With the costs of renting out property spiralling, with increasing property taxes, energy efficiency surveys and other costs, the Connexion has asked me to comment on the viability of property as an investment, thus buying to rent or ‘buy-to-let’.
Taxe d’habitation still remains for the landlord
We have seen new taxes introduced and increased. Even taxe d’habitation, which has been abolished for main residences from 2023, does not end for investment properties and thus not for landlords. Before it was phased out, this tax was paid by the tenant, thus the weight of tax has been shifted to the landlord.
Rises in other property taxes
We have also seen aggressive rises in taxe foncière, despite reassurances from the government, that this would not happen. This is also just for the property owner. Furthermore, we are seeing dramatic increases in the so called “garden shed tax” and other small taxes, adding insult to injury.
Rule and tax changes apply to everything, and property is no exception.
Take a long-term view of your property investment
I reason that property can be an excellent investment, as long as people need somewhere to live. Demand is unlikely to dry up, with populations continuing to grow. There are, however, considerable risks. This being the case, what are the pros and cons of property investing? Also, what are the most common mistakes that people make?
The property market is not as different as some people might think, to any other, meaning that there are always risks. The phrase “as safe as houses” does not fittingly describe investing for any strategy that does not take a long-term view, with considerable financial planning, and that includes property.
Most people who do badly, on any investment, tend to make one of two simple mistakes:
- They do not plan for markets to implode, have no contingencies, and are forced to sell at the worst possible time (essentially, they must sell because they need the money).
- They panic when things look bad and sell (again at the worst possible point).
Really, then, it is often a matter of market timing, regarding to the sale, no matter what the investment is. If you have planned carefully, you will be in a position to have total control over that timing, whatever is happening in the world. Income planning is a vital part of any investment strategy.
One of the reasons that people, who are generally bad investors, do better with property, is that you cannot easily get a precise daily or weekly value, such as is simple with stocks and shares. That inability to monitor pricing volatility saves people from themselves. One of the world’s most successful investors, Warren Buffet, said “Benign neglect, bordering on sloth, remains the hallmark of our investment process.” It is easy to “neglect” volatile asset values if you cannot monitor them on a regular basis, even if you are a very anxious investor.
Have a contingency plan
A big mistake that people make, is that they rely on rental income, with no contingency in place. It is often when a property becomes vacant that people need the money. It is when there is economic hardship that big companies / universities move or close, destroying a previously buoyant rental market. Property can so easily go from seemingly easy guaranteed income to nothing.
The reason that a contingency is so vital, with property, more than any other investment, is the generic problem, in that property is not liquid.
Calculate your net return properly
As just stated, there is no guarantee that a property will always be rented all the time and, even if it was possible, the net return (something so many forget to consider when calculating their percentage return) is rarely as great as people think / calculate.
Most of the people I speak to, calculate their net rental income incorrectly, forgetting all the costs and taxes associated with maintaining a rental property.
If the world goes to hell in a hand cart (it is already feeling a little like that these days) you cannot make a quick cash withdrawal from property and you definitely cannot eat it (unless you purchase a house from a child’s fairy tale, which is nice but might not last long). This means that too much exposure to property is a huge risk and needs to be balanced with liquid assets (those which may be quickly turned to cash).
It is vital to have enough liquid capital to be able to cover the costs of managing your home and other (vacant) property, for a considerable time. To do otherwise is to add considerable investment risk.
The tax advantages for UK property
Earlier, we spoke about the tax issues arising from property ownership, but what about the tax advantages?
If you are, for example, a UK national living in France, you might prefer to have a property in the UK, either as an investment or “pied-à-terre”. Interestingly, property owned outside of France is outside the scope of Property Wealth Tax for the first five years of ownership. Also, UK property, due to the succession treaty between the UK and France, is completely outside the scope of French Inheritance Tax and mostly, French succession law. I say “mostly” as there are some (very contentious) rules in France forcing it to be considered in some cases.
The tax advantages for French property
If looking at property in France, there are some very interesting tax deduction schemes for long term landlords.
This means that property can present some interesting financial planning opportunities and so should not be rejected out of hand, however, it does require some very careful thought and planning.
When it comes to managing your “patrimoine”, so all property and money, it is best to consider it all in tandem.
This is why, in France, people take the counsel of an authorized, registered and qualified “conseil en gestion de patrimoine”, before making important financial decisions, concerning both money and property. Maybe you should too!
This article was first published in the Connexion August 2022