[ part 1: Why low income areas | part 2: About gentrification | part 3: Coming soon ]
Becoming an investor in Paris
During the summer of 2004, I decided to start doing something I had wanted to carry out for a while: investing in real estate. I was still living and working in Paris at the time and property prices, albeit much higher than they were in the late nineties, had not spiraled out of reach yet. My plan was to try and supplement my income by investing money in a low maintenance property that I would turn into a rental so it would generate a positive cash flow each month.
Other than the idea of turning my investment into positive cash flow, I did not have a detailed array of sophisticated criteria about the property itself or the numbers. I did not even know what a “cap rate” was at the time – though I later learned it later while searching and meeting with realtors.
I figured that if I could collect a rent check that exceeded my monthly mortgage payment by “at least two hundred euros”, then my plan would be a success and I’d turn a profit.
Why Parisian investors (and tenants) favor smaller dwellings
Newcomers keep flocking in the French capital; Paris has always been a popular destination for students, young professionals, entrepreneurs and artists. The city is very dense with a limited number of dwellings almost exclusively comprised of apartments, which explains why rent prices are relatively high.
While the city offers a substantial supply in large family-sized apartments, studios and small one-bedroom flats are even more numerous and prove quite popular among singles and young couples – no matter how cramped they can get.
It’s quite easy for a landlord to find dozens of prospective tenants for a studio the very day his ad is published in the online classifieds (I know from experience, being a former tenant in Paris). Family-sized apartments on the other hand are much harder to lease and sometimes stay vacant for months; indeed, spending several thousands of euros every month to rent a 1,500 sq. ft., 3 or 4-bedroom apartment in Paris will be out of reach for most families.
This is hardly a surprise: according to INSEE’s figures, France’s gross average household income was just below 30,000 euros in 2005. What’s more, landlords want their property’s occupants to be able to pay the rent in full every month and therefore typically refuse leasing to tenants that would spend more than a third of their gross income in housing.
This explains why cramming in smaller, more affordable places is acceptable and usual for many Parisians, and landlords know it. As a result, investing in small dwellings and renting them provides Parisian landlords the best bang for their euro, and the highest return per square footage (in comparison with family-sized apartments).
Narrowing the choice
In 2004, I could not comfortably afford buying a place selling for more than 100,000 euros – and there was no way I would stretch my budget to the max, this just was not my predisposition. So out of sheer financial logic and necessity, I naturally decided to focus only on studios and small 1-bedroom apartments below the 90,000 euros threshold.
I made a rough estimate taking the potential income from rent, scheduled maintenance and taxes into account. It seemed possible to make my plan work, and I had enough saved up to provide for a decent down payment and the hefty French notary fees that apply on all real estate transactions.
Even though I was completely inexperienced with everything related to being a landlord I figured that if I fully invested my spare time in this endeavor, I would learn by “doing it”. Once I set my goal, I decided to forget my inhibitions and make it happen before the end of 2004, so I started scouting for properties at the end of the summer.
Paris versus its suburbs
Paris and its suburbs are known as Ile de France as a whole, and are comprised of a very wide and diverse spectrum of properties in quality, age and style.
Real estate in Paris and surroundings can be separated in two categories: what’s within the Boulevard Péripherique and what’s outside of it. The circular peripheral freeway pretty much separates the proper city of Paris and its 20 very dense arrondissements (districts) from its much larger suburbs. Residing in Paris itself (and therefore having an address starting with the 75 zip code) has always been considered more prestigious than living in its suburbs (also infamously known by their 92, 93, 94, 77, 78 and 91 zip codes). Due to geographical, historical, architectural and cultural factors, proper Paris also has a cachet that most of its suburbs do not have. And quite honestly, the farther you travel from central Paris, the duller the suburbs become.
As a result, central Parisian properties usually sell with a substantial premium compared to equivalent ones in the suburbs. Except maybe for the 19th arrondissement (Paris’s least expensive district), I quickly found out any decent piece of property for sale within the 75 zip code was not only out of my reach but would also translate into an investment with a potentially negative cash flow once rented. I wanted to make money on this deal, and relying on pride of ownership only was not an option.
I had no choice but to rule out all hip, trendy or prestigious Parisian neighborhoods – in other words I gave up on the whole 75. Still, I did not want to invest too far out in the suburbs and let go of the convenience of being close enough to Paris.
Not the “best” neighborhood…
With its abundant bus and tramway lines, and its famous subway network (called le Métro of course), proper Paris benefits from an excellent and reliable public transportation system. The problem is the deeper you go in the suburbs, the less public transportation is available; this is pretty obvious once you take a look at a RATP subway map. Suburban city planning is dramatically affected and revolves more around the usage of automobiles contrary to Paris, a very car unfriendly city. This is why far out suburbs look radically unlike Paris, and that the central Parisian lifestyle is dramatically different than a suburban one.
Having experienced living both in Paris and its suburbs as a young adult taught me one thing: it’s really all about location, location, location. And it makes all the difference in Ile de France because when you put a rental property on the market, you sell more than four old walls and a minuscule bathroom; what you’re actually selling is a lifestyle. And the Parisian one is much more desirable (and valuable) than the suburban one.
So here was the catch: how to find an affordable property outside of Paris but close enough to still benefit from its prestige? The answer was in the notoriously rough northern suburban towns of Seine-Saint-Denis, also known as the 93 zip code.
…But the “right” one
The towns just outside of Paris’ threshold form a circular outskirt called the proche banlieue (adjacent suburbs). Even though they administratively belong to the 92, 93 and 94 zip codes, almost all of them have the advantage of still being within reach by Métro and some even still benefit from a somewhat Parisian flair.
The neighboring northern and eastern towns have traditionally been inhabited by Paris’ working class and have long been looked down upon by Parisians as low-income areas not worth exploring. For a long period of time spanning from the late sixties to the mid-nineties, urban blight plagued a lot of the neighborhoods just outside of Paris’ periphery and real estate prices either stagnated or dropped considerably in towns like Montrouge, Clichy or Aubervilliers. Partially aggravating for France’s economic decline during these thirty years was the oil crisis of 1973; urban decay was a consequence of growing unemployment, ill-advised public spending and rising crime.
[ part 1: Why low income areas | part 2: About gentrification | part 3: Coming soon ]
