Acquiring real estate can be an important and involving act. Whether the objective is to build a patrimony for retirement or tax exemption, here are our tips for a successful real estate investment.
#1 Evaluate your investment capacity
Assessing your acquisition capacity is the first step to a successful investment in rental real estate. This estimate will allow you to define your budget, and consequently the type of property that will be the subject of research and negotiations.
The first step is to consult your bank in order to determine your disposable income and the maximum debt capacity that can be dedicated to this real estate project.
The objective is not necessarily to take on 100% debt. A real estate acquisition should not overwhelm the monthly budget. On the contrary, the necessary saving effort must be measured and optimal. In the best of the cases, it should be able to leave room for a second investment in the more or less long term. For example, it may be wise to divide your investment between two properties when possible, for example by buying two small studios instead of one two-room apartment.
Before embarking on real estate, the simulation therefore gives the maximum acquisition capacity. In the case of rental real estate, future rents will be taken into account in the calculation of financing. For the best optimized loans, the rents will be close to the amount of the monthly payments. The best being that these two sums are equal: this is called “self-financing”.
#2 Defining the right location in a known city
To be successful in real estate, an investor’s goals are to have tenants quickly, that tenants are stable and that they pay their rent regularly. Of course, these fundamentals should not be lost sight of if you wish to be successful in your investment. Also, to put all the chances on your side, it is necessary to put yourself in the shoes of the future tenant.
It is par excellence in a known environment that one can at best project oneself towards the expectations of future tenants. As far as real estate is concerned, the best way to miss your investment is to buy in a city that you don’t know and without having moved. This can lead to buying an apartment that is perfect on paper but never finds a taker, or to paying too much for it.
Putting yourself in the shoes of a tenant also means validating the location within the city: is it easily accessible (proximity to transport, main roads)? Is it easy to do your shopping, drop your children off at school? Is the neighborhood safe day and night?
#3 Define the type of property you are looking for
The two previous points have made it possible to define a maximum budget and a search area. It remains to define and find the ideal property. Is it necessary to choose a studio, a 2 room apartment, a parking lot? To buy in Pinel tax exemption law?
It is important to understand that a real estate investment is something personal: the ideal property is different for each person. Upstream, the future investor will have to determine his objectives in order to choose the best type of property possible. Several motivations can indeed push to invest, the most common of which are: to constitute a patrimony for a complementary retirement, to be tax free, to buy a house to accommodate his children or parents later, to finance his future second home by renting it for a few years…
#4 Using the right research tools
Several means are available to find the ideal property, first and foremost the Internet. The web is full of real estate ads. It is easy to make a selection of properties that correspond to your budget and your search area. Going through local real estate agencies can help save time, as they can propose properties they have for sale.
While the use of real estate agents is traditional, other means are less well known, such as hiring the services of a property hunter or a wealth management consultant. After having identified the client’s project (investment objective, geographical area, type of property…), these professionals start looking for suitable properties. This avoids having to visit each property, or wasting hours on the Internet exploring all the offers on each site. Interesting point: the specialized real estate hunter can direct his customers towards patrimonial properties allowing an optimization of the investment, such as a Pinel law, land deficit (if works), bare ownership or Malraux law. Note: these services are not more expensive, since like a classic agent, these professionals are paid by a commission once the sale is completed.
#5 Losing the “instinctive” side of your choice
The ” heart’s desire” is the real estate investor’s number one enemy. Contrary to the acquisition of a principal residence, the rental purchase is based on practical and rational criteria, with the quality of the location and the potential profitability of the place at the back of the mind. These two criteria are directly related to the wishes of a tenant: to have a home close to its amenities within a reasonable budget.
The housing acquired must appeal to a maximum number of people. It is better to forget the charm of the atypical or a too remote countryside, and keep in mind that few tenants are willing to pay more for a “favourite” property. Prefer rational spaces (right angles) and the functional (cupboards or storage space, fitted kitchen…) and remember that you don’t choose housing for yourself but to have a maximum chance of renting easily, durably and with a minimum of profitability.
#6 Do not rush to invest and always visit the property.
Investing in real estate is generally not an act that is often repeated in one’s life. However, it is possible that the right deal may not be on the market at the very moment the future buyer is looking for it. If necessary, you should not hesitate to postpone your purchase. However, be careful not to postpone the purchase for the wrong reasons!
Today, the logic of investment is that of placement. To be optimal, it must balance the investor’s objectives and constraints. Thus, not rushing means taking the time to validate the location, to find out about the rental market, to visit and compare the prices and services of several properties.
When a property seems to correspond to your expectations, going to the location in person can sometimes avoid major disappointments. You might as well remember that you should always visit and see what you are buying. Smelling the atmosphere of the neighborhood, looking at the state of the property or validating the location of a future construction is a sine qua none condition for any real estate acquisition, even if the property is not intended to be inhabited one day by its owner.
In all cases it is imperative to keep in mind that a property meeting all the criteria is often difficult, if not impossible to find. Learning to make concessions is essential. Without ever sacrificing either the quality of the location or the potential profitability of the investment.
#7 Assessing the profitability of selected properties
The profitability of a rental investment is paramount, whatever the objective. The examination of this criterion will notably make it possible to compare two properties before choosing one for purchase.
The gross return is the annual sum generated by the investment, compared to the amount that had to be spent to obtain it. It is expressed as a percentage. In terms of rental investment, it is calculated as follows:
(Sum of annual rentals – sum of annual expenses) / purchase price of the property.
Let’s take for example an apartment bought 120,000 (Usd) including notary fees, generating 400 (Usd) of rent per month. From this rent, each month is deducted 50 (Usd) of charges and 7% of management fees, i.e. 28 (Usd). The net rent each month is therefore :
400 (Usd) – 50 (Usd) – 28 (Usd) = 322 (Usd).
The gross annual profitability will therefore be :
322 (Usd) x 12 months / 120,000 (Usd) x 100 = 3.22%.
This profitability calculation is an approach that allows you to compare assets with each other. Indeed, to calculate a net profitability as accurately as possible, it would be necessary to remove the taxes generated (income tax depending on the tax bracket of the future investor, property taxes excluding garbage collection and CSG) as well as other possible charges (insurance …) and to reintegrate the tax advantage if the acquisition allows it (land deficit, Pinel law …).
#8 Moving closer to self-financing
Financially speaking, the best real estate investment is the one that is “self-financing”. That is to say that the rents received cover the monthly payments of the loan linked to it. However, few properties allow this for the purchase of rental housing without a contribution. The objective is therefore to obtain the best financing ratio rather than to achieve self-financing.
Let’s take the previous example again. By financing the acquisition of a property at 100% by borrowing at a rate of 1.6% for 20 years, one arrives at a monthly credit installment of 620 (Usd) for 322 (Usd) of rent. The savings effort is therefore nearly 300 (Usd) per month.
To optimize the financing and reduce the savings effort, it is possible to increase the initial contribution and reduce the amount of the loan. In the previous case, in order for the house to be self-financing it would be necessary to make a contribution of 50% of its price, i.e. 60,000 (Usd).
Optimizing the financing means finding a balance between the savings available to the investor, the savings effort he makes, the amount of credit needed for the acquisition and the rents generated.
#9 Finding a good manager
When it comes to rental investment, the manager is of great importance. His role will be to find the tenants, make an inventory of the premises, collect the rents, pay them to the landlord, and manage problems if any arise.
However, not all managers are the same and it is very important to choose a good one to avoid disappointments. Let’s sweep away preconceived ideas: the big brands are not necessarily the best performers. To make the right choice, there is nothing like word of mouth…
#10 Subscribe to an Unpaid Rent Guarantee (or GLI)
When you invest in housing, you expose yourself to the risk that tenants will not pay their rent. If at the same time the monthly payments on a loan are to be paid back, this can put landlords in a difficult situation.
The first rule is to take on a reasonable amount of debt, so that a possible default by the tenants does not jeopardize the household finances.
Second rule: protect yourself against non-payment of rent by taking out an Unpaid Rent Guarantee with an insurance company. In most cases, the manager can offer the guarantee that he himself has taken out in the context of a framework contract with an insurer. Some major retailers even have this insurance in-house.
For landlords who take care of their own rental management, it is also possible to take out a Garantie Loyers Impayés with an insurance company. Its cost is approximately 3% of the rents. It is largely amortized in the event of a problem.