In the Paris apartment rental game, it’s not how large the apartment is that increases rates or occupancy…but how many the apartment can accommodate. A studio apartment of 20 square meters or less rarely can accommodate more than two, but an apartment of approximately 30 square meters can accommodate up to four, often in two rooms (two in the bedroom with two in the living room on a sleeper sofa), rather than one large studio.
Accommodating four means your rental rate increases — not by double, but by about 150% of the rate of two-person accommodations. If you’ve paid 50% more for the apartment, then your return on investment for each is comparable.
Your decision to purchase a 20 square-meter studio may be purely financial — in that your initial investment is lower by the cost of a smaller space. Keep in mind that renovation/decoration for 20 square meters can be almost identical to the cost of renovation/decoration for 30 square meters.
Why? Because the most expensive parts of renovation are the bathrooms and kitchens which require expensive fixtures and appliances. A 20 square-meter studio and a 30 square-meter two-room apartment each house one bath and one kitchen, therefore the only differences may be additional furnishings for two rooms, such as a sofa bed, additional lighting, etc. Otherwise, all other amenities remain the same and therefore it’s as almost as expensive to prepare a 20 square-meter studio for rental to two people as it is a 30 square-meter two-room apartment for rental to four people.
In the industry, we use 2,000€ per square meter as an average renovation/decoration budget for high quality luxury rental apartments. Considering this is an average, let’s assume that the renovation is higher for 20 square meters and lower for 30 square meters, therefore, as an example we can assume that the fundamental work on a studio costs 40,000€ (2,000€ per square meter for 20 square meters), plus add 5,000€ for additional furnishings and incidentals for a two room apartment of 30 square meters.
So, let’s look at an example:
|Studio 20m2||Two-Room 30m2|
|Closing Costs (10%):||20,000€||30,000€|
|Per M2 Renovation:||2,000€||1,500€|
|Annual Rental Yield:||33,800€||50,700€|
|Return on Investment:||13%||13.52%|
Your return on investment remains approximately the same, but your annual yield is greater with a two-room apartment. If you take the scenario into the future by 10 years, and without consideration of appreciation of the property, your profit picture changes if not the percentage of return on your investment:
|10 Years Rental Yield||338,000€||507,000€|
Furnishing a small apartment is challenging in order to create a luxurious rental property that guests will enjoy and return to time and again. Everything one needs must be provided, whether in 20 square meters or 30, so the space must be carefully considered.
It is recommended that two beds be provided that can easily be connected to make one large bed to accommodate either couples or singles. In extremely small spaces, one might consider a sofa-sleeper, trundle bed, “Murphy” bed or other space-saving sleeping space. If you construct drawers under the beds, you can gain storage for linens and other items. A shower stall may replace a bathtub if the bathroom size is inadequate. Two stove burners will suffice in lieu of the normal four and a combination oven/microwave saves more kitchen space.
In small spaces, high ceilings, lots of light, bright colors and great views help alleviate any claustrophobic feelings. As long as the studio is as well-equipped as the two-room apartment, your renters will love the accommodations and not only return but will tell their friends, which will help increase your rental returns.
There’s no reason not to create a small studio rental apartment, but be smart, and do it right.
How to Budget for Your Paris Pied-à-Terre
Budgeting for your property investment in France is the first step toward actually purchasing the property. Without knowing exactly how much you have in cash to invest or how much you can afford to pay toward a monthly mortgage you cannot even begin to look at viable properties. Furthermore, if you intend to purchase a rental property, the revenues it will generate is equally important as it will fund the mortgage, either more or less depending on a variety of factors.
We have found some simple ways of calculating the budget, so that these “short cuts” can apply to almost any property to quickly and easily create a financial picture that is close to reality.
The elements of the calculations are these (using estimates in some cases):
Price of property: 10,000€/square meter
Square Meters: Studio 20 to 30, one bedroom 30 to 50, two bedrooms 60 to 80, three bedrooms 90 +
Price of property: 100%
Down payment: 20%
Loan to value: 80%
Closing costs: 10%
Notary fees and taxes: 7%
Property consultation: 3%
Mortgage interest rate: 2.85%
Life insurance: .005%
Arrangement fee: .01%
Term of mortgage: 20 years
Renovation/furnishings: 2,000€/square meter
Property taxes (of property value): .001%
Homeowners insurance: .066%
Copropriété fees: 25€/square meter
Rental rates: Studio 125€/night, one bedroom 175€/night, two bedrooms 275€/night, three bedrooms 425€/night
Occupancy rate: 65%
Net revenues: 65%
Property Management Fees: 35% of Gross Revenues
Additional Advertising: .01% of Gross Revenues
Now let’s look at the shortcuts — keeping in mind these are very rounded numbers in order to provide a ‘big’ picture. (Later, we’ll look at the details):
If you take a mortgage, then you’ll need 30% of the price of the property in cash.
If you renovate to luxury, then you’ll need 50% of the price of the property in cash (unless you mortgage the renovation expense).
To determine the monthly mortgage payment, an easy way is to use an online calculator of which there are many if do a simple search on “mortgage calculator.”
Multiply the monthly payment by 12 to get the annual mortgage repayment costs.
Multiply the nightly rental rate by 267 nights (65% occupancy) to get the gross rental revenues.
Then multiply that by 65% to get your net revenues.
Subtract the annual mortgage payment times 12 months and voila!…there lies your profit or loss for the year.
About Adrian Leeds
Adrian Leeds is founder and director of the Adrian Leeds Group, LLC, a team of North Americans who provide complete property consultation services including property search, purchase and sales assistance, financing, and marketing and development of fractional ownership properties. She speaks at conferences and seminars in both the U.S. and France on the topic of Living and Investing in France. Her sites Parler Paris Apartments and Paris Palais Apartments provide reservations and booking services of luxury apartments for a select group of property owners in Paris and France, and vacation rentals for visitors to Paris. She is the author and editor of the Parler Paris Nouvellettre®, editor of French Property Insider, and the author of the first online restaurant guide to Paris soon to be published in print and online for iPhone and iPad under the name of “Adrian Leeds’ Top 100 Cheap and Chic Paris Restaurants.” In addition, she co-hosts her own brainchild, the popular Parler Parlor French/English Conversation Group in Paris where members from 50 different countries meet to practice speaking French and English. Adrian Leeds Group, LLC, her U.S. based company and her France-based company, Parler-France EURL, provide Web-based relationship marketing, public relations consultation and event coordination targeted to “francophiles” living in North America and France.