First appearing in the 18th century in Paris, during the Restoration and Haussmannization period, rental property buildings or income-producing properties developed in response to an increase in demand. Individual houses were no longer sufficient to meet the housing needs of the time. Entire buildings were thus constructed, divided into units, and owned by a single landlord. Since then, condominiums have emerged around the 20th century. Although less common nowadays, income-producing properties nonetheless represent a real estate operation with significant value creation and numerous advantages.
What is an income-producing property ?
An income-producing property is a real estate investment that involves acquiring an entire building as a single unit and renting out each unit within it to generate rental income. It can consist solely of residential units or be mixed-use, including commercial spaces as well. Therefore, it is an investment, mostly geared towards rental income with the primary objective of profitability, but in other cases, it may also aim for a strategy based on building a qualitative portfolio or creating capital appreciation.
Why invest in an income-producing property?
When it comes to rental investments, acquiring an income-producing property offers several advantages compared to purchasing individual properties separately (also known as “standalone properties”).
More and more individuals are attracted to and adopt this approach.
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Attractive price per square meter
The first advantage of buying an income-producing property is undoubtedly the fact that it presents a lower price per square meter compared to purchasing multiple properties sold separately. In general, in real estate, the larger the purchase, the lower the price per square meter. Purchasing in bulk often goes hand in hand with greater negotiation power, although this depends on the specifics and scarcity of the property. For example, logically, an income-producing property in the heart of historic Paris will be less negotiable than a property in a province where real estate pressure is much lower and the supply less abundant.
With equal capital, building a portfolio by acquiring an entire building can, therefore, be more attractive than acquiring multiple detached rental properties, thereby improving the profitability of the investment.
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Reduced ancillary costs
The purchase of an entire building by a single buyer helps reduce ancillary costs associated with the acquisition. Compared to the purchase of multiple separate properties, acquiring an income-producing property implies a single transaction: a single financing, a single notarized deed, a single insurance policy, etc.
Property tax and operating costs are also generally lower.
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Monopoly property freedoms
By definition, an income-producing property is owned by a single owner who is the sole decision-maker. Therefore, the owner has the freedom to decide whether or not to undertake works in the building. Unlike condominium ownership, where any intervention is subject to a vote at a general meeting of the condominium, no one here can block you. You can decide alone to renovate common areas or redesign living spaces according to your wishes, thus creating added value to your property. Note: However, pay attention to urban planning constraints for some buildings.
Being the sole owner also allows you to manage the property yourself without going through a condominium management company. In an income-producing property, there is no condominium, no general meeting… This has its advantages but can also quickly become a disadvantage when it comes to managing multiple apartments, maintaining common areas, managing finances and the building’s accounts, especially remotely. It is therefore entirely possible to enlist the help of real estate professionals for the management of common areas.
What to watch out for?
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A micro-market with often hard-to-find properties
Finding an income-producing property is not always easy! The supply is limited and generally confidential. These are often prestigious properties in highly sought-after areas with significant heritage character or real estate complexes in average condition requiring renovation, which would eventually yield both good profitability and/or significant capital appreciation.
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Concentration of risks
Like any investment, there are risks. Investing in the same place can therefore go against prudence and the diversification strategy, which advocates for “not putting all your eggs in one basket.” It is therefore essential for this type of investment to thoroughly analyze the project before diving in. It is imperative to assess the overall condition of the building and not hesitate to seek advice from building professionals. Unforeseen or underestimated work could directly impact profitability.
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Division of the property
It will be different to buy a building “in stages” rather than a building whose spaces are already divided into apartments.
If the division is not carried out, it is as if you are renting the same property to several tenants through multiple leases. It would then be necessary to define the enjoyment of common areas in each lease and to set the distribution of charges in proportion to the private areas, which can lead to many complexities in management, especially regarding the distribution of energy costs.
Division thus seems more favorable, even if it will add, in the case where it is not already done, costs for surveyors (to delineate each lot), notaries (for internal regulations, for example), installation of individual meters, etc.
Note: It will be necessary to carefully review the PLU (Local Urban Plan) of the area concerned because dividing a property may require, for example, the creation of parking spaces.
Is there a typical investor profile for investing in an income-producing property?
The answer is no. However, it remains obvious that buying an entire building requires a greater financial capacity than for the purchase of smaller properties, even in the province.
That said, whether it’s seasoned investors or anyone else interested in real estate, these investments will meet the same strategic objectives as smaller investments (profitability, capital gains upon resale, leverage effect of credit, building a portfolio, obtaining additional income, preparing for retirement, etc.) with the sole aim of optimizing or exceeding them!
In addition to the intrinsic advantages of income-producing properties, it is important to note that there are several ways to structure these acquisitions.
For example, it will be entirely possible to buy an income-producing property in Bare Ownership, which, in addition to all the already mentioned advantages, will notably optimize the tax aspects of ownership (income tax, wealth tax, and inheritance tax) and further secure this transaction.
As mentioned earlier, acquiring an income-producing property allows you to control the entire value chain yourself (from purchase, through renovation, restructuring, management, to rental or resale…). This, therefore, requires having slightly more advanced knowledge of structuring, legal, civil, and juridical aspects.
It is therefore necessary to be well accompanied to optimize this type of investment and avoid certain pitfalls. We can certainly help you with this thanks to a complete network of experienced professionals. The current context more than ever highlights the importance of holding quality assets in high-demand locations that allow you to anticipate and navigate cycles with serenity.
Example of properties selected by PATRIMOLINK
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Content grouped for informational purposes only and not replacing current regulations. Without consultation with our experts, PATRIMOLINK cannot be held responsible for any potential consequences of implementing the advice and information provided in this article.
