French Leaseback : 4 pitfalls to avoid

The bottom line

There’s no such thing as a “risk-free” real estate purchase, especially when it comes to tax exemption. The classic pitfalls are buying at too high a price (in order to save more tax) in medium-sized towns with no potential for university growth, and in a student residence that is poorly placed and too expensive. Unfortunately, these pitfalls are frequently encountered in practice.

Wealth advisors extol the benefits of investing in a student residence in Bordeaux, Lyon or another city.

Investing in a student residence can be a good investment, but there’s nothing obvious about it. What’s more, buying off-plan is not without its pitfalls. A rental investment in a student room is a real estate purchase like any other. In other words, the location of the property is crucial, depending on the neighborhood and the city.

The same applies to an investment in a tourist residence, in terms of the city’s tourist potential.

Investing in a student residence: the limits of tax benefits

1. The mirage of “risk-free” and “guaranteed” student residence investment

Believing you’re buying a “financial product”, a “guaranteed, risk-free investment”. The search for “tax relief” should not obscure the fact that this is a REAL ESTATE PURCHASE made by YOU ALONE. This is the only version of reality that will appear on the contracts and legal documents you sign. The fact that you didn’t carry out the economic and legal arrangements, or sign the documents in person at the notary’s office, or have never even seen the apartment purchased, doesn’t change this reality.

2. BUYING MUCH TOO EXPENSIVE IN MIDDLE-SIZED CITIES and believing that the law protects you from buying property at a price that is far too high in relation to the market price. The tax advantage must not lead to a poor property purchase in a student residence that cannot be sold later (and is sometimes difficult to rent).

3. Invest in student residences in cities with (really) strong university potential (Lyon, Bordeaux, Lille, Marseille, Nice or Montpellier) to ensure a sufficient occupancy rate (for the tenant-operator and the lessor, who will only be paid if the company makes a profit). Beware of investments in medium-sized towns already saturated with housing, where the developer approaching you will offer hundreds of units in addition to your own.

4. Don’t buy in a poorly located student residence. Despite all the “guarantees” of the salesperson canvassing you, don’t forget the golden rule of buying real estate LOCATION, LOCATION and LOCATION (“location, location, location” in English).

TIP

• Find studies on the rental market and schools and universities in the proposed city before investing in a student residence,
• Check the exact location of the student residence in the city, including distances to the main schools (e.g. with googlemap, google earth, mappy etc.).
• Check the location of the tourist residence (or service residence) and the means of access (public transport, road, airport). How many minutes’ walk from the center, for example.
• Check the figures for the number of students or tourists in the city and the different seasons.
• Look for evidence of demand for student or tourist accommodation.

FREQUENT HAZARDS AND DIFFICULTIES

• Frequent and recurring risks of rent arrears (which can last for several years).
• Attempts by the company renting the student residence to renegotiate rents downwards (as with other service residences such as tourist resorts).
• Loss of value on sale of the property, even after 10 years (!)
• Bankruptcy of the company leasing the student residence
• Major works to be financed after ten years, when rental income from the student residence is low.
• The reform of the Loi PINEL allows commercial tenants to limit the charges they have to pay: the end of the “triple net” lease.

MEDIUM- AND LONG-TERM INVESTMENT PLANNING

Commercial leases are often ignored by buyers. Salespeople selling tax-free real estate investments rarely mention them. The operator of a student (or tourist) residence is entitled to renew his commercial lease after 9 years. The landlord who intends to reclaim his apartment must pay the tenant an eviction indemnity. (This represents several tens of thousands of euros).

What’s more, after 9 years, the tenant often asks for a legal appraisal (or negotiates a rent reduction by scaring the landlords), by returning to the “rental value” (determined by an expert according to calculation methods based on the operator’s results).

Many operators offer rents for the first nine years, knowing that they will request and obtain a rent reduction 9 years later.

Exceptional expenses and work will gradually be billed to the owner-landlords, who are used to taking care of nothing and paying a modest flat-rate for expenses.

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