Rules for successful real estate investing: five basic steps.

Purchasing an apartment and renting it out is one of the most popular ways to earn extra income in retirement. This is reasonable, as it is a relatively safe investment, as long as it is invested for at least ten years. With this timeline, you won't be affected by the changes in the real estate market that have been felt since the beginning of the year. To increase your chances of success, follow our advice.

Optimize your investment

Even though new builds offer 'ready to live in' options, rising land and material prices have significantly increased construction costs. In most large cities, the price of new buildings approaches or exceeds the limit of 5500 euros per square meter, after which the Pinel tax credit for investments in new buildings does not apply. Older apartments often offer much higher profitability. They also allow you to invest in a central area that is sought after by tenants, while new buildings tend to be in outlying areas.

Optimize your investment and prioritize an apartment that can attract the maximum number of tenants. Avoid top floors without an elevator or homes with too high utility bills. To ensure long-term investment success, also avoid apartments that are too small. "To rent easily, studios should have at least 20 square meters, with a shower and kitchen," says Henry Buzi-Caso, president of the Institute of Real Estate Management. If you have more cash, opt to buy a one-bedroom apartment of 30 to 40 square meters, which may appeal to a student, a young worker, a couple without children or an elderly person.

Do market research

Do your market research on rental housing and understand the demand in the city you plan to invest in. This way you will avoid buying a studio if there are already many small apartments, or a family apartment in an entertainment district.

Also check the real rent level in the chosen neighborhood, because, depending on the area, the same area of the apartment can be rented with a difference of 50-100 euros per month. Also pay attention to utility bills: the higher they are, the lower the net rent will be. Finally, consider the amount of property tax, as it has increased significantly over the past three years and will continue to increase. Be careful because depending on the type of house (built before or after 1970), housing type (house or apartment) and location, it can vary for the same area by an order of magnitude!

Look out for renovation projects

Because of the difficulty of launching renovation projects, most of the properties to be renovated, especially in the energy sector, are starting to clog up real estate listings. "Since the beginning of 2023, the demand for buildings with renovations has decreased significantly," notes Anne Monard Bretin, director of Guy Hoquet L'Immobilière du Plateau agency in Lyon. If you are interested in such a property, you will have more bargaining power, especially if it has a Diagnostic Power Efficiency (DPE) rating of G, the lowest category. Many owners of such non-energy efficient properties are rushing to sell them before January 1, 2025, when it will be illegal to lease them in their current condition.

Another benefit is that once updated, the facility will attract better tenants and you will reduce your risk. Pay special attention to the bathroom and kitchen, which are often drawbacks of rental properties. "Tenants pay a lot of attention to these two spaces, which often look outdated," warns Nathalie Nakkash, director of Keller Williams Fortis Immo agency in Paris. Finally, from a tax perspective, these jobs will allow you to take advantage of the tax loss mechanism.

Look for properties in good condition

The volume of transactions has fallen significantly since the beginning of the year in all major cities where prices are falling. "Now only the best properties, in good condition and in the best locations, are sold," emphasizes Clement Chaillet, director of Guy Hoquet agencies in Bordeaux. However, even if the property is not "premium", in good condition it will be easy to rent out in a city with a high demand for rental housing. Also look at properties that are less sought after by buyers for primary residences and negotiate a discount. Warning, demanding half the cost won't work! Your offer must be reasonable.

Calculate profitability

To do this, research recent sales in the neighborhood listed on the Patrim website as well as the Meilleursagents website. The latter also offers a revaluation of past transactions based on current market prices. Then increase or decrease this estimate depending on the characteristics of the property, as a noisy first floor will cost less than a bright top floor. Finally, estimate any necessary expenses for its rental (anticipated work on the house and interior finishes). After making these calculations, compare this estimate to market rents to ensure that the gross yield is at least 3.5% in the downtown area and 5% in the periphery. Note that this is not always the case in cities where rent restrictions apply (Bordeaux, Lille, Lyon, Montpellier, Paris and part of the first bypass, most of Pays Basque...)

Consider taxes and benefits

Real estate is the most taxable asset, as rental income is subject to ordinary taxes and is subject to social contributions of 17.2%. If the total net value of your property exceeds €1.3 million, you will also have to pay an estate tax (IFI).

To reduce your tax, you can take advantage of tax incentives. There are many of them, each requiring certain conditions for application. Note: "For Pinel and Denormandie, the tax relief is included in the overall tax relief limit of €10,000 per year, so care must be taken not to exceed this threshold," advises Christophe Schay, director of patrimonial management at HSBC Continental Europe. Calculate how many tax credits you already use if you have a full-time employee, if you hire a nanny for your children, or if you've invested in other tax credits. Check then whether the new real estate can be optimized in a tax efficient manner. If not available, you can always take advantage of Loc'Avantages, which offers significant tax incentives as long as the cost of rent is reduced. This program is also available for existing properties.