Rental Costs for Property Owners
Investing in real estate through a mortgage for rental purposes is an incredibly powerful way to build wealth.
The bank pays for the property, and you use your tenants’ rent to repay the bank loan.
It’s a perfect scenario, a tremendous leverage effect that’s a genuine means of building wealth.
However, to achieve this, you’ll need to consider several variables to account for all the costs that come with renting out a property.
The Costs
There are various costs that new investors might not immediately consider.
Here are the costs you’ll need to think about to make the best possible investment and be prepared for the various challenges that come with being a property owner who wants to rent out their property.
Taxation
It’s essential to plan a tax strategy before buying your property, as this can make a significant difference in your profitability at the end of the year.
Indeed, rental income is taxed at 50% without choosing a specific tax regime.
This could have significant consequences on your property’s profitability.
Many real estate investors prefer the LMNP (furnished rental) regime with actual costs, which allows for cost depreciation and thus enables declaring no taxes since the property will not produce an accounting profit, as service costs cover these profits.
Property Tax
When you own a property, regardless of whether it’s intended for rental or personal use, you’ll have to pay property tax.
Property tax helps finance local government budgets, primarily municipalities.
Generally, though it’s not a strict rule, for a property to be profitable, the property tax should not exceed one month’s rent. This isn’t a fixed rule and doesn’t account for seasonal rentals like Airbnb.
Condominium Fees
Don’t forget about condominium fees, which pay for services within the building where the apartment is located and ensure the proper functioning of the co-ownership.
These charges are paid by tenants, so the rental price already includes these fees. Therefore, if you think you can rent an apartment for €850 but the charges amount to €80 per month, you’ll actually have a reduced profitability since you’ll receive a net rent of €850 - €80 = €770 per month.
Property Management Agency
A property management agency isn’t a mandatory expense, but if you want a property that approaches a passive financial product, it’s highly recommended to use a management agency.
It will provide peace of mind as the agency acts as a filter and will only contact you as a last resort.
The agency will:
- Create online listings
- Take photos to rent the property
- Find your next tenants
- Collect rents
- Handle any potential tenant issues
- …
However, this comes at a cost. The most competitive real estate agencies charge 5.9% of the monthly rent.
You’ll also need to consider the agencies’ service fees. If your tenants leave, the re-rental will be charged to the owner.
GLI (Rent Default Insurance)
Rent default insurance is also an excellent way to protect against property damage and landlords’ greatest fear: not getting paid.
This could be catastrophic, as it would force you to repay your mortgage and all the associated charges we’re listing.
However, to reassure property owners, only 3% of landlords in France experience unpaid rent.
Again, this expense isn’t mandatory but is highly recommended to ensure peace of mind, especially since if misfortune strikes, the insurance will activate to remove non-paying tenants as the insurance pays your rent.
GLI costs are around 3% of the monthly rent.
Non-Occupying Owner Insurance
Non-occupying owner insurance is mandatory to cover potential damages that might occur when the tenant doesn’t have insurance.
Many insurance options exist in the market, from traditional insurers like Allianz or Axa to lesser-known, 100% online insurance providers like GoFriday.
The cost of such insurance varies mainly according to the insurance benefits; however, it’s very rare for tenants not to have insurance, which is why it’s often unnecessary to stack different types of coverage.
The most competitive insurance rates are around €140/year; however, the price will also depend on criteria such as property size and location.
Accountant
If you opt for the LMNP tax regime with actual costs, you’ll need to hire an accountant to register your LMNP activity with the government and perform depreciation calculations.
Again, this has a cost, depending on the chosen accountant, but prices range between €200 and €300 per year. Accountants also offer discounts if you register multiple properties with them.
Repairs and Maintenance
These costs are more difficult to quantify and predict, but it’s important to be aware of them to anticipate them as best as possible.
You might need to carry out unexpected repairs, such as fixing a broken air conditioner or redoing an electrical panel.
The cost here is impossible to quantify, but if you complete renovations when purchasing your apartment, you’ll have less chance of being surprised. Conversely, if you’ve omitted certain work for economic reasons, you’ll have a higher chance of repairs being needed during the rental period.
Furniture
Finally, if you opt for furnished rentals, you’ll need to replace any furniture that breaks.
This type of expense is similar to those mentioned above, which can be difficult to anticipate.
Conclusion
As you can see, the initial calculation that only considers monthly repayments and received rent isn’t realistic.
To better understand all the costs, I’ve created a Notion template to highlight all costs and make them easier to visualize.
Here’s the template:
Don’t hesitate to provide feedback here so we can improve together.