Rental investment: what elements should be taken into account to determine profitability?
Before you invest in a property you intend to rent, you should know how profitable it is first. Calculate the interest of your rental investment and find out its rental yield. This is so that you know that you're not wasting your money on something that won't give you anything in return.
How to calculate the rental yield of a rental investment?
The Rental Yield is based on the Purchase Price of The Property + the Rental Income you receive + Rental Charges.
How is The Gross Yield Calculated?
- (Amount of Annual Rent / Costs of all charges included or Purchase Price + Acquisition costs) x 100.
You don't need to take into account taxation and other charges as your rental yield is not the income generated from the rent.
How is The Net Return Calculated?
- As the lessor, you have to assume the charges and expenses inherent to the property. In addition to the property tax, you also have to subtract the non-recoverable charges by the tenant, the expenses of work and maintenance, any rental management costs, or the costs of the guarantee of unpaid rent (GLI) from the amount of the annual rent.
Logically, the net return is lower than the gross return.
In order to obtain an even more precise idea of the return on your real estate investment, you, as the lessor, must calculate the “net-net” return, i.e. net of tax.
It's necessary to take into account Social Security and Taxation on Rental Income (excluding charges). It all depends on the tax regime chosen (real, micro-BIC, etc.), but also on the possible advantages granted by devices such as Pinel, Censi-Bouvard Law, etc.
Does rental management reduce rental yield?
Rental Management represents all the operations concerning the administration of your rental property.
You, as the owner, can delegate various time-consuming tasks by using a rental management agency or a real estate agency that offers this service. However, this can represent a cost that will reduce your rental yield accordingly.
Nevertheless, hiring professional help will optimize the chances of making your rental property profitable over time by reducing certain risks such as rental vacancy or damage control. In addition, they are deductible from property income as well.
What else should be considered when determining profitability?
You should also take into consideration your Cash Flow, Net Current Value (NPV), and Internal Rate of Return (RR).
These provide insight into the relevance of your rental investment over its entire lifetime, from when you first bought it (acquisition) to when you sell it to someone else (resale). They must be calculated before proceeding with the purchase to have a clearer vision of the real gain you will get.
What is the minimum rental profitability?
The rental profitability of a property can vary between 2% and 7%. It depends on the type of property, its surface, its characteristics, and its location.
What You Must Remember
- Know the profitability of your property by calculating the interest of a rental investment.
- The result refers to the difference between the income you earn from renting it out and its purchase price.
- The performance of a rental property depends on the nature of the dwelling
- The rental yield is based on the purchase price of the property + your rental income + rental charges.
- We have gross yield, net yield, and net-net return (i.e. net of tax).
- Other elements to consider when determining profitability are Cash Flow, Net Current Value, and Internal Rate of Return.
- The rental profitability of a property can vary between 2% and 7%
- Knowing the profitability of your home is knowing and calculating the interest of a rental investment.
- It is simply a performance indicator that is calculated from the income generated by a rental compared to the purchase price.
- The performance of a rental property depends on the nature of the dwelling
- The rental yield is based on the purchase price of the dwelling + the rents received + rental charges.
- We have gross yield, net yield and net-net return (i.e. net of tax).
- Other elements to consider when determining profitability are cash flow, Net Current Value and Internal Rate of Return.
- The rental profitability of a property can vary between 2% and 7%
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to sell in Paris or its surroundings ?
Posted on 09/12/2022 by
Andy LECUYER
