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Leaseback' is a term often banded around by property companies and is not necessarily fully understood by clients who could benefit from it.

Investors buy a freehold property and, at the same time, sign a commercial lease contract with a property management company who will rent it for a pre-determined, renewable period of around normally 9 or 11 years.

The leaseback scheme is a hands-off investment, offering guaranteed income, a VAT refund and great finance options. Under the scheme, the purchaser may use the property usually between 1 to 8 weeks per year (with a maximum of 6 months per year). The French government encourages the development of leaseback schemes in touristic areas to alleviate shortages in rental accommodation.

The scheme works by purchasing a freehold property. You become the legal owner. The property is then leased back to the developer or a management company. Under the leaseback scheme the government also refunds to you the VAT normally charged on a new build property (currently 19.6%).

The owner is then guaranteed a rental income throughout the period of the lease. The net return to the owner varies between developments, but is typically between 4% and 6%. This compares very favourably with a typical 20 year fixed rate mortgage of around 3.75%, and variable rate mortgages which are lower. It can be seen how the rental income can be used in respect of the mortgage payments. Loans of between 50% and 85% are available depending upon circumstances. The rental yield is also index linked annually to construction costs, which means the rental income currently increases by approximately 2% per annum.

As in the UK there are tax allowances in respect of mortgage payments which can be offset against income. The lease typically lasts for between 9 and 11 years, after which the management company has the option to either renew, or the property can be sold, or rented out and held privately by the owner.
The purchaser/owner can also enjoy periods of usage free of charge through the year, depending upon the terms of the lease. The management company is responsible for the maintenance of the property including the maintenance of furnishings which are often included in the purchase price. The developer is also responsible for insuring the building and its contents. It also pays for some of the property taxes and all the utility costs.

The leaseback scheme is suited for the long-term investor and should be considered as an ideal addition to a traditional bank savings account or personal pension. Up to 85% mortgages are available for this type of investment, with the rental income paying most of the repayments.

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