Primary residence or rental investment?
This is the existential question we all face at some point regarding real estate. And as you might expect, the answer is: it depends… Today, in France, 37% of investors are themselves not owners of their primary residence, and current lifestyles are likely to push this figure higher. Of course, there isn't necessarily a better option than the other; each has its advantages and disadvantages. Here is a small guide of questions to ask and elements to know to help you in your decision.
What can I do?
First of all, and even before thinking in more detail about this question, you must already know your possibilities. This starts with evaluating your financial capabilities.
Calculate (either alone using our simulator or with your bank advisor, for example) your borrowing capacity. This is assessed based on your personal situation, your activity and its form (permanent contract, fixed-term contract, self-employed, ...), your income and your expenses. Once determined, add the savings you can incorporate into the project. Thus, it's up to you to estimate whether this budget allows you to buy the main residence you want, the property where you can envision yourself in the long term (generally, we expect a horizon of around 8 to 10 years).
If the budget suits you, then you need to evaluate the impact on your future cash flow. Calculate the monthly payment necessary for your purchase with the current rates, add the property management fees and the property tax converted to monthly values, and you obtain the amount you will have to pay each month. This amount should be compared with your current rent, and it is often much higher.
What do I wish for?
If the budget and cash flow have not helped you to orient yourself, it is necessary to deepen the reflection.
The primary residence, the choice of stability
Buying your primary residence means buying safely: no worries about finding a tenant or having to manage one, you are your own boss. It is also the choice of comfort: having the possibility to undertake work to tailor the acquired property to your image, without compromise on the layout or design. It also means freeing yourself from the psychological burden of paying rent. From a financial perspective, it is also the ability to benefit from tax exemption on the capital gain upon resale.
A coherent choice in smaller towns
There are certain cases where the primary residence is also a financially coherent choice. Indeed, in some small and medium-sized towns, the rent is higher than what the monthly payment would be for acquiring a property of the same type and size. This is common in towns that have a relatively low price per square meter.
But then, why choose rental investment?
The choice of budget: real estate investment offers numerous advantages compared to other investments, but it is not always easy to obtain the financing one desires for their primary residence. Rental investment allows you to invest in property without wasting time with your current capacity.
Let’s take the example of a resident of Lyon with a borrowing capacity of 150,000 euros living in a 40m2 space. With average prices of 5,000 euros per m2 and notary fees around 8%, they could afford a primary residence of 28m2, but that is not necessarily what they want. While waiting for an increase in their salary and borrowing capacity, it is possible to invest in real estate through rental investment.The choice of flexibility: whether you are in difficulty, want to simply change your environment, or need extra rooms, you can quickly leave an apartment you are renting. In the case of a primary residence, it is necessarily longer to find a buyer and to complete the sale. Additionally, in the case of a recent acquisition or significant renovations, the chances of a loss operation are high.
Let’s imagine the following operation:
Property price: 300,000 (30m2 at 10,000 e/m2), notary fees: 32,400, renovation costs 30,000, agency fees: 15,000
The operation thus requires: 300,000 + 32,400 + 30,000 + 15,000 = 377,400 euros, hence a loan of 337,400 after deducting a contribution of 30,000 euros.
After 2 years, our first-time investor wishes to leave the most beautiful city in the world to discover the sunny Marseille. At that moment, they would have reimbursed about 22,000 euros. If property prices have increased by 5% and the renovations have created an increase in property value, the resale could be 345,000 euros. You understand, the 2 years spent have served to gain 22,000 + 45,000 = 67,000 euros, but the fixed costs were 32,400 + 30,000 + 15,000 = 77,400 euros. The operation has therefore not been profitable, with a loss of about 10,000 euros despite favorable assumptions.The financial choice: rental real estate will allow you to detach from personal criteria such as geographical area or surface area in order to optimize the profitability of the operation. Therefore, you give yourself the possibility to invest in areas with higher yields than those close to your place of residence.
In short: You got it, there is no unique answer, the choices to be made depend solely on you!
If you have the ability to unlock the budget you want, if you have visibility on your future projects and prioritize comfort, then buying your primary residence seems to be the right compromise. On the other hand, if one of these conditions is not fulfilled, do not hesitate to invest in real estate: rental investment is made for you.
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