Do you want to make a rental investment ? To complete this important stage in life, you will first need to calculate the rental profitability of your real estate investment. Although it is difficult to buy on a whim, it is better to know and estimate how much you can earn from this acquisition annually. How to calculate the rental profitability of a property? While there are different ways of measuring the performance and the profitability of a home, certain other factors may also weigh in the balance. Explanations.
What is rental profitability?
Rental profitability makes it possible to estimate how much a real estate investment can bring in and how long the housing will be fully reimbursed. This is the key indicator for controlling the relevance of a real estate project before its acquisition.
Calculating rental profitability is therefore very useful upstream of a real estate project. This is one factor that will allow you to target whether the contemplated real estate investment represents an opportunity.
Calculate the profitability of a rental investment: It's simple: take the cost of the annual rent of your future tenant and divide it by the purchase price of the property. Then multiply the result by 100.
In other words : (Rent x 12 monthly payments/price of the property) x 100.
If, for example, you have just purchased a home for € 500,000 (notary fees, fees, and any work included) and the monthly rent requested is € 1,300. So the calculation of the profitability of a real estate investment will be as follows: (€ 1,300 x € 12 / 5,000,000) x 100 = 3.12%. It will then take 32 years (calculation: 100 / 3.12 = 32).
Good to know: Some real estate advertisements include a gross return rate without considering ancillary costs such as notary fees, fees, etc. Therefore, these rates which seem accessible to you are, in reality, above the market. So take the time to check what is included in the property's purchase price to ensure good rental profitability.
The net rental profitability of a property
Undoubtedly the most exciting indicator and the most used: the net rental profitability of a real estate investment. Unlike gross rental profitability, net rental profitability also considers all charges that the current owner will bear. Will this be integrated into the calculation:
- insurance contract contributions (PNO / non-occupying owner or GLI / unpaid rent guarantee);
- non-recoverable co-ownership charges (costs of convening general meetings, trustee fees, etc.);
- management fees if a rental agency manages the property;
- property tax;
- etc.
And if the expenses are never really identical from one property to another, it is nevertheless estimated that they represent 25% of the total rental income received.
Good to know: If you want to invest in Paris, know that the net rental profitability varies between 3 and 4%. However, the average ranges between 4 and 6% at the level of the first ring.
Rental profitability net of tax
Finally, it is also possible to calculate the rental profitability of a so-called net tax apartment. For an even more precise estimate, it will be necessary to take into consideration:
- social security contributions;
- taxation on rental income;
- the chosen tax regime;
- any tax exemption
What is the rental yield?
While the two concepts are often confused, the rental property yield corresponds to the ratio between the investment made and the rents received. In other words, it makes it possible to obtain the balance between the income generated by the rental compared to the purchase price of the housing. It is, therefore, a vital indicator of the performance of a property.
Rental yield and rental profitability
You will understand, if these two concepts seem similar, they are, however, not identical:
Rental yield relates only to the percentage of income generated by your real estate investment concerning its acquisition price.
Rental profitability
: it includes, in addition to the rental yield, the life of the housing, resale, and a possible capital gain.
Rental profitability, therefore, contains rental work in its calculations while including other considerations such as the estimated time to reimburse the accommodation.
The gross rental yield of a real estate investment
To calculate the gross rental product of a rental investment, you must then divide the annual rental income by the housing price and multiply the whole by 100. In other words, it is a question of taking the first calculation carried out to analyze rental profitability without integrating the notion of long-term profitability.
However, this calculation does not consider the charges weighing on the lessor and does not include its taxation either. Therefore, while this amount can give you some idea, it will not provide you with the actual income that the rental investment can provide.
The net rental yield of a real estate investment
To obtain the net return on a real estate investment, the purchaser must then include in these amounts all the costs inherent in his purchase. For example, rental management costs, insurance, charges and work not recoverable from the tenant, etc., will enter into the calculation.
Other factors impacting rental investment
The nature of the accommodation
Several other factors could have an impact on the rental profitability of your real estate investment. The nature and size of the home will therefore have a direct effect on its profitability. A studio, for example, will be more profitable than a T4 or T5 type surface, but for all that, its turnover rate could also be higher in the long term. UNION COMPLEX provides the best luxury apartments.