What is an LMNP investment ?
A LMNP investment is an investment made under the status of non-professional furnished renter. The beautiful tax advantages that it reserves, accompanied by a gross profitability of 15 to 25 %. higher than that of the PinelThis type of investment is exploding today due to the fact that it can be rented bare or leased out commercially. Follow our guide to make the most of this LMNP investment, which is currently among the most advantageous.
Close-up on the taxation of a non-professional furnished investment
There is no doubt that it is first of all the fiscal aspect of a real estate investment in LMNP which attracts the investor in search of a profitable property on the rental market. Under certain conditions, the LMNP regime allows for a tax reduction that can go as far as a complete exemption. This compensates for the traditional disadvantages of furnished rental, with a higher purchase price, due to the equipment of the LMNP property and its maintenance and management costs.
The BIC category
To benefit from this system, the lessor declares his rental income in the category of industrial and commercial profits (Bic), which is different from income tax.
Note: his LMNP rental activity is considered a commercial activity whose income is not taxed in the category of land income. This option allows an investor not to increase his marginal tax bracket. A choice is necessary between 2 LMNP regimes : the real one or the micro bic.
The micro bic
This tax system is the one applied by default for a small non-professional furnished renter, those whose LMNP rental income is less than 70 000 € per year. It gives the right to an abatement of 50 % of the rental receipts per year. This rate increases to 71% if the property is a bed and breakfast or a gîte (annual revenue ceiling of €82,800). In addition, there are social security deductions of 15.5% as long as the revenue does not exceed €23,000 per year (beyond that, the status is LMP). Otherwise, the tax authorities consider that the LMNP activity falls into the category of a professional furnished rental business, for which social security contributions amount to 22.7%.
When there is no loan or work to deduct from the revenue, this LMNP regime is interesting. It is light on the accounting level and causes few formalities.
The receipts to be declared will include the sum of all the rents, including the charges. On the other hand, if the deductible charges exceed 50% of the receipts, the regime of the LMNP in real simplified, becomes more advantageous.
The simplified real
The LMNP micro bic does not authorize the deduction of any charge, which is not the case with the real regime of taxation. It is precisely with the importance of all the possible deductions thatan investment in LMNP takes all its interest to avoid the taxes during a certain duration. It is possible to avoid the taxation on the rental incomes LMNP thanks to the depreciation, depreciation which comes to act directly on the reduction of tax by creating a deficit. It implies that the real estate investor does not declare any more his perceived rents and his expenses in a fixed amount, but for their real amount. That leaves him the possibility of carrying out a calculation of depreciation, that is to say of deducting a part of price of the good each year of its rental receipts, in addition naturally, of the other deductible loads in LMNP. Let us note in these charges :
- notary fees at the time of purchase ;
- condominium fees ;
- interest and fees related to the real estate loan;
- property tax ;
- Insurance (loan, PNO, GLP...);
- repair and improvement work ;
- the housing tax.
- the expenses of the tenant if the contracts (water, electricity, heating) are in his name.
For an owner LMNP cashing many charges, the interest of this mode becomes obvious. It can make it possible to entirely defiscalize a new acquisition during the first years. How can this be done? Thanks to the system of the deficit, from the moment when the expenses exceed the receipts. This deficit can be carried forward each year, for 10 consecutive years.
Managing accounting complexity
The only downside is the accounting complexity of the matter simply for an LMNP investment. Establishing a depreciation plan is a matter for a specialist, because all the elements of a dwelling are not depreciated in the same way: the land, for example, is not depreciated, while the furniture benefits from a 10% rate. An investment in LMNP under this regime, obligatorily solicits the services of a chartered accountant to avoid the errors and the troubles with the tax authorities.
LMNP taxpayers whose rental income does not exceed 70 000 €, can benefit from the real regime on request. This is an operation that savvy investors do not miss, as soon as they have calculated that the amount of their expenses will provide them with a tax break that is more important than the 50% deduction alone. Taking into account the fact that depreciation is calculated on the basis of the price of the property, landlords have a real interest in making this change if their property increases in value.
The taxation of an investment in LMNP reserves other small gifts. The reductions obtained in LMNP do not enter in the 10 000 € ceiling foreseen by the tax niches like Pinel.
It also allows you to benefit from a recovery of the vat included in the purchase price. It is necessary, for that, to enter in the conditions of statute of the LMNP (not to appear with the register of the companies nor with the register of the trade as professional furnished hirer).
How to become a furnished renter?
Once you have grasped all the interest of the possible tax arrangements of an LMNP investment, you should also ask yourself about the other parameters of this type of investment. Just as they do not fall within the same tax framework as bare property, furnished accommodation does not fall within the same legal framework of the LMNP status. Therefore, there are legal constraints for the future LMNP owners.
At the property level (residences)
A decree dated July 31, 2015 (n°2015-981) has come to fill the legal void that existed as to the definition of a non-professional or professional furnished accommodation. Previously, in contentious LMNP cases, judges evaluated the case on a case-by-case basis. Today, the legislator has definitively clarified things by enacting a compulsory list of the main equipment that defines it as furnished. All the objects of the everyday life must be present, to allow the tenant to live there decently.
That is to say, in the list LMNP, a bed furnished with a comforter or covers, curtains or shutters in the bedroom, an oven or a microwave, cooking plates, a refrigerator equipped with a freezer, crockery, kitchen utensils, a table and seats, shelves, light fittings, as well as the necessary for the maintenance of the housing LMNP.
It is necessary, moreover, that the LMNP property is provided with a heating system, a drinking water supply, a bathroom, a kitchenette with sink and sanitary facilities.
Normally, in an LMNP investment, the equipment will be part of the initial investment, the price of which is added to the total acquisition price, to be included in the loan. It is therefore advisable to invest in solid furniture, so as not to have to replace them with each new tenant.
Please note: of course, you must always make sure that you rent a healthy and decent LMNP property. In this regard, the minimum living area is 9 square meters, which diagnosticians take care to verify. The powers of investigation of mayors and prefects have been strengthened by the Élan law, to oppose the rental of LMNP housing that does not meet the criteria of decent housing.
The lease contract
The Alur law has made the use of LMNP standard contracts mandatory and defines their content. The activity of furnished renter can give rise to 3 types of leases for rental income.
- the one-year furnished rental contract, with a tacit renewal of the lease;
- 9-month student lease;
- the mobility lease, a new feature created by the Élan law.
This last lease gives the possibility to rent for short periods, from 1 to 10 months, only to people or populations subjected to a displacement related to professional needs. This concerns personnel on transfer or mission, but also students on internships, apprenticeship contracts or following higher studies. The commercial lease contract is not eligible for LMNP.
The duration of the LMNP rental
The duration of the LMNP rental remains free if the property is not the tenant's main residence, i.e. if the tenant does not occupy it for more than 8 months of the year, with the exception of students whose main residence is attached to their place of study (even if they are dependent on their parents' tax household).
All these LMNP leases can foresee the payment of a security deposit by the tenant, the amount of which can reach 2 months of rent excluding charges. This period is longer than for an empty rental in order to anticipate possible damages to the furniture.
Exception: the mobility lease does not fall under this rule, as the lessor cannot require a security deposit. To protect himself against the risk of unpaid rent, he can add a joint and several guarantee to the lease. However, if the tenant is a student or an apprentice, the landlord cannot take out a joint guarantee for unpaid rent.
An investment in LMNP is also distinguished from the lease contract by a specificity of the furnished rental. Today, an inventory of all the equipment in the property has become mandatory. It must accompany the lease contract, and together with the technical diagnoses, be signed by the 2 parties. At the time of the restitution of the LMNP housing, the inventory acts in some ways as an "inventory of fixtures" of the equipment. It can thus help to justify a deduction on the deposit, in case some equipment would be damaged or missing.
Please note: the inventory is part of the mandatory documents to be produced since August 1, 2015. This step is a bit restrictive, but is necessary to decide in case of conflict. This document will, in fact, qualify the accommodation as furnished if there was a dispute.
In principle, you can freely set the rent for your LMNP investment. Freely, except if the property is located in Paris or Lille, which undergo, since July 2019, a new rent control. This new directive of the Élan law has been extended in October 2021 to agglomerations such as Lyon and several cities in the Paris suburbs (grouped under the name "Est ensemble" and "Plaine commune").
Cities with more than 50,000 inhabitants will also be able to request its application, if they judge that there is too great a gap between the level of private sector rentals and that of the social sector. In concrete terms, this measure obliges the LMNP lessor to set a ceiling on rents based on a threshold of 20% in relation to the reference rent defined for furnished accommodation by an independent observatory.
The fixing of charges
For an investment in LMNP, it is rather advised to the owner to invoice the tenant for the charges which are incumbent upon him (water, electricity, maintenance of the common parts etc) in the form of a fixed amount of charges payable per month or per quarter. Contrary to the system of monthly provisions, where the amount of the charges is revised at the end of the year, the fixed amount can be revised upwards, if the lease contract so provides, according to the same terms as the rent. The fixed price never gives place to regulation, but must however be faithful to the real expenses, under penalty, there again for the owner LMNP, of facing copious fines.
The owner's leave
Before considering an investment in LMNP, it is necessary to be aware of the forthcoming consequences of the Élan law, which plans to reinforce the protection of tenants in furnished rentals. Let's remember that if a tenant has the right to give his notice, with a simple one month notice, it is not the same for the owner. He must respect certain restrictive conditions: a 3 months notice, be at the end of the lease and be able to justify one of the 3 following reasons: resale of the property, resumption to live there or to house a close relative (children, parents, spouse or cohabitant). In the future, the Élan law promises heavy fines against any offender (up to 6,000 € without counting the damages to the tenant). Moreover, the law also provides that even in the case of a regular reason, it will be impossible to evict any tenant over 65 years old with a modest income.
Which investment should I start with?
To carry out an investment in LMNP is possible in the new and in the old. In the first case, it will be necessary to invest in a residence equipped with various services such as coliving or investment in a building and the success of the rental investment in LMNP will depend on the quality of the operator. On the other hand, renting in an old building gives more leeway, especially in case of resale, but suggests to master the subject of rental management.
The LMNP investment in the new
The LMNP residences able to propose this type of rental investment are of 3 kinds: the student residences first of all, the residences of services for the elderly (the senior residences) and the residence of services for dependent seniors (Ehpad).
However, attention is drawn to this type of real estate investment before jumping in, as these establishments are subject to specific rules in order to operate. In particular, student residences must have a minimum of 70% students and offer a minimum of 3 services such as cleaning, laundry or catering. The Ehpad are subject to an authorization from the prefecture, in virtue of the fragility of their residents. These details should be checked before investing in LMNP.
Another crucial point concerning the investment LMNP in the new: the know-how of the operator. Certainly, thanks to its services, the investor is relieved of a big part of its rental constraints, such as the search for the tenant, the signature of the lease, the maintenance of the places, etc. Nevertheless, the profitability of an investor can be weakened by its management performances. This type of LMNP investment in new buildings guarantees you an income every month and no risk of rental vacancy, but... Because there is a but, if your operator struggles to fill his senior residence LMNP, for example. He has no choice but to lower the rate of return by a few points. Often, it is too high rent levels that cause this problem. It is therefore recommended to get informed before investing on the local rental market and to check the level of rents of the residence. It will be difficult to reverse a bad investment in the area, as the managers have their own resale structure.
Finally, an investment in classic LMNP in the new will raise the question of the taxation, because 3 arrangements are possible: the system of the depreciation to the real, the regime micro bic or the device LMNP Censi-Bouvard.
The first, as we have already seen, offers the possibility of deducting from its annual rental income all the expenses incurred (loan interest, co-ownership management fees, property tax, etc.). As a bonus, a share of the price of the property and the furniture is also deductible. An average rental return of 5% is targeted on an investment in LMNP in the new with this mechanism. Even if it is necessary to count additional expenses of approximately 300 € per annum for the assistance of a chartered accountant, count that these expenses are also deductible in the charges.
If one chooses the Censi Bouvard scheme, the performance of the investment drops from 3.8 to 4.2%. This LMNP tax arrangement is comparatively easier in terms of accounting, since it does not require the deduction of expenses and depreciation from taxable income. It simply requires the establishment of a lease contract with the residence operator, over 9 or 11 years, to obtain a tax reduction of 11% of the purchase price of the property, spread over the duration of the lease. A maximum ceiling is set at 300,000 euros, which gives the hope of a reduction in annual taxation of 3,666 € per year. This is not a bad result if you add that this system also allows you to benefit from a 20% VAT exemption.
The other investments in LMNP
More regulated, but still attractive, other LMNP investments are still possible.
The LMNP investment in the former
Investing in LMNP remains advantageous, in particular because of the system of depreciation to the real to which it also gives right. The latest provisions of the Élan law, such as the creation of the mobility lease should give more freedom to owners this year. Other measures such as the drafting of the regulated lease, or the framing of the rents in the big cities, come a little, however, to calm the euphoria.
The case of seasonal rental
The renting of a furnished property to travelers of passage makes the hirer benefit from the advantages of the status of LMNP. Yes, but, the LMNP investment in seasonal rental But is it still advantageous? Although the Internet has democratized this type of rental through the intermediary of large platforms such as Booking or Airbnb, the public authorities have been raining down regulations for several years to limit its development. The formula has ended up harming the traditional hotel industry and reducing the number of vacant properties for long-term rental. The public authorities have therefore imposed a straitjacket of very restrictive rules on landlords, particularly in Paris and in the so-called "high tension" areas.
Nevertheless, it is still possible and profitable to rent a residence other than one's primary residence in "relaxed" areas, where there is no imbalance between supply and demand. Only the declaration in town hall is required. The profitability of the seasonal rental LMNP remains one of the highest that one can hope for, the rates always flying around the 2 figures, taking into account the price of the rents, calculated at the night. Another advantage, and not the least to be taken into account in the LMNP seasonal rental: the risk of unpaid bills does not exist, because the stays are paid in advance, directly on the online platforms.
Namely: the new guidelines now prohibit seasonal rental of his primary residence more than 120 days a year, under penalty of a fine of € 5 000. Platforms are obliged to play the game, with the obligation to mention in the ad the registration number of the renter, which allows controls of rental income. Beyond 3 000 € of annual income, they must also declare to the tax authorities the sums received by their customers.
Non-professional furnished rental has existed since 1949 and can allow any French person to choose his or her rental investment in order to improve his or her retirement, to build up an estate or to create additional income. It is an investment that is rarely planned with the objective of resale, but rather on the long term, by increasing the value of the property.
What are the risks of investing in LMNP?
The main risk of an investment in LMNP is undoubtedly that of vacancy. It is essential to carefully select the geographical location of your LMNP property and to make sure that there is a demand for furnished rentals in your town. The type of property is also important, as some categories of property are more sought after than others: studios have a lower turnover rate than shared apartments.
The LMNP rental market is also cyclical and depends on the economic situation and unemployment (see Covid).
What is the average profitability of an LMNP investment?
An average profitability of about 5% gross can be expected for an LMNP investment, with a minimum of 2%. Isolated, this gross profitability is of course meaningless because it must be compared with an area where to invest and a type of investment.
Never forget that the risk-return trade-off is inseparable and increases proportionally when there is no market anomaly (which we actively seek at Ever Invest: our famous Off-Market).