I recently returned to Paris for a couple weeks of meetings. One meeting was with friends who have lived in Paris about as long as Kathleen and I have had our apartment… 20 years or so.
We bought our apartment when we moved to Paris. We didn’t know how long we were going to live there, but we did know we wouldn’t mind having an apartment in the city long-term. Plus, we had kids and wanted to make a home for them.
Our friends moved around the same time and rented. They didn’t have kids when they moved, but they had two while living in Paris. Still, they continued to rent… partially because they didn’t know how long they would stay in Paris, and partially because they found a nice place with a low rent and over time the landlord didn’t increase the rent much.
Eventually, they were forced to move because the landlord passed away and the son who inherited the apartment wanted to move in. They decided once again to rent rather than buy even though they’d been living in Paris for 15 years by that time, had two kids in school, and had no intention of moving… at least until the kids were both in university which was still years away.
It’s not that they couldn’t afford to buy, but a mortgage would have cost more per month if they bought an apartment the same value as they were renting.
Therefore, renting seemed to be the safe move still.
I understand the thinking.
When Kathleen and I moved to Panama, we rented in Panama City. Kathleen wanted to buy an apartment, but we needed at least three bedrooms with the kids—one in university and one at home. However, in our case, we already owned an apartment in Panama City.
It was a one-bedroom apartment that didn’t suit us at the time, but works perfectly now that both kids are on their own.
Renting in Panama City made sense to us like it makes sense to our friends in Paris.
However, 20 years later, our apartment in Paris is paid for. They are still paying monthly for their housing.
Owning real estate builds wealth. Renting can give you more flexibility… in the short-term.
Our friends wanted flexibility when they moved to Paris.
They saw buying an apartment as a risk. What if they decided to move in a year, two, five. Real estate transaction costs in France are around 6%. They didn’t want to risk that expense.
They didn’t want to risk the property market going down if they had to sell if they moved.
They didn’t want to risk their lifestyle short-term paying more for a mortgage than they were in rent.
The risks they perceived kept them from owning property.
That’s left them with a larger stock portfolio, but paying rent for the rest of their lives… because they don’t want to risk selling stocks to buy a place today.
We may have had less flexibility in the short-term, but we now have much more freedom… as well as potential income if we want to rent the apartment… which we did for years while living full-time in Panama.
However, not everyone thinks renting their property is worth it.
Another friend from Ireland owns an apartment in Paris that they use for vacation trips to the city. Over the years the amount of time they use it in any given year has varied, but it’s never more than a few weeks here and a few weeks there.
I’ve suggested many times over the years that they find a property manager and rent their apartment out short-term when they aren’t using it.
The apartment is perfect as a short-term rental. It’s a modern apartment with basic furniture (because they don’t use it much, they didn’t want to spend too much on fancy furniture) in a reasonably rentable neighborhood although not in the prime locations many people look for when renting a vacation place in Paris.
The main reason they give for not wanting to rent the place out: taxes.
Yes, that’s right, they don’t want to rent the place because they’d have to pay taxes in France on the rental income. The asset is sitting there not doing anything… actually being an expense, but rather than make some money renting it, they’d rather make no money because of the taxes.
To be fair, it’s more about the administration of having to file and pay taxes in France than the taxes themselves. They see the administrative hassle of dealing with a short-term rental not worth the effort. They see the administration of a rental property a risk to their lifestyle. It would take time to manage even a property manager who would deal with everything in Paris from finding renters to repairing things to filing their taxes.
Since they don’t need the money, it’s an easy decision for them. They just want to come to Paris when they have time to come to Paris. They don’t want to deal with renters… and possibly having to schedule their trips to Paris around an occupied apartment.
I can’t be too hard on my Irish friends because we own an apartment that I should either rent or sell. It’s in Medellín.
The original idea was to renovate the apartment and set it up as a short-term rental that we’d use ourselves once in a while… like our Irish friends do with their Paris apartment.
Kathleen and I aren’t worried about administration or paying taxes in Colombia on rental income. The reason we don’t rent our apartment in Medellín is because it’s too nice to be a short-term rental—both the apartment itself and the furnishings.
We did rent the apartment out for a brief time, but when we went for a trip to Medellín and saw that the previous renter had badly scratched our custom wood countertop in the kitchen, the decision was made for us.
No more renters.
As one rental manager I had in Argentina said, you can’t charge a damage fee for each scratch renters make in a table… so buy a glass top. If they break the glass top, you can charge them for that.
We weren’t going to put glass on the kitchen counter. And I was worried about some idiot sitting down on our leather couches with a pen in his back pocket and puncturing the cushion (it’s happened before).
At this point, Kathleen and I make it to Medellín maybe once a year for a week. The common-sense thing to do would be to sell the apartment and invest in something else. The problem is we love the apartment, love how it is furnished, and use it to store some art and collectibles that we don’t want to get rid of.
Unlike our friends’ decisions to not own or not rent based on their lifestyle risk, our decision is based on the risk to the apartment if we rented it. And our decision to not sell it is an emotional one. Neither of which sit well with me as an investor… but here I am a dozen years later still owning an apartment in Medellín that doesn’t generate any cash flow.
Fortunately, it has gone up in value in U.S. dollar terms.
Risk comes in all shapes and forms. Don’t let risks you make up in your head keep you from building your wealth with real estate.
Editor, Simon Letter