Turn Every Dollar You Invest Into $1.20…Instantly Date: 03/08/2008
International Living presents: You can create a safe retirement investment plan, secure a gorgeous vacation property, create a new income stream, or just increase your wealth…using what the guest author of today’s Saturday Edition describes as “the closest you’ll get to a sure thing.” Pathfinder’s Ronan McMahon explains more below.
Saturday, March 8, 2008
Read more about foreign real estate in International Living Postcards—Saturday Edition
In today’s investment markets, a sure thing is hard to come by. In 10 years of investing in and scouting non-U.S. real estate markets, I’ve discovered something that comes close just once. And the phone call I had with a contact in Paris last night convinced me that this strategy remains the closest you’ll get to a sure thing in the international real estate investing game.
Whenever a developer talks about guaranteed rental returns, I hear alarm bells.
From Dubai to the Dominican Republic, real estate developers “guarantee” rental returns pushing double digits for periods up to four years. In the industry, it’s no secret how this works: You effectively pay upfront for the rent you will receive during the period of the rental guarantee. If you buy a unit expecting…or relying…on the same level of rental returns to continue at the end of the guarantee period, you will be sorely disappointed. The rental market for your unit will be limited.
But there is one exception: the French Leaseback Program. When I first heard about this program and its guaranteed rental returns, I thought it was too good to be true. But when I researched the program, I saw that it made sense on paper…and conversations with purchasers confirmed that the program works in practice.
Here’s how it works. When you buy (an apartment, house, or ski lodge) through this program, you get a full refund from the French government of the 19.6% V.A.T. levied on new build in France. That’s like getting $1.20 worth of real estate for every dollar you invest…straightaway. Why does the French government do this? It needs tourist beds to allow France’s tourism industry grow—you get a check for 19.6% of the purchase price…the French government gets a tourist rental. Everybody wins.
But, French bureaucracy being what it is, look for developers who will give you the 19.6% discount upfront, and let them chase the government for the check. It’s just easier.
Now comes the guaranteed rental return. When you hand your unit over to a management company—typically for nine years—you agree on a rental yield (usually 4% to 5%, although it can be higher or lower), which is guaranteed for the nine-year term. The management company takes care of everything, and you get a check each year, the amount of which is guaranteed. Plus, this rental return is indexed in such a way that it may increase, but it will never decrease.
It’s not unusual for European governments to use tax incentives as a tool to increase the supply of tourist beds. In most cases, you can only capitalize on these incentives if you have a big tax liability or other rental income in the country in question.
The French Leaseback Program differs in that the tax incentives benefit you equally irrespective of any other tax liability you have in France.
There are hundreds of leaseback projects available across France. I don’t have to research every one—I know what to look for in a leaseback, and on a call last night with a trusted contact in the business, I learned about a project to be released in the coming days that ticked all my boxes. Competitively priced units (from $108,000) in the greater Montpellier region, a growing urban area that has potential for capital appreciation…net rental yield of 4.6% guaranteed by an experienced management company….and a developer-advanced refund (so you don’t have to claim your 19.6% from the French government).
A note of caution: France is a beautiful country. From Paris to the Côte d’Azur to the Alps, this is a very appealing place to spend time (just ask the 80 million tourists who visited last year).
If you’re looking for a vacation home, the French Leaseback Program is not the best way to buy it.
If you’re looking for a pure investment, put aside all romantic notions about France. The French don’t use the term “gringo pricing,” but they can embrace the concept. An apartment in Saint Tropez may seem like a great idea when you’re basking in the sun on the French Riviera…but ignore that “blow to the heart” (as the French say) and go by the numbers. That way, you’ll avoid overpriced leaseback units.
As a general rule, I like leaseback opportunities with high rental yields in urban or ski locations. Urban and ski areas offer the best prospect for year-round rental at the end of the guarantee period. France’s top ski resorts continue to grow the volume of non-ski-season visitors with the growth in hiking and other outdoor pursuits. My contact also told me about a ski project that got my attention…which I’ll tell you about in a few days, after I verify a few details.
If the leaseback opportunity in Montpellier sounds interesting to you, contact paris@imoinvest.com.
Ronan McMahonFor International Living
P.S. In recent years, the French Leaseback Program has expanded to include not just tourist units, but also student accommodation and nursing homes. I’ve no room to get into it here…but these can also make sense as an investment in certain situations.
Editor’s note: Ronan McMahon is executive director of the Pathfinder real estate scouting group, currently active in eight international real estate markets.