Achieve capital returns

Combine investment and a holiday home and get the best of both worlds, advises finance expert Tahminae Madani

One of the trends influencing current investment opportunities in France is the growth in the number of tourists and visitors looking to rent a furnished flat or holiday property for their vacation instead of a hotel or bed and breakfast. 

For investors, or those who have been thinking about buying a second home in France, this trend represents a fantastic financial opportunity.  A growing number of clients are asking us for financial advice on the best ways to defray the cost of investing and ownership - while still having a sufficient level of flexibility to enjoy their property when and for however long they want. 

We recently assisted American banker Matt Yonally and his wife Karen with the purchase of a three-bedroom, two-bathroom flat in the historic Marais district of Paris.  Like many visitors, Matt had been thinking about how nice it would be to own a property in France. "For the past eight years, each time we came to Paris we found ourselves spending more and more time staring in the windows of various estate agents. And each year we found ourselves regretting we hadn't done it the year before - prices were going up and the US dollar was going down."

Although they currently live in Santa Barbara, California,Matt and Karen have been regular visitors to France for the past 25 years. "My wife attended the Sorbonne when she was younger and that started her love of French food, culture and lifestyle. It's become something that we both share."  As a self-described numbers person, Matt admits that he would have been reluctant to buy a property just for pleasure. At the same time, he wasn't interested in purchasing something solely as investment. "The idea of a holiday home that we could enjoy with our young son, coupled with the business prospects it represented, convinced me that we finally needed to make this happen."

Finding the property

Matt found Susie Hollands, of www.bonapartconsulting.com through a recommendation from a friend. Property search company Bonaparte caters to international clients, providing assistance with renting, buying, relocation and renovation. 

Susie always begins the process by ensuring her clients understand the implications of borrowing in France. Hence she introduced Matt at France Home Finance, to provide an explanation of the differences in the lending process in France versus the US and a decision in principle for the loan amount the couple wanted to obtain. 

With the financing discussed and the budget secured, Susie stayed in contact with Matt over a period of four months to advise on the characteristics of the property in order to achieve the best balance between what they personally wanted from the property and what was required to maximise rental revenues.  "Most clients do quite a bit of research before they come to us," explains Susie. "But what you are drawn to for a personal property needs to be balanced against the budget. It is also critical to consider the criteria that an investment property must have to make it desirable to holiday renters."

Factors such as proximity to transport and historical sites or districts, traditional Parisian features such as mantelpieces, wooden parquet flooring and high ceilings, and views are all elements that visitors to Paris look for in a rental property.  Matt and his family returned to Paris in July 2007 to view the shortlist of properties that Susie had put together. They viewed almost 30 properties in 10 days before closing on the last apartment they saw -literally on the way back to catch their flight. "Susie arranged to have the notaire meet us at 7am as we were on our way to the airport!" laughs Matt.

Obtaining a mortgage

The mortgage process in France was surprising to Matt and Karen in terms of the time, administration, and paperwork required. However, they were pleased with the lower euro based interest rate and the tax advantages of having the loan secured on the French property.  After reviewing loan options, they opted for a capped variable rate mortgage over 20 years at 4.2%. A larger down payment and the strength of their financial situation enabled them to waive the life insurance normally required, representing a significant saving.  To optimise inheritance costs and transferability of the property, the Yonallys opted to create a French company called a societe civile immobilier (SCI) to buy the property.

Timing was essential, as once the purchase agreement was signed, the Yonallys had less than two months to create their French company, open their French bank account and secure financing or request their deposit back. As French banks move slowly, particularly with non-resident applications, every day counted.

Thankfully, technology has made the process more manageable. Matt was able to scan and email documents which gained valuable time. "The difficulties our mortgage broker overcame and the money they saved us were impressive. I'd never recommend anyone attempt the journey without professional assistance."

Up and running

With the final papers signed, the Yonallys were able to take possession that October and start on the renovations. Susie worked with Matt on both the decoration and renovation of the flat. "As with the property search, when it comes to decorating a holiday property, one of the challenges is to find a balance between your own tastes and the functionality and durability required from a rental property," explains Susie.

Susie took a series of photos to show prospective renters what was on offer to get a headstart in marketing the flat. The property has only been advertised for rent in its completed state for three weeks. Nevertheless, demand is high and they already have 16 weeks in 2008 booked - with Matt and his family reserving certain weeks for their own use.  The focus is now on managing the property to handle maintenance and ensure maximum rental profits. Finding and working with a rental management company you can trust is a critical step for any non-resident investor.  For 40% of the rental fee, Susie and her team manage the entire process for Matt, everything from booking the guests to ensuring fresh soap and sheets are available for each new round of visitors.

Matt's advice to others looking to make a similar sort of self-funded investment is to work with professionals who cater specifically for the overseas investor. "Neither my wife nor I speak French, and although we have bought a number of properties in the US, the process was completely different in France," he says.

Summing it up

Balance is the key to a successful self-funded property investment - between your investment and personal lifestyle goals.  It is important to spend the time up front to obtain a pre  approval from a French mortgage intermediary. This will ensure an efficient search. In a competitive market, this also allows you to provide a letter from a bank to prove you are financially viable if you need to win a bid on a property.

Location, renovation, and furnishings will have a major impact on future rental returns. When organising your budget and financial planning, keep in mind that almost all properties require at least some renovation before they are able to be rented. This means planning for additional cash or financing up front and factoring in a lag time between closing on the property and offering it for rent.

Lastly, it is always worth checking with a solicitor or tax advisor in your home country in order to understand the tax implications of owning a rental property in a foreign country Rental income earned in France must be declared to the French tax authorities.

Financial snapshot
Currently, the monthly costs on Matt's property are on track to be covered by the monthly income - with a healthy positive cash flow remaining.

• Total acquisition cost: €1, 191 ,500
• Purchase price: €97~,000
• Sourcing fee: €29,250
• Fees/taxes/registration of charge on property: €72,250
• Renovation, air conditioning: €45,000
• Furnishing costs: €70,000 *
• Less mortgage amount: €760,500 **
• Total cash employed: €431 ,000
• Monthly mortgage payment: €4,690
• Monthly net rental income at 80% occupancy: €5,800 ***
• Positive monthly cash flow: € 1,110

* Furnishing costs are higher than average as Matt and Karen opted to furnish with authentic antiques

** It is possible to have a higher loan to value and include renovation costs in the project to finance to reduce cash employed

*** Net of all management and maintenance fees, rent amount will increase each year

Tahminae Madani is the managing director of France Home Finance, providing mortgages for investors in France.