Calculating the profitability of a real estate investment

It’s risky to become an investor if you don’t know how to calculate the profitability of your investment. Successful investing is about making money. Not knowing how to calculate and evaluate the profitability of your property in relation to its purchase price and loans exposes you to a high risk of failure. Find out everything you need to know about calculating rental yields for real estate in this article!

The different types of yield

First of all, it’s important to distinguish between rental yield and rental profitability. At first glance, these two terms seem to mean the same thing, but that’s not true.

Rental yield is the return you get from your property in relation to its price.

A rental return is the profit you make from renting a property. It incorporates not only your initial investment, but also the price trend since then. In this article, we’ll take a closer look at rental yields in particular.

Profitability indicators for rental investment

Gross profitability

The first profitability indicator to know when calculating the profitability of a real estate investment is the gross margin. The ratio between the annual rent and the price of the property can be used as a measure in this respect. This indicator is not really indicative of true profitability. It does not take into account all property-related expenses. However, it does give you a rough idea of the profit that owners will be able to make from the property.

Example calculation for a property purchased for €200,000 and rented for €1,000 a month

((1000*12)/200000)*100 = 6%

Net profitability

The profitability of an investment depends on the amount of rent in relation to your annual expenses. The difference in this case lies in the property taxes you’ll have to subtract from your annual income. This tax is generally paid by the owner-investor, not the tenant. It is also necessary to deduct non-recoverable expenses and management fees from your income, so that they do not exceed what you actually earn.

With this indicator, you can better measure the ins and outs of your investment. This indicator enables you to carry out a financial simulation that will help you draw up a sound financing plan.

As in the previous example, we will now deduct property tax of €1,000, deductible expenses of €600 and 10% management fees.

(((1000*12)-(1000+600+((1000*12)*10%)))/200000)*100 = 4,6%

Net profitability

Investing in real estate is not always a simple matter. There are a number of tax exemption schemes available to you when you buy a property, such as the Pinel and Censi-Bouvard schemes. If you’re over 65, Cosse can also help you in your investment situation by deducting work or loan interest from the rent you pay. It is therefore essential to calculate all the available advantages before making an investment decision. Calculating profitability is essential to the success of this type of business; how do you go about it?

Net profitability is therefore a profit that takes tax benefits into account. Of course, the assessment of this profitability varies from case to case, and depends on each individual’s personal tax rate and the type of benefits to which he or she is entitled.

While this method is often preferred when it comes to finding the profitability of a real estate investment, it also entails certain risks. The elements taken into account in the calculation must be as precise as possible, otherwise your plan won’t be solid. Beware of overestimating rent increases and simulations based on an unrealistic resale price.

Taxes should not be the only determining factor in calculating your profitability. Take into account any rental vacancyto get a more accurate figure for your expected profit. Think of tax benefits as bonuses, and don’t dwell on them too long either!

Profitability with the Larcher method

The Larcher method is a simplified way ofestimating the rental yield on your investment, since it calculates profitability over nine months instead of twelve. It is estimated that total charges represent an average of 25% of rents.

To continue our calculation on the previous example

((1000*9)/200000)*100 = 4,5%

This gives a result close to our net profitability

Profitability with the Pinel law

Calculating the profitability of a property investment is an important part of achieving a clear return on investment. Investing is all very well, but evaluating your ROI is much better. That’s why, in France, the Pinel law enjoys an excellent reputation for its benefits and effective mechanisms.

21
^%
of the property price for a 12-year rental period

18
^%
of the property price for a 9-year rental period

12
^%
of the property price for a 6-year rental period

Of all possible investments, stone is in fact the most stable. Over time and through crises, it never fails to win people’s confidence through its stability compared to other more unstable assets that sometimes have higher returns but are also riskier…. In all cases, the rule when it comes to investing is first and foremost to diversify your investment portfolio (within shares or crypto-currencies or savings account etc…) but also its choice within these individual investment types (real estate in large cities or provincial towns such as Paris).

Also read: Use a real estate broker for your loan?