grouped into Performance SCPIs, Capital Gain SCPIs and Tax Exemption SCPIs. Like conventional real estate rental, one can invest in SCPI by taking out a mortgage.
In practice, the saver can invest in the SCPIs of their choice and it is the managing company that manages the housing stock and pays the rent. The choice is wide: SCPI invested in residential real estate, office buildings, shops or hotels, diversified … in France and abroad. Like conventional rental real estate, it is a long-term investment, because there are amortized purchase costs (between 5% and 9% according to the SCPI, costs close to notary fees in conventional real estate). Become an associate owner and know the addresses of the property, knowing that a SCPI can have hundreds or even thousands of partners with a property value valued at more than a billion euros.
Average yield of SCPIs in 2019: 5.60% (4.40% of income return + 1.20% of price revaluation). In practice, you can invest in SCPI in life insurance or be accompanied by a specialist SCPI broker.
Real estate crowdfunding: lend to developers and charge interest
Crowdfunding means “crowdfunding”. This is crowdfunding, to jointly lend and participate in the realization of a project. Therefore, savers act a bit like a bank and lend to a property developer who has a construction or renovation project. The investor becomes a creditor and signs a contract to obtain the agreed remuneration (annual interest between 8% and 10%, generally depending on the project). It is a real estate investment without costs, in the short term since the works generally last between 18 and 24 months with interest received at the end of the operation.
In practice, a real estate crowdfunding platform acts as an intermediary between real estate developers seeking financing and savers seeking investment. The platform audits and selects the projects it deems the safest to present to savers. Homunity is one of the market leaders, with almost 200 projects financed since 2016. After registering on the platform, we have access to projects and investment is very fast, in a few clicks.
Average yield of real estate crowdfunding in Homunity in 2019: 9%. For more information (operation, taxes, good investment practices, etc.)
SIIC: become a shareholder of real estate companies and receive dividends
SIICs are real estate investment companies, also called real estate companies. You undoubtedly know the Unibail (Westfield) and Klepierre shopping centers, or the Icade company specialized in offices and health. The specificity of SIICs is that they must return to shareholders at least 95% of the income received and 70% of the realized capital gains. Therefore, dividends paid to shareholders are generous, with a return generally between 5% and 10%.
Unlike the previous 2 investments in stone paper, this is an investment in the stock market, so there is a certain price volatility for more experienced investors. It is a long-term investment for shareholders who want to invest in the real estate sector with generous dividends.
The advantages of paper stone.
SCPI, crowdfunding and SIIC are the most accessible and comfortable real estate investments:
the entry ticket is low (a few hundred euros to invest),
these investments require less management effort (the purchase of goods, the sale, the maintenance and the management of rentals are fully delegated), so we really receive passive income,
while allowing better diversification and less risk of deterioration and unpaid income.
The purchase of the main residence.
We are no longer here in the family of investment in rental properties, but in pleasure properties. We will not debate the purchase of the main residence (RP), because the purchase of real estate should not be dictated only by a purely financial logic, but also by certain somewhat irrational needs, such as really feeling at home.
That being said, there are prerequisites for purchasing – it’s best to be professionally and personally stable and plan for over 8 years when considering purchasing rather than renting. And note that notary fees alone represent around 2 years of rent and that the landlord spends more on his accommodation than the tenant (property tax, labor, etc.).