Calculating the Profitability of a Real Estate Property

If you’re considering investing in rental real estate, mastering profitability calculations is essential. These calculations will allow you to accurately assess whether the investment is profitable and if it meets your yield objectives.

In this article, we’ll explore different methods for calculating the profitability of a real estate property.

Gross Return

Gross return is the simplest to calculate. It involves dividing the annual rent by the acquisition price of the property:

Acquisition price = Property price + Notary fees

Gross return = (Annual rent / Acquisition price) × 100

Concrete example:

An investor buys a house for €150,000 (acquisition price) and sets a monthly rent of €800.

Calculation:

Annual rent = 12 × 800 = €9,600
Gross return = (9,600 / 150,000) × 100 = 6.4%

The gross return is therefore 6.4%.

This method gives you a first overview of your investment’s performance. It is identical for all investors and constitutes the most basic calculation of profitability.

Net Return

Net return is more precise because it takes into account the annual rent as well as the acquisition price and all expenses related to the property.

What are these expenses?

• Property tax
• Condominium fees
• Insurance
• Management fees (if you use an agency)
• Electricity, water, and internet costs (if they’re your responsibility)
• Mortgage costs

For a detailed list of expenses, see our article Rental Costs for Landlords.

To calculate the net return, you must first determine the total amount of annual expenses:

Net return = [(Annual rent – Annual expenses) / (Acquisition price + Mortgage cost)] × 100

This net return gives you a more realistic view after deducting fees and expenses related to the property.

However, to know precisely what will actually remain at the end of the month, it is necessary to calculate the net-net return.

Net-Net Return

Net-net return takes into account the net return as well as your personal tax situation. This return is unique to each investor.

It’s important to know that your rental income (rent) is added to your other declared income to constitute your “taxable income,” which is the basis for calculating your taxation.

This taxation varies according to several factors:

There is no single formula for this calculation, as it depends on:

• Your marginal tax rate
• The tax regime chosen for operating the property
• The advantages of applicable tax schemes
• Completed and deductible work
• Possible expenses and depreciation
• Deductions you may be eligible for

The net-net return provides the most accurate overview of the money that will effectively remain after all deductions. It represents the exact figures of your investment’s performance.

Thus, depending on your situation, you can calculate the net-net return as follows:

Net-net return = ([(Annual rent – Annual expenses) / (Acquisition price + Mortgage cost)]) - Annual taxation × 100