Leaseback investment!!!!!

tightwadapprentice

I have recently been thinking about the possibility of owning a property abroad, but was keen to have a property that I could rent out on a guaranteed basis.

On searching the web I came across leaseback properties which you own but you lease back to a large company who pay you in the region of 4% return on investment.

The term of the contract seems to be around 9 - 11 years, so the investment is long term.

If you buy a property along these lines in France then the added benefit is that you do not pay VAT, which is around 20%.

Any thoughts would be greatly appreciated.

adj38

I deal with all the major developers in France and specialise in leaseback properties. As such i am not plugging any particular developer or location. The properties are all over France and are listed on the website at http://www.esprit-consultants.co.uk

The Leaseback scheme was established in France in 1976. The scheme works by purchasing a freehold property which is then leased back to the developer or a management company. Under the leaseback scheme the French government refunds the VAT of the property (currently 19.6%).

The purchaser can also enjoy periods of free usage through the year, depending upon the terms of the lease. The developer or management company is responsible for all the maintenance of the property including the maintenance of furnishings which are typically included in the purchase price. The developer is responsible for insuring the building and contents. It also pays for many of the local taxes and all the utility costs.

The owner is then guaranteed a rental income. The net return is typically 4% to 7%, which is index linked annually to construction costs. Tax allowances apply in respect of interest payments, legal expenses etc. The lease typically lasts for 9 - 11 years, after which the management company has the option to renew or the property can be sold or rented out privately. If the property is held for 15 years there is no French Capital Gains Tax.

The website is full of relevant information and tries to outline the pros and cons. Please contact me through the website and I will be pleased to answer any specific questions.

I hope you find it useful.

gallygirl

Spooky! I was looking at this yesterday......

The figures quoted by ad38 seem to be the norm - property prices can vary tremendously though, and I saw some contracts as low as 1 yr.

France seems to have by far the most properties but this seems to operate worldwide - see link.
http://investment-property.themovechannel.com/guaranteed_rental_income.asp
I'm quite interested in this, bearing in mind the motto "if it seems too good to be true......" - comments from anyone else would be appreciated.

adj38

I know there is a tempation to think this is too good to be true, but hold your disbelief for a moment. The following are common FAQs. Please note that this is not the same as Bulgaria. The leaseback scheme I am referring to is approved by the French Government.

Is Leaseback the same as a Time-share?

Leaseback has no similarity with time-share. With leaseback the purchaser owns the freehold of the property and then enters into a lease agreement with the management company. This is secured against a guaranteed income.

What is a typical return, and is it net of all charges?

The guaranteed income is up to 6% per annum, although typical leases are from between 4% and 6%. This is a fixed income as specified in your contract and is guaranteed whether the property is rented or not.

The income is also index linked to construction costs and is paid after deduction of all day to day expenses, which are met by the management company.

Who is responsible for the day to day running of the property?

The management company is responsible for fully maintaining the property. Clearly it is in their interest to maintain a high standard to ensure maximum occupancy levels.

All utility, maintenance and insurance costs are met by the management company. The purchaser is only responsible for the local “taxe fonciere”. This is dependent on the size of the property but a typical two bedroom property would cost approximately £200 per annum. This can be offset against the income.

Why is the VAT refunded?

This is essentially a tax-break from the French Government to encourage developers to build tourist properties. This is to ensure that there is sufficient accommodation available to service the tourist industry, which is a major source of France’s Gross National Product.

Are there any tax allowances?

Mortgage interest and expenses can be offset against income, together with a fixed amount for depreciation. Allowances can also be rolled over to successive years.

What about French income tax and Capital Gain Tax?

With regards to income tax, normally there is none. The acquisition can normally be structured in a way that does not make you liable for any. For Capital Gains Tax, as a non resident, you pay 16% of the net profit when you sell. However you can deduct your acquisition costs such as notary fees, selling fees etc and the cost of major improvements made to the property. After the first two years, there is a reduction of 5% of CGT liability per year you hold the property. After 15 years there is no capital gains tax to pay.

Am I permitted to use the property during the lease period?

Typically the terms allow for between 4 to 6 weeks of personal use each year. This is free of charge. However, it is also possible to have no personal use in exchange for an increased income. Depending upon the terms of the lease it may also be possible to sub-let any unused weeks.

What are the arrangements for mortgages?

It is typically possible to borrow up to 80% of the property’s value on either an interest only or more usually a repayment basis. In certain circumstances it is also possible to borrow up to 95%. A typically repayment period is 20 years and in addition to variable rate borrowing, it is also possible to fix the interest rate for the whole of the loan period.

As a very rough guide, a yield of 5% with a 30% deposit would be capable of repaying the loan in 20 years.

Clearly the guaranteed index linked income, together with fixed repayments, provides a high degree of financial certainty.

Mortgage rates are currently around 3.5% at present. This clearly compares with the 4-6% income.

What other purchasing costs are there?

Solicitor’s (Notaire’s) fees, land registry costs and the like typically account for 4% to 5% of the purchase price.

Why not purchase a property and let it myself?

The advantage of this is that it may well be possible to generate greater income. However, newly built properties purchased outside the leaseback scheme are subject to VAT at 19.6%.

You would be responsible for maintenance, property taxes and finding tenants. You would probably also need to employ a management rental agent at a typical costs of between 20% and 25% of gross income.

What happens at the end of the lease period?

At the end of the lease period, there are several options available. Some leases allow for the management company to review the lease for another fixed lease period. Alternatively, the property can be sold or rented out privately.

What about if the leaseback company goes bankrupt?

This is very unlikely as leaseback company are well established and are approved by the French government. However, if that happens, you always retain ownership of the property as it is freehold. You will have the option of self manage, or you can put it through another agent.

As with anything there are potential drawback and these should be understood. If anyone has any specific questions I would be very pleased to answer them. Please contact via the website at http://www.esprit-consultants.co.uk

Francoise

Ali007 please contact me and i shall explain in more detail.

brigittejohn

We bought a leaseback in May 2005. The construction was delayed for well over a year during which time we had to pay the part of the mortgage without any income to set it off against.
In May this year, the mortgage payments have gone up by more than 10%.

I was under the impression that the costs were handled by the company I lease to, but no: we have to pay all these:
VAT on the rent received
Charges de copropriete (service charges)
Taxe fonciere (council tax)
Bank charges (yes, banking in France is not free, and if you have a French mortgage you need a French bank account)

The cost of purchase are also far higher than usually indicated, as it is not only the lawyer (notaire) but also the estate agent and the mortgage provider that want an arrangement fee.

You must also pay an accountant in France to prepare your VAT returns either quarterly or yearly.

I have had and still have lots of work to correspond regarding the bank account, the mortgage, the management company, etc... Luckily I speak fluent French! so it is far from a hassle free investment...

So, don't be fooled by the 5% returns: they don't exist. You pay net, not receive net.

josie

DON'T DO IT, DON'T DO IT, DON'T DO IT!!!!

I can't emphasise enough - it's all far too good to be true and the rental is by no means guaranteed!

It will prove to be a costly mistake!

ManAtHome

Sounds like the usual - "we'd rather get 2% interest in the bank and let all you lovely Brits get much more than that" - very altruistic these builders...

lynzpower

even if theres a 4% return, wouldnt it be better income wise to put that same money in a bog standard bank account? MAny bank accounts give 5.3% pre tax?

or am I missing something here?

A_Nice_Englishman

sorry, finger trouble. Try again!

A_Nice_Englishman

I thought the same, lynzpower.

However if Euro interst rates are 2% as ManAtHome says, there is the possibility of making a modest rertun if the rental income lives up to expectations.

To set against that, there are risks of Euro interest rates rising, property values falling, possible difficulty in selling and all the work briggitejohn describes which you would have to pay a French accountant to do if you weren't familiar with the French financial system and language. A Briton would also be exposed to currency fluctuations.

Overall, I think it's a lot of risk and hassle for little return.

adj38, you appear to be a leaseback sales person.

Could you show us your business plan? I'd be interested to know how sensitive it is to the factors I mentioned above,particularly Euro interest rates as they are lower than sterling and the US dollar so there may be upwards pressure on them.

How are your customers' leasebacks performing? Do you get many referrals or repeat business? What about your own leasebacks? I assume you have some