There are several methods (gross, net, net-net) to determine the yield of a rental property. While the gross rental yield is the fastest and easiest to calculate, it is not the most relevant data. To have more precise and meaningful figures, it is preferable to calculate the net return (or even net-net) taking into account all the ongoing costs assumed by the owner, and of course the taxation to be assumed.
Why calculate the profitability of a rental property?
As with any investment with a view to building up assets and supplementing pensions, the return on the real estate transaction is decisive. Expressed as a percentage of the initial investment, this annual gain is one of the main evaluation criteria, as is the ability to resell the property over time, ideally with a capital gain.
The higher the rate of return, the better. However, to be realistic, the rental yield calculation must take into account many criteria. In addition, the rate is likely to vary from year to year, as the owner’s earnings and costs are not necessarily stable over time. It is therefore advisable to calculate the profitability for each year that the investment lasts, in order to have the most up-to-date figures possible.
The calculation of the gross return on the rental investment
To determine the profitability of a rental investment, the simplest calculation to perform is to determine the gross rental yield, by reporting the annual rents received or forecast (excluding charges) in relation to the cost price of the property: (Amount of rents over twelve months) x 100 / by the cost price of the property concerned.
By cost price here, we must understand the “real” purchase price of the property. Either the price paid during the acquisition, to which is added the registration transfer rights paid to the notary as well as any agency fees (if you went through a professional for the transaction) or renovation work (carried out before letting). You can further refine the cost price of your rental investment by integrating any capital gains or losses in the event of a future resale, if the market price of your home has changed significantly since your purchase.This is not the most relevant indicator, because it does not take into account the other costs that are assumed by the lessor following the acquisition of the home, but it allows to get a first general idea of the interest investment in the rental property.
The difference between net return and net-net return
A better technique to determine the profitability of your property is to determine its net return. A more precise estimate than the previous calculation which will take into account the recurring costs that the owner must assume each year:
- Non-recoverable rental charges, because the lessor can only pass on to his tenant part of the co-ownership charges. These non-recoverable charges cover management costs, the cleaning costs of common areas, etc.
- Work expenses assumed by the lessor. Only routine maintenance is the responsibility of the occupant of the accommodation, the owner pays for major work such as a facelift or a change of heating equipment.
- The property tax on built properties which is required by local authorities, and the amount of which varies markedly from one municipality to another.
- Rental management costs, in the event that an intermediary is entrusted with the day-to-day management of the rental accommodation.
- Any insurance costs for landlords who subscribe to a non-occupying owner-type guarantee or unpaid rent guarantee.
- Loan interest if the rented accommodation was purchased on credit.
Taken together, these recurring costs can represent up to 20% or 30% of the rents collected, sometimes even more! It is therefore essential to deduct them from the amount of rents in order to have a more realistic vision of the yield of a property. Still in the same vein, it is possible to calculate taxes on property income as well as social security contributions, to obtain an even more precise result when calculating the return on your rental investment. This is called the net-net return. The amount of taxation on your property income will depend on the regime chosen when declaring your property income and your taxable bracket.
Also, be careful to take into account the tax exemption measures you benefit from as part of your rental investment. These could, for example, be Pinel or Denormandie measures which reduce your taxation. Instead of subtracting them from your income, it is necessary on the contrary to add them (since it is a gain).
(By the editorial staff of the hREF agency)
Source: Challenges en temps réel : accueil by www.challenges.fr.
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