Rental investment: how to calculate profitability?

L'rental investment is a popular financial strategy for generating passive income while building wealth. However, before buying a property, it's essential to assess its profitability. There are several indicators for this: gross yield, net yield and cash flow. Let's find out how to calculate and interpret them.

1. Gross yield

Gross yield is the simplest profitability indicator to calculate. It provides an initial estimate of the ratio between the annual rent and the purchase price of the property. The formula is as follows:

Gross yield (%) = (Annual rent / Purchase price) x 100

For example, if you buy an apartment for €200,000 and rent it for €800 a month, the calculation is :

(800 x 12) / 200,000 x 100 = 4.8%.

This rate allows you to quickly compare several properties, but it does not take into account charges and taxes.

2. Net yield

Net yield is a more precise indicator, as it includes property-related expenses. It is calculated as follows

Net yield (%) = [(Annual rent - Annual expenses - Taxes)] / Purchase price x 100

Expenses can include management fees, insurance, property tax, condominium fees and any work required.

Let's go back to our previous example with the following data:

• Annual charges (property tax, co-ownership, maintenance): €2,000
• Property taxes: €1,000

The calculation becomes :

[(9 600 - 2 000 - 1 000) / 200 000] x 100 = 3,3 %

This rate is closer to the real profitability of your investment.

3. Cash flow

Cash flow is an essential indicator for assessing the financial viability of a rental investment. It corresponds to the balance remaining after payment of all charges and the mortgage (if borrowed). The formula is :

Cash flow = Monthly rent - Monthly service charges - Monthly mortgage payment

If we add to our example a mortgage with a monthly payment of €700, the calculation would be :

800 - (2000 / 12) - (1000 / 12) - 700 = -133 €

Negative cash flow means that the investment costs you money every month, while positive cash flow means that it generates a financial surplus.

4. How to optimize profitability?

There are several ways to improve the profitability of your rental investment:

• Buying at the right price: Negotiating the purchase price helps improve gross and net returns.
• Optimize taxation: Opting for schemes such as LMNP (Loueur Meublé Non Professionnel) or deficit foncier can reduce taxation.
• Increase the rent: Converting a property into a furnished one, or targeting seasonal rentals, can improve returns.
• Reduce costs: Compare insuranceminimize work and optimize rental management.

Conclusion

Calculating the profitability of a rental investment is a crucial step in guaranteeing the viability of your project. Gross yield provides an initial analysis, net yield refines the evaluation by integrating expenses, and cash flow indicates actual financial performance. By optimizing these parameters, you'll maximize your chances of making a profitable, long-term investment.