A Guide to the French Leaseback Investment
French Leaseback Investment
The leaseback scheme was introduced by the French government to help boost tourism and improve the quality of tourist accommodation. The scheme gives investors the opportunity to buy properties in desirable locations in France and then lease them back to management companies. To investors, his provides a hassle-free investment with guaranteed income and fairly good returns. In return, investment funding is secured for new, high-quality developments in tourist resorts – bolstering the tourist trade in the country.
How Does French Leaseback Investment Work?
Properties are bought by foreign investors in holiday resorts, and then leased back to management companies. The properties are often bought off-plan and the money made through the investment is used in the actual building of the development. The management company will lease the property from the investor, paying a monthly rent for a period of typically nine to eleven years. During the term of the lease, the management company will take full responsibility for maintenance and rental of the property. The investor can just sit back and rest assured that any issues with the property will be taken care of. The scheme provides great peace of mind for investors, as they know that they will get a monthly income through monthly rental payments, regardless of whether the management company has successfully let the property or not.
What are the Benefits of French Leasebacks?
The rent paid by the management company is not subject to the property being let. This means that even if the property stands empty for a significant period, rent will be paid by the management company to the investor. Few investments provide a guaranteed rental income, so this is a huge advantage. In most cases, rent is paid by the tenant of a property, so if the property is vacant for any period of time, it generates zero income or even makes a loss. This never has to be a concern for investors who take advantage of the French leaseback scheme.
The management company takes care of all maintenance issues relating to the property. They will normally ensure that the property is well furnished, arrange for it to be decorated, and deal with any repairs that are needed. The management company is also responsible for marketing and letting the property, as well as dealing with any issues raised by the tenants. The investor has little to no involvement with the day-to-day running of the property. This is great for people looking to invest in property, but who have little free time to commit to carrying out the duties of a landlord.
Properties that are eligible for the leaseback scheme are generally in very popular tourist destinations, such as central Paris, the French Alps or the Cote d’Azur. Owners get rights to stay in the properties for so many weeks per year, and special rates if they wish to spend more than their allotted time at the property. The desirable locations in which these properties are found, means they are great holiday homes. Most leaseback properties are also located in resorts with private pools and leisure facilities.
If an investor holds a leaseback property for twenty years, the French government will rebate the TVA (Taxe sur la Valeur Ajoutée) paid in the purchase of the property. TVA is basically the equivalent of VAT in the UK. It is paid on almost all commercial goods, including properties. A TVA rebate can be very significant, as TVA is paid at a rate of 19.6%.
Chance of Good Returns
Yields on French leaseback investment properties tend to be between 3% and 5%. This is fairly high in comparison with high-interest savings accounts or other long-tern low risk investments. More and more people are turning to leaseback properties instead of traditional pensions, for this reason.
You can sell a French leaseback investment property at any time. The remaining lease simply passes to the new buyer and the management company pays rent to them instead. The tax benefit also passes to the new buyer, so the original investor is not liable to pay back the VAT saved.
Are There Any Risks?
The rental income is only guaranteed so long as the management company is in business. If for any reason the company struggles to let the properties they control or are otherwise badly managed, the company is at as much risk as any other of going bust. If this happens, the investor is left with all the responsibility for the property, whether they wish to keep attempting to let it or sell it. You will be responsible for both maintaining and marketing the property, unless you can find another management company to take up the lease.
Tax Benefits Lost if Early Sale
If you sell the property before 20 years have passed, you will no longer be eligible for the TVA rebate. The tax breaks will pass to the new owner. You will not have to pay any extra taxes, but nor will you receive any money back.
Short Notice Visits Difficult
Because the letting of the property is controlled by the management company, despite owning the property and generally having rights to visit for between one and eight weeks each year, you will normally have to book your visits well in advance. Otherwise, it is likely the property will already be rented by another tenant.
Little Control Over Design
The management company will normally take control of decorating and furnishing the property. They will probably do this in such a way that the property fits in with other properties on their books. The owner will usually have little control over the appearance or functionality of the interior design.
It is difficult to find chalets or luxury buildings on the leaseback scheme. Typically only apartments in resorts are available on this scheme, as these benefit from access to amenities and facilities within the apartment complex, such as swimming pools or fitness suits. This means that the investment required is usually smaller, but choice of holiday homes is limited and an apartment may not be suitable for a family or large group holidays.