How can you protect yourself from the risks associated with rental investment?

Of the various ways of getting rich, real estate is still seen as a safe haven, compared to the risks involved with financial investments such as the stock market. Investing in real estate with a view to renting it out is an effective way of building up wealth at a lower cost, or of investing existing capital so that it provides a sustainable income while increasing in value. 

However, the operation is not without risks, and it is advisable to protect oneself against them to preserve not only the profitability of the investment, but also one’s financial health and daily peace of mind. Let’s take a look at how best to protect yourself when making a rental investment. 

Solutions for unpaid rent

The fear of every landlord is that one morning the rent has not been paid. It should be noted that late payments can occur and that, particularly in this period of galloping inflation, flexibility is required if you are not to be caught out. When we talk about late payments, we are assuming that the tenant has not paid at least two successive monthly instalments and is not reassuring that he or she will pay up. Delays can also multiply, putting you in a delicate situation with your own bank for the repayment of the property loan, if any. 

The first thing to do is to maintain a dialogue with the tenant, to prevent the situation from deteriorating – and to determine whether or not an amicable solution can be found. In any case, certain precautions can help ensure your financial peace of mind. 

Selecting the right tenant

Above all, it is advisable not to make the first person to sign a lease. A careful study of the applicant’s file should be carried out to ensure that he or she answers the following questions: 

• Do they have sufficient and regular financial resources to pay the rent and utilities comfortably? 
• Is his or her situation eligible for the cover you wish to take out?
• Are the supporting documents presented true? 

A relationship of trust should be established from the very first exchanges, and you can trust your instincts. It’s better to wait a little while to find the right tenant than to rent to a bad tenant quickly!

Requiring a guarantor

As a third party who undertakes to pay the rent if the tenant gets into difficulties, the presence of a physical guarantor is reassuring. The guarantor can be a “simple” guarantor, and you can then contact him or her after having first contacted the tenant and if he or she does not settle the situation. In a second case, the “joint and several” guarantor must make up for the tenant’s default as soon as it appears.  

In all cases, the guarantor undertakes to pay what is stipulated in the guarantee deed that you have had him sign, in the event of the tenant’s default: the rent, of course, but also the charges, taxes, maintenance of the accommodation, etc. 

Unfortunately, the guarantor’s precaution may not be enough if he or she also becomes insolvent or refuses to intervene. The recovery or eviction procedure that is then initiated will undoubtedly be long and costly, including morally. 

Protecting yourself with the Guarantee against Unpaid Rents (GLI)

It will only be accessible if you present a solvent tenant with a secure situation: a permanent employment contract, an income of at least 3 times the amount of the rent and no previous unpaid rent. Various documents will be required to justify this and if accepted, you may be compensated for :

• Any unpaid rent, up to the date of voluntary or forced departure;
• Any damage noted on the inventory of fixtures on departure, as well as for the loss of rent caused by the delay in restoring the property (to be taken out as an option);
• Loss of rent if the tenant suddenly abandons the property or dies;
• The costs of proceedings in connection with an eviction application or recovery action. 

There are other insurance policies than the GLI to protect against the risk of non-payment, but be sure to study the proposed contract carefully: cost, deductibles or restrictions on the choice of tenant may surprise you. 

Preventing financial loss through the Visale scheme

This is a guarantee granted by Action Logement under certain conditions, aimed at compensating a landlord who has been short-changed in rent and charges for the amount of his debt. The organisation will then take action against the defaulting tenant. 

There is a limit of 36 monthly payments, and the rent must not exceed – including charges – €1,500 in Paris, or €1,300 in the provinces. Damage to the property may be compensated for up to 2 months’ rent. 

Keeping your property in good condition

This is an essential point, which if badly managed, can have a significant impact on the intrinsic value of the property or generate substantial renovation costs. A wise landlord will pay particular attention to protecting himself against damage that tenants may cause. We have already mentioned the guarantee against damage that can be taken out with the GLI, but other measures are also necessary. 

Carry out a detailed inventory

This may seem like a fussy and time-consuming process, which is not required by law, but you will be glad you did it if you have any concerns. 

Do not hesitate to draw up a document listing the various elements present in each room, in order to agree with the tenant on their condition. This may include walls and floors, but also switches, plumbing, sanitary and kitchen equipment, even joints and other specific details. You can then create an analysis grid that allows you to quickly indicate, with the help of simple crosses, whether the condition of each item is new, correct or deteriorated. 

By signing such a document, the tenant will not be able to show bad faith at the time of the inventory of fixtures on departure. To ensure that you are reimbursed for any damage, you can rely on the deposit requested on entering the property – also known as the security deposit.  

Being reimbursed for minor damage thanks to the security deposit 

Automatically payable when the lease is signed, the security deposit is equal to one month’s rent excluding charges. It can be paid directly by the tenant, by the loca-pass advance from Action Logement or by the housing solidarity fund (FSL). 

You will be entitled to decide what to do with this sum when the tenant leaves, and therefore to keep all or part of it if you consider that it is necessary to restore the property to its original state. This assessment is subjective and is often a matter for negotiation between the tenant and the landlord. 

Insuring your home in your absence

Damage is not always caused by the tenant and can occur when the property is empty: fire, flooding, vandalism, are all risks that should be covered. If the property is unoccupied, therefore, take out a non-occupational landlord insurance policy which will cover the costs according to the options chosen. These can cover monthly loan payments, repair of damage, or even reimbursement of objects or equipment in the home. 

If you are the owner of an unoccupied dwelling in a co-ownership, the ALUR law requires you to take out such insurance. Beware, failure to do so could have serious consequences in the event of a disaster affecting other dwellings in the co-ownership. 

Preventing the risk of vacancy

An empty property represents a cost – or lack of gain – that can quickly become problematic. Vacancies can occur and persist if certain precautions are not taken at the time of purchase or during the rental life of the property. 

Targeting the right location

A property may be exceptional in its intrinsic characteristics, but it will not interest any tenants if it is located in the middle of an isolated wood. Finding demand for your property requires an attractive location: in the city centre, close to shops and schools, cultural venues or in developing areas. This is the first criterion to consider, especially with a view to selecting a search area where properties can be presented at a price that matches your budget. 

Making your property suitable for renting

An investor is sometimes tempted to buy a cheap but poorly maintained property in order to maximise the immediate return on his investment. In such a case, it is essential to ensure that the property meets the basic criteria for letting and in particular that the decency criteria set by law are respected. 

In view of the strong rental competition in certain sectors, it may be useful to go further and carry out a partial or total renovation of the property acquired. If the initial financial burden is then increased, the landlord will be able to benefit from a significant increase in the rent and ultimately from a higher market value of the property. 

When carrying out such work, it is important to think about the layout and equipment in terms of the expectations of today’s households: a spacious living room, an attractive open kitchen, and a wood-burning heating system are all assets that will ensure that the house is occupied all the time. 

Finally, when each tenant leaves, do not hesitate to review the property with a view to restoring it to its original condition, or even improving it in order to re-let it as quickly as possible. 

Set a reasonable rent

Outside areas where rent is regulated, you may be tempted to increase your monthly income. This can be a bad idea if competition is tough: potential tenants will flee your property. Watch the market and set an affordable rent. This particular point should guide your financing package, not the other way around: don’t try to make your investment profitable with a high rent, but rather aim for a property whose natural rent makes your package profitable. 

Pampering the existing tenant

Finally, keeping the occupant of your property will obviously reduce the risk of vacancy. Make sure that you maintain a good relationship with them, that you are responsive to their requests, and that you regularly offer to improve the property by replacing or modernising equipment, renovating paintwork or floors – in short, by carrying out work that you would have carried out anyway after they have left!

Investing more securely thanks to LMNP

Finally, it should be noted that there is a way of investing that eliminates most of the risks associated with rental investment: non-professional furnished rental (LMNP). 

By investing under this status in a serviced residence, you entrust the responsibility of managing the property to the residence operator: he will be responsible for finding a tenant, collecting the rent, and managing and repairing any damage at his own expense. The contract signed at the outset even commits the operator to paying you the scheduled rent when the property remains unoccupied!

The LMNP status also allows you to receive income that will be taxed as industrial and commercial profits (BIC) and not as property income: this will cost you less in taxes. 

Investing with peace of mind requires paying particular attention to the initial financial arrangements and taking a few special precautions. One last useful tip: when choosing a property, be careful not to become emotionally involved. You are then in the shoes of an investor, you are not buying the property to live in. So don’t look for a property that you feel comfortable in, but rather one that objectively meets the criteria you have set for renting. Happy searching!