In today's current economic climate with very low interest rates, rental investments are a form of investment that is appealing to more and more French investors. Brick and mortar has traditionally been a safe haven for securing value and is an effective way to build capital. However, when it comes to renting out your property, one question arises: should I rent it out as furnished or unfurnished? Both types of rental have specific ins and outs that should be well understood, as they could have a significant impact on your investment's profitability.
Rent out a furnished apartment: good or bad idea?
Renting out a furnished or unfurnished apartment, and their different tax schemes
The main reason for one’s decision to rent furnished or unfurnished is the taxation applied to the income made from the rental investment. In general, both types of rentals are subject to progressive income tax rates. A landlord renting out an empty apartment generates income that is considered as "property" for tax purposes. In this respect, two solutions are possible. The first is to subscribe to a micro-property scheme, which allows taxes to be paid on only 70% of the rental income generated by the rental property. The second is to subscribe to the direct tax scheme, with includes possible deductibles.
Owners offering furnished housing whose rental income does not exceed €33,200 per year are eligible for the Non-Professional Renters of Furnished Property status (abbr. LMNP in French). In addition, they declare Industrial and Commercial Profits (ICB). Those who opt for the tax scheme called micro-IBC have half of their rental income taxed, while those who choose the direct tax scheme can reduce their taxable amount through deductibles like expenses and depreciation. At a first glance, taxation seems to favor furnished rental providers, with a lower taxable percentage of income (50% versus 70%).
Rental conditions depending on the type of rental
In order to better understand the specific nature of furnished rentals, the law has also established differences between furnished and unfurnished in terms of general rental conditions. The security deposit that may be required by a furnished landlord is equivalent to two months rent, compared to only one month for of an unfurnished apartment. Similarly, the legal duration of a furnished lease is one year (9 months for a student lease), compared to 3 years renewable for an unfurnished accommodation.
In addition, minimum notice periods are shortened for furnished apartments: 3 months on behalf of the landlord, and 1 month on behalf of the tenant, compared to 6 months and 3 months respectively (1 month for city districts located in "high demand" areas) for unfurnished properties. Finally, it is important to note that a furnished apartment must include certain amenities that have been expressly defined by law, and in failing to comply with this list, a judge may reclassify the property as unfurnished. A furnished owner has greater flexibility if he or she wishes to repossess their property, however in return, they are exposed to a more frequent turnover of tenants.
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Furnished and unfurnished apartments: expected rates of return
Only figures can tell if renting out a furnished apartment is actually worthwhile. The daily newspaper Les Échos published statistics at the beginning of 2018 showing that the average gross rate of return on furnished rentals varied between 6 and 8% (excluding seasonal rentals), compared with 4.7% to 6% for unfurnished properties. These differences should nonetheless be analyzed with caution.
Various gaps exist between cities and regions. For example, profitability is generally lower for properties located in the Paris region, where restrictions are more severe. In addition, furnished accommodations are generally more expensive to maintain, due to the ongoing maintenance required for the amenities and equipment used by tenants. These are expenses that must be taken into account in the medium and long run, even if contributing furniture makes it possible to generate rental income that is on average 15 to 20% higher than unfurnished housing.
Furnished rentals, a cost-effective solution with some disadvantages
In the long run, it's not easy to answer the question if furnished rental are any more interesting than unfurnished. While on paper, gross rates of return and tax schemes for furnished apartments seem to be more advantageous, the restrictions on landlords face terms of investment and maintenance of amenities and fixtures, frequent tenant turnover, and flexibility for tenants to move out with little minimum notice, are all factors that heed for caution. Beyond these considerations, a rental investment is always an appropriate investment in a healthy real estate market, whether or not the property is furnished or unfurnished.