Buy a primary residence or rent to invest: which strategy is the most profitable?
Feb 2, 2023
5 minutes
Primary residence or rental investment, what should you focus on for a first real estate purchase? What strategy should be adopted to build wealth and optimize income? Beanstock answers all your questions 👇
Rental investment or primary residence: where to start?
You are, like 41% of the French (and like 88% of those under 30), a tenant. Each month, you see a good part (about ⅓ on average) of your income leaving your bank account for a roof over your head.
You have probably wondered at least once (10 times? 100 times?) how to get out of this situation. If all this was a good calculation.
You consulted your bank - Eureka! They agree to lend you money. So, should you take the plunge?
👀 The tool that will bring you all the answers
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⚠️ The mistake not to make: staying a tenant… and doing nothing
Your rent is a dead loss. It does not bring you any money. To make money, you only have 2 options: either you remain a tenant AND invest the money you set aside each month, or you buy your primary residence so that the money you spend each month on housing is turned into real estate wealth. That's it. No other option. In particular, the option of remaining a tenant, not saving money, and/or not investing the money you would set aside is a pure financial disaster that holds you back in your life. Just that!
🤔 The right question to start with: do you really have the means to buy your primary residence?
You have a clear idea of your dream primary residence: you know where you want to live for the next few years and the minimum space you will need.
The first question to ask is the feasibility of your project: does your current situation allow you to buy your primary residence? Do you have the necessary contribution to make the purchase possible?
If you are lacking contribution or income, the question does not arise. You have only 2 options left: invest in rental property or… increase your income and/or your contribution!
The following question: what would be your rental investment budget?
You can simulate your borrowing capacity via our tool. If your borrowing capacity is €0, then you need to consider lowering your rent or increasing your income. Otherwise…
You have the means to buy both: which option wins the match?
Your available monthly cash flow
By becoming the owner of your primary residence, in most cases, you will have to repay a loan that will cost you more than your current rent. You will increase your monthly expenses and reduce your disposable income (income - expenses). Not to mention the investment you will have made...
This calculation is crucial, as you need to ensure that you have the ability to significantly reduce your living budget.
In the case of a rental investment, the remaining charge is often very low (if not nonexistent). Indeed, a huge portion of your loan repayment is covered by... your tenant! The impact on your disposable income will be much (much) lower. Therefore, a rental investment should have a minor impact on your daily life.
Winner: rental investment 💸
Flexibility
Another point: by buying your primary residence, you will have to accept less flexibility in your life. Moving to another city, region, country... getting into a relationship... having a new child... a divorce... a death... any change of residence will become infinitely more complex and will take several months (if not years). This is an element to consider.
A rental investment, on the other hand, allows you to remain a tenant and therefore benefit from the freedom that comes with it.
Winner: rental investment 💸
Leverage effect
The most powerful tool in modern finance is called leverage effect: thanks to your bank, you suddenly increase your buying power. You can purchase a property whose value is far greater than your total available assets.
But the power of leverage does not stop there. When you make a rental investment, it is your tenant who pays back most of your loan (by the way, don't forget to show your appreciation!).
For example, if you buy a property for €200,000, with €20,000 down payment, that you rent for €950 and costs you €1,000 in monthly loan repayment, after 20 years you will have invested €32,000 out of your pocket and own an apartment valued at around €250,000. That's the full power of leverage. In contrast, when buying a primary residence, you are obviously the only one paying back the loan. You will not fully benefit from the leverage opportunity.
Winner: rental investment 💸
Capital gains and taxation
Conduct a survey. How many French people know that the capital gain on the primary residence is exempt from capital gains tax? Answer: many.
Conduct a second survey. How many French people know that the capital gain on a rental investment is exempt from capital gains tax if you use the sale proceeds to buy your primary residence? Answer: too few.
And this applies to as many properties as you want. However, you must not have been the owner of your primary residence in the last 5 years to benefit from it, and you must purchase the primary residence within 2 years after selling the rental investment.
Winner: draw 🏳️
Emotion
A little emotional sequence. That of entering your home. Of having "a roof over your head." This is only allowed by purchasing a primary residence. Because often, a rental investment will lead you to buy a property in which you do not envision living. In contrast, your primary residence will hold a value to you that goes beyond financial considerations, beyond rational thinking. And this element, while less mathematically relevant, nonetheless holds strong emotional value for many French people.
Winner: primary residence 🏡
Conclusion
RP or IL: if you can buy, buy!
If you cannot buy either, increase your income or decrease your expenses
If you have the choice, rental investment will likely be advantageous on many levels
Non-contractual tool, estimates provided for informational purposes and based on the data available
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