How profitable is your rental investment?

How profitable is your rental investment?

Gross yield

Let’s imagine you’re interested in a 3-room apartment in the center of town with a rent of 850 euros per month, excluding utilities. Multiply this amount by the twelve months of the year and you get 10,200 euros in annual rental income. The price of this apartment is 110,000 euros, of which you will have to pay around 7,900 euros in notary fees, giving you a total purchase price of 117,900 euros. Simply take the 10,200 euros, divide by the 117,900 euros and multiply by 100. This gives you a gross return of 8.65%.

Net yield

You have to take into account new parameters such as property tax and condominium fees. Don’t forget to take condominium fees into account, especially for very large buildings where you have 200 or 300 apartments! You’ll have very high condominium charges, if you have an elevator, janitor, roads, parking spaces, etc. These are very high-maintenance buildings, and it’ s vital to take this parameter into account, as it alone can determine the viability of your project.

Let’s take the example of a 3-bedroom apartment in the center of town. If your monthly rental income is 850 euros excluding charges, you’ll have 10,200 euros in annual rental income. But if you have 1,200 euros in condominium charges and 650 euros in property taxes, you’re left with only 8,350 euros in annual income. And if you divide this amount by the purchase price including notary fees, your profitability drops to 7.1%, which isn’t necessarily a very low profitability, but it’s very important to take it into account.

If you want to go further, check the posted rents – some real estate agents may announce that the apartment is not rented, but that it can be rented at such and such a price! Don’t put too much faith in this kind of remark, do your own study by looking at the rents charged in the area where the property is located, obviously for similar properties (if there’s a balcony, terrace, parking, swimming pool etc).

Read also: check the rent carefully

Net net yield

This yield is also called net of tax. It gives you a precise idea of the return on your investment, but you also need to take into account the tax burden of real estate investment. The net-net yield is calculated on the basis of the income tax for your tax profile (where applicable) and social security contributions linked to real estate investment(Pinel law, Malraux law, Censi-Bouvard law and LMNP).

In-house advice

To be on the safe side, weight the number of months rented per year. If you’re looking to buy in a city where rental pressure isn’t necessarily very high, consider that the apartment won’t necessarily be rented 12 months a year. Obviously, if you rent a T2 or T3, the average rental period in France is between 40 and 50 months per tenant. it is preferable to multiply the monthly rent excluding charges by 11 or 11.5but not necessarily by 12 to take into account that between two tenants it may take you a month or two to find a new one that matches your criteria.

Then, as far as yields are concerned, a good rule of thumb in cities of over 100,000 inhabitants is not to carry out an operation without a minimum yield of 8%. For towns with populations of between 150,000 and 100,000, the minimum profitability should be between 8% and 10%. And finally, for towns with fewer than 50,000 inhabitants, gross profitability greater than or equal to 10%, which may seem high, but is possible if you negotiate the apartment you want to buy well. Because the success of your project depends on your purchase.

Self-financing is in the region of 7, 7.5% gross yield (with a 110% loan). However, looking for greater profitability is important if you want to live off your rents as quickly as possible, and therefore have a surplus that you can generate.

It’s important to respect the 8-10% rule, depending on the size of the city, unless you can increase the property’s profitability by various means.

Also read: how to increase profitability

If a seller doesn’t accept your proposal, which allows you to buy at 8 or 10%, just move on – it doesn’t matter. It’s better to miss a good deal than make a bad one!