Comparing French Apples with U.S. Oranges:Rents, Taxes, Lofts
City Rents, Property Taxes and Loft Living
New York, Paris, London…Loft Living is a Bargain in Paris
French Property Insider
Thursday, August 05, 2004
Bonjour French Property Insider Subscriber,
This past weekend I was in London, cringing at the high prices of absolutely everything, from the price of a hotel and B and B, to a simple dinner in a restaurant to the price of a taxi across town. At the same time, my daughter was desperately seeking an apartment in New York City. She complained that her student budget wasn’t stretching far enough to find something habitable, in a safe part of town, near a subway, much less in Manhattan. It confirmed for me that Paris is a bargain.
By doing a simple search using CraigsList.com, I found the lowest priced apartment rental in Manhattan was $750 per month, in Harlem, for a what is termed a “semi-studio.” Does that mean one-half of one room? In London, I found prices under 200 ($365) for the same approximate apartment. Shocking, until I discovered they price by the week rather than by the month. So, the least expensive studio I found there was $1025 per month! In Paris, as little as 400 Euros ($480) rents you a studio in the center of the city. Again, I am convinced Paris is a bargain.
Also last weekend, an IL client who signed a “promesse de vente” on a fabulous find here in the Marais just the week before, used his right to cancel the purchase taking advantage of the seven-day buyer’s remorse period to get out of the contract. The decision was based on his U.S. financial advisor’s advice that buying French property wasn’t a good investment. This, based on nothing more than his ignorance of French property and making the mistake of comparing French tax “apples” with U.S. tax “oranges.”
We don’t want you to make that mistake. So today’s issue is packed with good, solid how-to-avoid-the-traps advice and guidance, thanks to Jocelyn Carnegie’s on-the-ground working knowledge of the system and the market: dealing with making proper comparisons between the purchase of U.S. property vs French property, as well as properly preparing in advance for the purchase you’re going to make and getting a mortgage, even if you’re past your prime.
For fun, IL’s Rentals Manager Porter Scott is still getting down in the dumpsters for tantalizing tidbits he can use to renew the old with the even older in “The Paris Scavenger: Episode Four.”
And for What’s Hot, be sure to check out the dream million euro apartment in Hot Properties! And don’t scroll past the three beautiful lofts in various parts of Paris.
Editor, French Property Insider
P.S. We’ve added some new and fabulous short-term rentals to the roster, so be sure to read the classifieds at the end of the newsletter. My own apartment is still available September 4-14 while I’m in Washington, D.C. for the Living and Investing in France Conference (http://www.adrianleeds.com/parlerparis/liveinfrance/LIF_DC/LIF_DC_home.html). For more information about the apartments, visit http://www.adrianleeds.com/parlerparis/apartments.
Volume II, Issue 32, August 05, 2004
In this issue:
* Digging in the Trash, Again, Finding More Treasures
* Don’t Let Your American Advisor Give You Cold Feet
* Comparing French Apples with U.S. Oranges
* Become a “Boy Scout”… Be Prepared Before You Buy
* You Are Never Too Old to Get a Mortgage
* Discover How You can Live in France
* Currency Exchange Update
* Hot Property: Overlooking the Abbaye Saint-Germain-des-Prs
* Property For Sale: Loft Living in Paris
* Classified Advertising: Vacation Spots
THE PARISIAN SCAVENGER: EPISODE FOUR
The Paris Scavenger Strikes Again!
By Porter Scott
Extra! Extra! Read all about it! The Paris Scavenger struck again and again over the last few days, just as the Parisians began their annual housecleaning-attic emptying-basement regurgitation-renovation work phase.
Every year, starting on the last day of school at the end of June, the renovation teams hit the city with a relish, digging into the very fabric of ‘Old Paris’ and throwing out countless treasures as they refurbish flats and shops throughout the city. This is a period when opportunities abound for ruthless scavengers who are ever ready to pounce on refuse of all sorts, provided they are prepared to do so at a moment’s notice. The Paris Scavenger, of course, only intervenes when true treasures are on the verge of destruction. He salvages and saves these items, giving them hope for a new life and a better future!
The other night, dressed up and on my way out to meet friends for dinner at a fancy restaurant, I spied a dumpster brimming with enticing objects, building materials, and
furniture. There was no way I could even consider getting my hands dirty at that time, dressed in my finery. So I resigned myself to coming back after dinner, in the hopes that no one would intervene in the interim and deprive me of my just rewards as the Paris Scavenger — he who does his best to salvage the downtrodden detritus of Paris from an ignoble end.
Luckily, upon my return from a glorious dinner at ‘La Rtisserie d’En Face,’ one of Jacques Cagna’s restaurants, the dumpster hoard was still intact. I raced back home, changed into my all black, low profile, Paris Scavenger attire, and headed back to the dumpster. There I began sorting and digging to discover the treasures within. There were numerous hand made bricks thrown into the dumpster in a haphazard way. I proceeded to sort the bricks and stack them neatly on the sidewalk, choosing only the ones that were in good shape. Over 200 bricks later (it was then about 2 a.m.), I had accumulated a great variety of useful items, some of which had real value. That is, if I were an antique dealer looking to resell.
To simply list the most important items, there were: 2 sets of antique andirons in perfect shape, one Thonet bar stool, a large buffet whose drawer and doors had been wrenched from the main body and thrown separately in the dumpster, a heavy duty card table, some carved marble pieces from a dismantled mantle. Fortunately, this dumpster was directly across the street from one of my apartments where I have several basement storage areas stuffed with street treasures and whatnot.
The hardest part of the job was getting the loot into the building without making too much noise and awakening the neighbors. I would not advise carrying bricks after midnight. But sometimes you have to be willing to push yourself to the limit and beyond for the sake of salvaging some choice street rubbish from the crushing indifference of the garbage collectors.
About a week later, after another delicious meal at the same Jacques Cagna establishment (pure coincidence to eat there twice in a week’s time), returning to my Parisian home away from home (I live in Tours), yet another full display of items that had been removed from someone’s basement sat on the sidewalk, awaiting the garbage truck in the morning. Once again, I shouted ‘Eureka!’ This was not Troy, however, and there was no gold (my wife’s name is Cecilia anyway), but it was a great find on a much more modest scale. This time, only going until 1 a.m., loading up my car with the following: two very large rectangular mirror frames, a lovely porcelain corner sink with its original faucet, an oak cabinet door, a small cheese cabinet door with its wooden grill, more carved marble mantle pieces, a large cast iron skillet, and bits and pieces of carved wood, from molding to cornices.
So there you have it, another heroic episode of dirty work done by the one person in Paris who, in a flash, is capable of changing his identity (and clothing) to fit the circumstances, who can go from high end to low end at a moment’s notice, who can scavenge until the wee hours of the morning. Most women would wonder what there husbands are up to when they are away from home and when they go out alone late at night. Male predators are known for their late night carousing and many wives have reason for worry. Not mine, fortunately — and I say “fortunately” for both of us. Anyway, she knows that no woman would get near me when I am rummaging through a dumpster, expending all of my energy in the pursuit of a one of mankind’s more noble pleasures: scavenging!
Editor’s Note: Porter Scott is IL’s Property Rentals Manager. For more information on how to get the best return on your Paris rental property investment, rent your Paris apartment, or renovate and maintain it, contact Porter Scott at email@example.com
LET YOUR U.S. ADVISOR GET COLD FEET WHILE YOU MAKE A HOT BUY
By Jocelyn Carnegie
We have had a couple of instances of ‘freezing feet’ recently, where people have pulled out of purchases during the seven-day buyers remorse period. That is, indeed, what the seven day period is for: to take stock. However, it should not be used lightly — discuss your purchase before you arrive (just as we would advise you to seek pre-approval for a loan if you intend to mortgage) with all your advisers but do be warned that your U.S. adviser is likely to try to dissuade you.
They say that ‘a little knowledge is a dangerous thing.’ Don’t get half a story — if you want to buy a property in France take the advice of someone who understands both systems and how they can dovetail.
There have been several cases where potential U.S. purchasers have been put off their hunt for a French property by their U.S. financial advisers. To try to compare the French system with that of the U.S. is like comparing apples with oranges — it is a total ‘red herring.’ We would never try to dissuade anyone from taking as much independent and expert advise as possible. Your U.S. adviser should indeed be involved with structuring your purchase and fitting it into your own financial planning in the U.S. But the main problem is, they are commenting on a system that is largely misunderstood. The legal basis is not Anglo-Saxon but Latin (Civil Law as opposed to Common Law) and this fundamentally affects the way the two systems have evolved from both a legal and fiscal point of view. Closing costs are a lot higher for a reason. They discourage litigation as well as overt speculation thereby creating a stable basis for growth in value.
The bottom line is, your U.S. adviser may well tell you not to touch it with a barge pole because he does not understand it. It may therefore be helpful to refer them directly to a U.S. attorney and tax expert in Paris and for you to be in on the conversation.
There are several major points:
You are investing in euros — this can only be a good thing for diversification of your investments. Saddam Hussein converted from dollars to euros before the latest invasion. That may not be a popular thing to say, but your U.S. adviser wants to keep your money in his fee pot.
2. Closing costs:
Yes they are a lot higher but they create and promote a stable growth trend and discourage speculation. Closing costs consist of tax (about 5.5%) and notaire fees (about 2.5%). The process eliminates the need for title insurance.
3. Return on Investment:
This is usually overlooked. On a purely demographic level, visitor
numbers to France are staggering and the shortage of tourist beds promotes high rental and therefore return.
You are investing in bricks and mortar. This is not an investment in paper which can be traded in a matter of hours. A minimum growth of 10% or so per annum is likely and is certainly a low risk investment.
There follows an extract of an article which appears on the website, ‘Own2Invest’ which has some interesting reflections on the subject:
“Investing in income property must be looked at in the medium to long term; it is not a ‘get rich quick scheme.’ It usually enables the wise investor to obtain an above average, steady growth of wealth.
Owning French property is one of the safest investments to be found in today’s ‘unstable’ world economy. French property law makes owning property in France an extremely safe investment, (with well under 0.5% litigation), and is the envy of legal professionals and governments throughout the world, with many countries at present looking into “adopting” the system – including the U.S.A, (with nearly 6% litigation in some areas). Property and fiscal laws also ‘discourage’ outright property speculation and this clearly shows in the very stable, long-term increase in property values, without the usual ‘highs and lows’ associated in other property markets throughout the world.
Closing costs are unavoidable, however there are ways in which you can mitigate their severity such as itemizing fixtures and fittings separately to reduce the taxable total.
It is our view that Paris (and France) is a very low risk investment. France is the most visited country in the world. Annual visitor numbers outpace the population of France by 25%. For this reason, French property stands apart from most other countries in that it provides an excellent rental return because there is a chronic shortage of visitor beds. Stable growth averaging 10% per year (in Paris) is the icing on this cake.”
The moral of this story is: take as much advice as you can prior to your purchase but make sure the advice is well informed on both sides of the Pond.
COMPARING CLOSING COSTS AND PROPERTY TAXES
By Adrian Leeds
When you purchase a property in France, you are required to pay what is labeled “Notaire Fees” — a percentage of the purchase price of the property as a one-time tax assessment. Notaire Fees can be from 7% of a $1,000,000 property up to 13% of a $100,000 property.
On most properties purchases we have worked with, fees were roughly 8% of the purchase price, about 5.5% of which are tax and about 2.5% of which are fees paid to the notaire to do the title search, secure and process the sale, thereby eliminating the need for title insurance.
Closing costs in the U.S. are considerably lower. They could include loan fees (points, application fee, credit report), prepaid interest, inspection fees, appraisal, mortgage insurance, hazard insurance, title insurance, and documentary stamps on the note fees. These items are negotiable, but expect to pay about 4% of the purchase price.
Closing costs are a one-time assessment in both cases. Property taxes, however, are annually assessed. In the U.S., annual property taxes are quite high. They can vary from as low as 0.5% (Mobile, Alabama) to 3.8% (Concord, New Hampshire).
In France, property taxes are quite low. There are two forms of tax: 1. Taxe d’Habitation paid by all inhabitants, regardless of renting or owning. Therefore, this tax should be excluded from the comparison. 2. Taxe Foncire paid by the owner.
Taxe Foncire is determined by the “valeur locative cadastrale” (local tax registry value). It represents the estimated annual rent if the property was let on the open market. However, the valeur locative is often substantially lower than the market rental value. To estimate it, base it on an estimated rental value (which increases about 1% a year), which is adjusted for allowances (for new and reconstructed properties), then multiplied by the current tax rates of the region, department, and neighborhood, plus 2.5% of that as a collection fee. This makes it very difficult for an individual to estimate the tax. However, interestingly, taxes are lower where population is denser (in the cities where more property contributes to the tax base).
We find the taxe foncire to be somewhat equal to the tax d’habitation. To give you a concrete example, my own annual taxes on my 70 square-meter apartment in central Paris are:
Tax d’Habitation: 189 Euros ($227), 0.042% of the current value of the apartment (450,000 euros)
Tax Foncire 2003: 306 Euros ($367), 0.068% of the current value of the apartment(450,000 euros)
At these rates, in would take 7 years to equal the tax I’d pay if the property were in the U.S. at the LOWEST tax rate of 0.5% and 56 years at the highest rate of 3.8%!
So, what do you think is the better deal?
ON BEING PREPARED TO BUY, SCOUT’S HONOR
By Jocelyn Carnegie
Before you arrive in France, please insure that you collate the following documentation. This will be required for your mortgage application and/or to open a bank account in France. We advise our clients to contact recommended lenders in advance to discuss getting ‘Lender Pre-Approval.’ This means you will be able to make a clean, unconditional offer should you need to act rapidly. An unconditional offer is much more attractive to a seller as well as increasing your negotiating power.
If you intend to apply for a mortgage, you should be aware that it is mandatory to have a bank account in France. You will also be asked to complete a medical questionnaire which may require a medical examination as Life Insurance is a legal requirement to cover the full amount of your mortgage. This will be explained in full by your lender.
DOCUMENTATION REGARDING EACH BORROWER:
Basic / Support documentation:
* a photocopy of each borrower’s passport or identification card
* a copy of any rental deed and proof of rental income (if you have other rental property).
* photocopies of the last 3 consecutive monthly bank statements confirming receipt of income.
* photocopies of repayment schedule regarding mortgage on any properties you c
* proof of source of your down payment (i.e. bank account, asset portfolio, investment account etc.)
* photocopy of birth or marriage certificate (this to prove female applicants maiden name)
* a photocopy of the last 3 consecutive monthly pay slips.
* a photocopy of the last 2 tax returns or 2 most recent W2 and 1040 forms.
* confirmation of income(s), type and date of employment signed by employer(s).
* a photocopy of the pension and/or retirement payment details,
* a photocopy of the last 2 self assessments or 2 most recent tax returns.
Self employed or company owner:
* 3 years audited balance sheets and trading accounts.
* a letter from a chartered accountant confirming the above figures and personal income.
* a photocopy of the last 2 self assessments or 2 most recent tax returns.
Documents for Opening a Bank Account:
* a photocopy of each account signatories passport or identification card
* If the account is to be opened by correspondence you will need to provide 2 forms of photo ID (i.e. drivers license)
* a utility bill showing your current name and home address
* If by correspondence, you will be required to provide a recent bank/credit card statement as well
* Bank Reference Letter from your bank (wording to the effect of, “Mr/Mrs X have been valued account holders of this bank for x years”)
Editor’s Notes: For this list in an easy-to-print format, see: http://www.adrianleeds.com/frenchproperty/insider/issues/images/5-8-04loandocuments.doc, and for a form to complete for pre-approval: http://www.adrianleeds.com/frenchproperty/insider/issues/images/5-8-04preapproval.doc.
TOO OLD FOR A FRENCH MORTGAGE? NEVER!
By Jocelyn Carnegie
Our readers often ask us about the contentious issue of age.
I am 60 years old. Can I get a mortgage?
The answer is, yes you can, but the insurance cost will treble when you reach the age of 70; it is, therefore, only cost effective to have a 10 year mortgage. It is mandatory in France to have Life Insurance to cover the full amount of your mortgage. This is normally calculated at the rate of 0.23% of the total amount of the mortgage for non-EU residents. As an example, life insurance would cost less than 29 euros per month on a 150,000-euro loan – over 70; it would cost nearly 100 euros per month (subject to a full, clear medical examination).
If age is a concern, there are ways in which your purchase can be structured to bypass this problem. The best scenario is that you have non-dependent children. You can structure your purchase through the formation of an SCI with you and your children as shareholders. In this way, the children are nominated as the insured (the mortgage is granted in the name of the SCI) but you can still pay the mortgage.
Mortgage loans are based on income rather than assets in France. It is also possible to leverage your purchase by having your (earning!) children pay for the mortgage whilst you act as guarantor (if your wealth is based on assets rather than income).
FPI had an interesting case recently of a mother and daughter purchasing an apartment together. The table below illustrates two scenarios presented by prospective lenders:
Mother @ 60 years
Total Purchase Price
Down payment 30% (incl.10% closing)
Mortgage Interest Rate: Variable 3.35%
The figures do not represent an actual offer made and are illustrative as part of the pre-qualification process
The use of an SCI in this scenario means an immediate ability to purchase an apartment about 15% higher in price whilst benefiting from a 35% saving in monthly mortgage repayments. It also illustrates the importance of seeking advice and pre-qualification from lenders before you arrive if you intend to leverage your property purchase. FPI can help you through this process. For more information please consult our website/see after for the list of documents required.
Mark your calendar for the exciting upcoming conferences sponsored by the International Living Paris Office!
Living and Investing in France
September 10 – 12, 2004
Dinner and Virtual Tour of Paris with Thirza
Walking Tour of French-Speaking DC
LIF_DC Walking Tour
Single in the City of Light
(And Loving It!) with Adrian Leeds The Westin Grand – Conference Site
LIF_DC Single in the City