Calculate the real estate profitability of an investment

Before investing or to re-estimate the value of your investment, calculating profitability is mandatory.

How to calculate the profitability of an investment?

Une femme qui calcule la rentabilité immobilière de son bien

First, it is necessary to take into account several elements:

The recipes

• The annual rent: this is the monthly rent excluding charges multiplied by 12. It is important to take into account a rental vacancy rate, which corresponds to the period during which the property is unoccupied. This rate may vary depending on the type of property, its location and the economic situation.

• Other possible income: this may be income generated by car parks, garages or ancillary commercial premises.
  

Expenses

• Acquisition costs: they include notary fees, agency fees, mortgage costs and any renovation work.

• Rental charges: they include property tax, household waste tax, co-ownership charges, non-occupant owner insurance, etc.

• Maintenance work: it is important to plan a budget for routine maintenance work and major work.

• Rental management: if you do not manage the property yourself, you will have to deduct the management costs from your rents.

• Income tax: rents received are taxable as property income.

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The two main indicators of the profitability of a real estate investment

Gross yield

This is the ratio between the annual rent excluding charges and the purchase price of the property, expressed as a percentage. The gross return only gives an approximate indication of the profitability of the investment because it does not take into account charges.

Gross yield formula:

Gross yield = (Annual rent excluding charges / Purchase price of the property) x 100

The net return

This is the ratio between the net annual profit and the purchase price of the property, expressed as a percentage. The result is the difference between revenue and expenditure. The net return gives a better indication of the profitability of the investment because it takes into account expenses.

Net return formula:

Net return = (net annual result / Purchase price of the property) x 100

In addition to gross yield and net yield, it is important to take into account other criteria when evaluating the profitability of a real estate investment, such as:

• The potential capital gain of the property: the capital gain is the difference between the purchase price of the property and its sale price upon resale.

• Rental risk: rental risk is the risk of not finding a tenant or of incurring unpaid rent.

• Taxation: the tax regime for property income can have a significant impact on the profitability of the investment.

It is important to obtain proper information and carry out simulations before making a real estate investment. Mojave - Real estate agency, advices and local concierge service supports you in all your projects.