Until a few years ago, the banks financed the rental investment projects without complaining. It must be said that the steady rise in real estate prices allowed for many differences.
It was the golden era of tax exemption operations where both bankers and investors could almost certainly realize a great added value.
The financial crisis that hit all economies has brought to the attention of all market players.
Banks first, forced to raise their capital ratios have significantly tightened their positions to reduce risks and especially those related to the rental property loan, which weaken the assets of their balance sheets. Promoters then, who for lack of tax support measures have learned to live with the recession. Investors finally, who can no longer finance a rental investment without having a personal contribution.
The different stages of a rental investment project
Look after the constitution of the financing file
To put the odds on its side, it is imperative to treat its rental financing request in the smallest detail and to establish an accounting forecast of the operation .
Present a forecast of the results of the operation
A rental property investment impacts both the tax situation and the budget. On the other hand, the bank will only take into account net rents and for this will apply a reduction coefficient that may vary depending on the credit institutions.
Thus, on a gross rent of 650 € monthly, the bank will make the following calculation to determine the net amount to remember: 650 * 0.7 = 455 €
This method may be unfavorable to the investor and it is often more interesting to present oneself a projected balance sheet showing the net income .
In general, the rental charges are as follows:
- Property tax
- Insurance (unpaid rents and non-occupant homeowners insurance -NOP-)
- Rental Management Fees
- Income Taxes
The tax of household garbage, condominium fees and water, electricity or heating are charges that are incumbent on the tenant.
Determination of net rental income
We will take the example of an investor who buys an old apartment of 120 000 € that he intends to rent and for which he asks for a mortgage to the extent of 100%.
He therefore finances the ancillary costs by his own money. The rent is set at 550 € monthly.
We imagine that the rental management is entrusted to a real estate professional and establish the charges as follows:
- Property tax: 550 €
- Insurance of unpaid rent: € 14 per month or € 112 for the year (about 2.5% of the rent)
- Non occupant homeowners insurance (PNO): € 8 per month or € 96 per year.
- Rental management fees: 330 € annual or 5% of net rents
Namely : the agencies often offer group contracts for unpaid rent insurance which allows to benefit from better conditions than for individual membership.
- Annual net revenue: 550 * 12 = 6600 €
- Annual charges: 550 + 112 + 96 + 330 = 1088 €
It remains to measure the impact on the tax situation of the investor. For this, we need to know the characteristics of the rental property loan:
- Duration: 20 years
- Interest rate HA: 3.55%.
- Credit insurance on borrowed capital: 0.30%
The borrower will have to repay € 729 per month including € 30 for insurance. However, he will only be able to deduct the interest and insurance contributions that will be paid in the first year to: 3 359 € interest (1) + 360 € insurance totaling 3,719 €
(1): we imagine that the investment is made on January 1st of the year.
Analysis of the tax impact
We assume that this is the only rental property owned by the investor. It is therefore part of the micro-land system (rents of less than € 15,000 per year) and the benefit of the 30% abatement (excluding tax exemption operations).
The result of 1793 € will be added to the professional income and result in a tax that depends on the marginal tax bracket of the investor.
Highlight the project’s assets
It is advisable to prepare a file presenting all the advantages related to the investment. This will have a double impact: reassure your interlocutor about the viability of your project and show it the seriousness you are showing. The objective is to highlight the most favorable aspects on:
- The housing situation. Its proximity to public transport, schools and universities. Its location in relation to the city center.
- The building and the composition of the rooms . Floor, elevator, parking or garage. What is the layout of the rooms, the apartment is it sunny, renovated? What is the level of rental charges?
- Economic data, ie the level of the market : is there an imbalance between supply and demand? What is the average rental price of the neighborhood? Are you well located? If you are planning to hire a professional to find a tenant, try to benefit from his help, otherwise ask the agency that sold you the property.
Documents related to the situation of the borrower
As with any financing request, the banker will ask for a number of supporting documents to analyze your financial situation and verify your identity. You will need to provide the usual pieces such as a copy of the last 3 payslips, 3 statements of account, the latest tax notice and your national identity card.
Bring all the necessary parts from the start. Respond immediately to any additional request. In short, show your seriousness.
Impact on the debt ratio
Even if the amount of rent to be collected covers the monthly installment of the mortgage with insurance and all rental charges, there is an impact on the debt ratio.
We will demonstrate this by performing several calculations by taking the example above. We will assume that our investor has professional income of € 35,000 a year, that he is the owner of his main residence for which he pays a loan of € 850 per month or € 10200 per year. We admit that he has no consumer loan.
We therefore take only the income (professional and rental) on one side and the repayments of credits on the other.
Formula for calculating the debt ratio
(Credits in progress * 100) / Revenues
Situation before rental investment
(€ 10,200 * 100) / € 35,000 = 29.14%
Indebtedness after completion of the operation
(€ 18,948 * 100) / € 41,600 = 45.54%
Case where the level of the rents covers the entirety of the loan maturities
In this example, we assume that the level of rents covers the entire loan, ie € 730 per month or € 8760 per year.
(€ 18,948 * 100) / € 43,760 = 43.29%
As can be seen, rental investment hurts the debt ratio and the fact that rents cover the entire loan does not change much. However, the bank will not take into account the debt ratio as it appears after the operation but will only analyze the risk related to its realization.
The question of personal contribution
From a strictly fiscal point of view, the objective is to deduct a maximum of expenses to minimize the impact of the tax. This is why it is better to obtain a rental property loan without making any contribution.
However, it will be necessary to face the reluctance of banks considering less and less to finance the entire investment for rental.
Thus, to give you every opportunity to achieve the transaction, it will probably be necessary to have at least the amount to pay the notary fees and warranty.
Namely : many banks require in addition to the amount for notary fees that the borrower has a contribution of 10% of the total cost of the transaction.
The advantages of the loan in fine backed by an investment contract
The solution to avoid the personal contribution and to optimize the fiscal result of the operation consists in then in financing in fine of the rental property For this, it is of course necessary to have the necessary funds but they will not be invested in the project.
As the debt is only repaid at the end, the borrower only pays the interest. In return, it will put in guarantee an investment whose amount is evaluated starting from a hypothesis of yield. Interest and capital will have to replenish the loan amount.
Encrypted example :
Let’s take the elements from the example above.
- 3,55% over one year is 4260 € per year
- Amount to put in guarantee (hypothesis of yield of a life insurance contract 3%): 67 000 €.
This financial amount also has a positive impact on the monthly payment which will be much lower than that of a depreciable loan since it will be 355 € instead of 729 €. It will however be necessary to take into account the total cost of credit in fine which is more important.