How do you calculate the profitability (or yield) of a buy-to-rent property?

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The profitability, or yield, of a buy-to-rent property is the key to deciding whether it is worth taking the plunge. Knowing what it means is a good idea! Our information will help you pick your way between unrealistic claims promising the moon and a sometimes-disappointing reality and avoid unpleasant surprises.

Yield? Which one?

The vocabulary counts. When your estate agent talks about yields and your bank talks about yields, they are not necessarily talking about the same thing. There are, in fact, three definitions of profitability, or yield.

Gross Yield

Gross yield is the rent as a percentage of the purchase price of a property. It is expressed on an annual basis and is generally somewhere between 2% and 7%. The figure should not be taken too seriously, however, since it does not include unavoidable expenses associated with renting out a property or the tax costs involved.

It is the figure estate agents like to highlight, because gross yield is a quick and useful way of comparing different properties.

Net Yield

This will give you a helpful indication of the feasibility of your project. Property tax, insurance on the mortgage, managing agent fees, and management and maintenance fees are all included in the calculation, as are periods when the property may remain vacant.

Yield Net of Taxes

This one takes everything into account. As well as deducting any expenses associated with letting out the property, any tax you will be liable to pay in the form of income tax is also taken into account. Results can vary enormously, therefore, depending on your tax regime.

How is yield calculated in each case?

To calculate gross yield, only rental income and the purchase price are taken into account, using the following formula:

Gross yield = [(Monthly rent x 12 months) / purchase price] x 100

For an apartment purchased for 100,000 euros (including estate agents’ and notary’s fees) and with a rental price of 450 euros, gross yield is calculated as follows:

Gross yield = [(12 x 450) / 100 000] x 100 = 5.4 %

To calculate net yield, you need to deduct the expenses mentioned above. It can, however, be difficult to predict certain data, such as potential periods of vacancy.

Net yield = [(Monthly rent x 12 months – property tax – non-recoverable expenses – management costs) / purchase price] x 100

The calculation for yield net of taxes, takes revenue after tax into account. The calculation is based on your tax situation, which means it is more difficult to calculate.

What, then, can be considered as a good rate?

You do not have to be a mathematician to compare yields. By way of example, in 2018 the average yield of life insurance funds (policies in euros) was 1.4%. With gross yields of between 3.5% and 5% in Paris, between 4% and 5.5% in Lyon and between 3.2% and 5% in Bordeaux, it is not surprising that investing in buy-to-rent properties is a firm favourite in France.

As well as rental yields, you should not overlook the nature of the property and where it is located. It follows that if you opt for a bigger apartment, initially your investment will be less profitable. Having said that, you will not have to deal with high tenant turnover, which is often the case with smaller apartments, and tenants will probably be more willing to invest in the upkeep of the property, bringing your costs down. On the other hand, smaller apartments are cheaper to buy and you will find tenants a lot more easily.

The high purchase price of properties in the centre of the big cities often has a major impact on yields. That disadvantage is, however, offset by the fact that the value of the property will almost certainly increase in the long-term. The lack of housing in any given sector remains the best guarantee against a property decreasing in value. That explains why Paris is constantly attracting new investors.