Rental Income

One of the major attractions to investors is the rental income which is guaranteed by the property management company.

The rental income is nearly always calculated on the ex VAT price of the property, excluding notary and other fees.

So, if a property was priced at 100 000 Euros INC VAT, the ex VAT price of the property would be 83 612 Euros. If the property was being sold with a 5% yield, the annual rental income would be 4180.60 Euros.

Recently, there have been several cases of properties being advertised with much higher net yields than the property is really offering. Agents may do this to draw in more customers who have been attracted to the high looking yield initially. This is not a very honest way of dealing and if you see the same property but with a higher yield you should ask what the yield is based on.

For example, if there is 4180.60 Euros of rental income and the total ex VAT price of the property is 83 612 Euros this will give a yield of 5%. However, if the ex VAT price of the property includes 10 000 Euros for a parking space some developers will calculate the yield on the price of 73 612 which makes the yield look like it is 5.7%!

This price is net of French VAT at 5.5% but gross of other costs including taxe foncière, accountancy fees, income tax and so forth.

In fact, the income that you will receive is subject to French VAT at 5.5% and you will require an accountant to prepare your quarterly VAT declarations for you. Accountants will usually charge in the region of 200 ?300 ? per year for this service.

The rental income is normally paid to owners quarterly in arrears although this does differ from development to development and should be checked prior to reserving.

When the construction of the development is completed there is normally a short period consisting of a couple of months where no rental income is earned. This grace period allows the property management firm to set up inside the development and start advertising the properties to let. Where this is applicable it is written into the lease contract.

The rental income will also be index linked, often using the INSEE Cost of Construction Index as a reference.

How the rental income is indexed will vary from development to development but it is more often reviewed on a yearly to three yearly basis on the anniversary of the lease contract.

The review will either take into account the full amount of the fluctuation of the index or, will be capped at a certain percentage of the fluctuation (75% cap is becoming common).

Full details of the INSEE Cost of Construction index as well as archives of how the index has performed can be found here: http://www.insee.fr/en/indicateur/indic_constr/indic_constr.asp