créée le 16 / 11 / 2016

Furnished properties are recapturing their former glory

Century 21 recently highlighted the decline in rental yields. Fortunately, furnished properties offer an attractive alternative to be rediscovered. Tax incentives allow lessors to build up a brick-and-mortar portfolio while receiving regular income.

A lot has been said about seasonal furnished rentals lately. The mayor of Paris has even launched major operations in certain neighbourhoods, such as Le Marais, to monitor individuals illegally engaging in this activity.
This does not mean that all forms of furnished rentals are forbidden – even seasonal rentals, which represent significant sources of income.

Non-professional (LMNP) or professional (LMP) furnished rentals are categorised into three main types:

1/ Residences (tourists, seniors, students, nursing)

Commercial lease

All of these residences are managed by companies offering to rent out the property, which you own, under a commercial lease.
This lease often offers a fixed yield depending on the desired type of occupancy. Because this lease lasts nine years, a financially solid company recognised for its professionalism should be used.
The highest yields that we have seen are around 4%.

Tax reductions

In certain cases, this type of investment can also allow investors to benefit from tax reductions under the Duflot and Censi-Bouvard laws.

Furnished rentals with a one-year lease

This activity is found mainly in major cities hosting a large number of students and executives who need lodging during the year with more flexibility and without the need to furnish the dwelling.
Business travel for seminars, transfers, or training remains the main reason for stays in furnished rentals in Paris.

Furnished rentals with a one-year lease

Source: Lodgis, "Baromètre de la location meublée à Paris : les chiffres du 2ème trimestre 2015" (Survey of furnished rentals in Paris: figures for 2nd quarter 2015)

Renting out a furnished property can generate yield:

  • the rent differential with unfurnished rentals is approximately 15% to 20%,
  • the risk of unpaid rent is lower for two main reasons: first, tenants in furnished rentals are more affluent and second, this type of rental usually meets a temporary need.
  • Note that, for a year, this type of rental has also been regulated by the law of 6 July 1989 amended with certain provisions applicable to unfurnished rentals.

    According the latest survey from Lodgis, prices for furnished rentals have grown by an average of 1.50% in Paris over the past year. This trend is even more pronounced in western Paris and the Paris arrondissements outside the city centre.

    Parisian flats furbished
    Source: Lodgis, "Baromètre de la location meublée à Paris : les chiffres du 2ème trimestre 2015" (Survey of furnished rentals in Paris: figures for 2nd quarter 2015)

    Seasonal rentals

    This last type is found mainly in tourist regions (seaside resorts, ski resorts, etc.). It has seen significant development, thanks to the growth of "sharing economy" services, such as Airbnb.
    In the particular case of Paris, this activity is highly regulated because of the difficulties in finding housing there. The municipal services estimate that between 25,000 and 30,000 dwellings previously rented to individuals working and living in Paris have been transformed into true full-time furnished properties for tourists.

    Seasonal rentals airbnb

    Source: Wall Street Journal, map of Paris showing the number of Airbnb overnight stays in the capital in summer 2014, neighbourhood by neighbourhood.

    Demand for this type of dwelling is very strong in certain tourist areas of the capital, such as Le Marais, Saint Germain, and Montmartre.

    An advantageous status of non-professional (LMNP) or professional (LMP) furnished property landlord

    The three families of furnished rentals described above allow investors to enjoy the special status of non-professional (LMNP) or professional (LMP) furnished property landlord, in application since 1947.

  • this system does not absolutely fall within the various tax breaks that we know
  • it is governed by the civil code, which gives it greater stability
  • it is not impacted by the recent caps placed on the various tax breaks
  • Numerous fiscal deductions

    In addition to the deduction of interest, insurance, and other expenses taxable for a traditional investment, LMNP investment allows you to depreciate your real property over 30 years and the furnishings over 10 years, if you opt for the actual cost scheme.

    Recognised as an expense, such depreciation decreases or even cancels out the rental income. Example:
  • Property purchased for €300,000
  • 15-year mortgage at 1.65%, with a monthly payment of €1,883 and insurance at around €75 per month
  • Furniture and furnishings for €10,000
  • Considering a seasonal rental of around €2,500 per month (€30K per year), over the first five years, for example, the investor will be able to deduct:
  • On average, €351 per month (€4,212 per year) for loan interest
  • €75 per month for insurance (€900 per year)
  • €1,000 per year for depreciation of the furniture
  • €10,000 per year for depreciation of the real property
  • In the end, without taking into account the exhaustive list of all deductible costs (in particular, property tax or work), the investor will be able to deduct around €16K from the €30K in income received. The calculation of the investor's tax will thus be done on a taxable base of €16K instead of €30K. Considering a marginal tax bracket of 30%, the "tax reduction" generated by this form of rental would be approximately €4,200.

    Location and credit

    At the end of the day, Airbnb's relative success depending on the regions or neighbourhoods shows the importance of location.

  • lessors must select their property with a medium-term perspective. For example, a student residence must be located near a university.
  • depending on the chosen property, the lessor will have very different tenant profiles
  • It is also wise to make wide use of borrowing to take full advantage of the benefits of debt
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