Is the rental yield necessary to determine the quality of a real estate investment?

How do you determine if your real estate investment is a good investment? You can trust your sixth sense, or on the contrary, you can try as much as possible to measure the quality of your real estate investment project through its return.

The rental yield This is probably the best known indicator. It measures if a real estate investment generates profit but does it give an objective vision ? The answer is: YES … Provided that you take into account all the datas that can increase incomes or expenses.

The gross yield. You have surely already heard about the gross yield, a simple calculation which makes it possible to quickly bring back the sum of the annual rents on the price of the apartment.

Formula of the gross yield :
((Monthly rent x 12 months) / Purchase price of the apartment) x100

It does not present a great interest because let us imagine an apartment whose rent, relatively high, generates a good gross yield while the condominium charges and property tax are overwhelming Would that make it such a good investment? Yes, would it not? It is necessary to do the math.

Indeed, the purpose of the return is to determine how much money goes back to the owner once the entire rental process is done.

The net return It is the same formula as the gross yield to which we add all the charges that degrade the rental income, they are sometimes numerous but it is important to consider everything so that the calculation is as fair as possible.
It is once the result is obtained that we can compare different opportunities on the market.

Net yield formula :
((Monthly rent x 12 months) – (annual fees and charges)) / (Purchase price of the apartment + (annualized acquisition costs and cost of credit))

Annual fees and charges to be considered:
– Non-occupant owner’s insurance
– Condominium charges payable by the owner (a part is charged to the tenant)
– Housing tax
– Property tax
– Agency fees for rental management
– Annualized furniture cost (if furnished rental)
– Etc…

Financing acquisition costs :
– Annualized real estate agency fees
– Annualized notary fees
– Amount of annualized interest

We also recommend that you annualize exceptional expenses that should not be accounted for only one year but rather over a defined period (agency fees, notary fees, furniture).

Always consider the same type of expenses so that your calculations are comparable and thus determine the best return.

Many investors are satisfied with a net return calculation as one of the decision factors for their project. It is true that it is a good indication for profitability investment and the calculation is very quick to perform.

At WALDORF PRIVATE OFFICE, we go further in our approach of real estate investment. We take into consideration additional variables that we recommend you also to follow, in order not to leave anything to chance and to structure you in the best possible way.

The net/net return. You have calculated a net return and you think you have found the property that
corresponds to your investment project. Nevertheless, take the time to do some additional calculations to make sure that your choice is the right one.

The remaining criteria we recommend you to integrate into your reflection are:
– Taxation applied to your rental income ? (“Foncier” or “BIC”)
– Potential exemption from real estate capital gain?
– Capital gain estimated at 5 years, 10 years. (Prepare your crystal ball!).
– Liquidity of the property on resale
– Vacancy risk
– Law on rent control (properties in tense areas or in Paris)
– Yield on your portfolio in case of loan (if collateral asked)

Taxation on rental income. Taxation is very variable concerning income from rentals, if the dwelling is empty or if it is declared furnished, if you are a tax resident in France or abroad, depending on the amount of rent received, etc… It is necessary to make a personalized analysis of your situation in order to be able to orient yourself towards the right project.

Potential exemption from real estate capital gain. Depending on your profile or on the property, you may meet one of the criteria for exemption from capital gains tax, which is a considerable advantage. Savings can be substantial. You can find all the conditions of exemptions here

Estimated capital gain of 5 or 10 years. Nobody knows at the moment what the future will bring and how the real estate market will be in France. It is up to each person to make up his or her own mind, and this question leads back to the philosophical question: does the past help define the future?

Liquidity of the property on resale. This is an element which is difficult to tangible but which remains important when we talk about investment, you must be sure that when you want to resell your property at market price in the years to come, it will find a buyer quickly.

Risk of rental vacancy. The objective is that your property is rented without a vacancy period, if you have to change tenants several times it will cost you the loss of income but also the agency fees. It will degrade your profitability.

Law on rent control. You can find all the details concerning the rent control law ALUR /ELAN directly on the government website. In Paris, the possibility of adding a rent supplement to apartments subject to the ALUR law will allow you to optimize your income, although you must be able to justify this supplement and it must be accepted by the tenant.

Interest of the pledge. We saw in the article « Being a non-resident and obtaining a real estate loan in France » that it was quite possible that your banker would make you a financing proposal in return for a pledge placed in the bank’s books. Yes, but what is the interest rate? This money placed will generate a return that should allow you to minimize the cost of the credit, so it is important to take it into account!

Of course, all this process requires the support of professionals, in this way your structuring is optimal and your performance is the best possible. However, have this open-mindedness that will allow you to see that a good performance in real estate is not necessarily directly related to the building but to everything that revolves around it.

Do not hesitate to contact us if you wish to benefit from our expertise or consult our other articles to learn more before making your price offer on a property.

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