A few days ago in a group conversation, there was a discussion on a number of bad things about France, and in particular on how it was a scandal that landlords had such a hard time getting rid of tenants that don’t pay. I kind of put a damper on the conversation when I said that financially weak people should not invest in real estate, prompting questions on whether I considered people who are capable of buying a flat are financially weak. Although I felt I knew exactly what I meant, my arguments weren’t ready. They are now.
!!Investment The foundation of investment is to keep some of your money and lend it to someone else in order to make a profit. The capital you invest may get lost or go down in value, so investors associate a risk with any investment, and ask for higher yields for higher risk investments.
For example, investing in government-guaranteed bonds has a low risk of your capital disappearing, and has a low yield (in the order of 2% in France at the moment). Speculative investing in the Asian stock market can yield phenomenal returns (15%, sometimes more) but with a high risk of losing some of your capital (50% from 2000 to 2001 for example).
One of the basic rules of investing in the stock market (i.e. riskier investments) is that //you should only invest money you can afford to lose//. These words were actually //literaly// said by an investment advisor I met a long time ago during the dot-com boom. It sounds like reasonable advice.
!!Investing in Real estate There is no reason to treat investing in real-estate any differently. This means that before investing in a flat, you need to assess your risk:
- You may not find a tenant (reducing your ROI to 0%)
- The tenant may not pay its rent (reducing your ROI to 0%)
- The tenant may leave and cause extensive damage to the
- flat (sending your ROI in the negative)
It is true that French law is strongly in favour of the tenants. However this is known ahead of time by prospective landlords, and should not come as a surprise.
According to my investment advisor, you should only invest what you can afford to lose. This means that:
- if you can’t find a tenant, it shouldn’t be a problem,
- if your tenant doesn’t pay rent, it shouldn’t be a problem,
- if your tenant damages your flat, it shouldn’t be a problem.
Basically it means that //you can afford to lose the mortgage repayment//. Otherwise you’re exposing yourself to unacceptable risk (it’s like borrowing money to invest in the Asian stock market). Being exposed to unacceptable risk is what I meant by being financially weak.