CalculateReal Estate Return

Calculate real estate return using examples

Real estate could be a very lucrative investment. Nevertheless, you have to select exactly. Calculating real estate returns is one of the basic requirements for an investment. However, there are some pitfalls. To ensure that you do not make a mistake, you will find all the important information and tips here. Here we have discussed how you can calculate real estate return using examples. 

Rented properties generate monthly income. If these are higher than the costs associated with the property, you generate a positive return. In order to determine this in more detail, the annual net cold rent must first be divided by the purchase price of the property. In this way, you get the gross return, which is often given in exposés and advertisements.

Real estate return: calculation example

If the purchase price of a property is €1,000,000 and is associated with the receipt of a net cold rent of €5,000 per month, the following invoice will be obtained:

Tax advantages in the case of a shareholding

An important key figure when investing in a property is the purchase price factor. This varies greatly between sites and is considered to be the first factor in a profitability test. To get the purchase price factor, form the inverse value of the return.

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Calculation example

We remain in the example above and have calculated a real estate return of 6. We form the inverse via the following invoice:

  • 1 / Real estate return = 1/ 0.06 = 16.66
  • The purchase price factor is therefore 16.66.

Expand the purchase price by the additional purchase costs

The purchase of a property in Germany is usually associated with additional purchase costs. An accomplished investor takes these into account when calculating the real estate return. The exact purchase price ancillary costs differ from object to object. There are usually three factors to consider:

Depending on the state and broker, these are around 9-12. For a further calculation of the real estate yield, you will be added to the purchase price. For a purchase price of 1,000,000€ and an ancillary purchase costs of 10, the following invoice results:

  • Monthly net cold rent * 12 / (purchase price + additional purchase costs) = 5,000€ * 12 / (1,000,000€ + 10) = 0.0545
  • Taking into account the additional purchase costs, the result in this case study is therefore a return of 5,545.

Types of equity participation

There are costs involved in operating a property. About 2/3 of these costs can be passed on to the tenant. They are referred to as chargeable costs. For example, the following items:

  • Electricity
  • Water
  • Waste water
  • Concierge
  • Gardener
  • Heating
  • Property tax
  • Garbage disposal
  • Street cleaning
  • Chimney sweep
  • Smoke detectors

The owner of the property must bear approximately 1/3 of the costs incurred. In order to calculate the real estate return correctly, these must be taken into account. For example, the following cost lines are not payable:

  • Maintenance reserves
  • Bank charges
  • Administrative charges

You must deduct the non-payable costs from the net cold rent.
Depending on the condition and age of the property, approximately 7.5€/sqm of maintenance reserves are incurred in the year. The cost of administration depends on the tasks that the administrator performs. They are about 250€/residential unit per year. Bank charges are worth around €10/residential unit per year.

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Calculation example

  • (Monthly net cold rent – non-payable costs) * 12 / (purchase price + ancillary purchase costs) = (5,000€ – 500€) * 12 / (1,000,000 + 10) = 0.0049
  • The cost-adjusted return is therefore 4.9

Real estate return: Free cash flow

Those who want to live on their real estate returns depend on creating a free cash flow. This refers to monthly surpluses that can be paid into the private account. In order to calculate this, the monthly incoming rent, the non-payable costs, the financing interest and repayments must be taken into account. It is here that it depends on how much equity has been raised to finance and how much interest is paid on debt. In addition, the amount of repayment is an important factor. In the following calculation example, we assume these values: The purchase price is financed to 100. The additional purchase costs are paid out of equity. The interest rate is 2 and the annual repayment is also 2.

Investing in a secure future

The E1 Investments concept offers a proven system for the solid development of a business as a broker and owner of a real estate business. E1 Real Estate has the infrastructure and operating systems that enable us to offer first-class services with a team of brokers. You are investing in the market of the future.

Calculation example

  • (Monthly net cold rent – non-payable costs) * 12 – Interest – Repayment = (5,000€ – 500€) * 12 – 20,000€ – 20,000€ = 14,000€
  • The annual free cash flow is therefore 14,000€

Calculate the return on equity

When determining the return on real estate, the return on equity is interesting for investors. It provides information on how much return is achieved with the capital employed. Here, too, the invoice can be simplified first. For the first calculation, the sum of the invested equity, the costs of debt financing, as well as the annual rental income is required.

Calculation example

  • (rental income * 12 – interest costs) / equity = (5,000€ * 12 – 20,000€) / 100,000€ = 0.4.
  • The return on equity is therefore 40.

Return on equity of the property taking into account operating costs

Here, too, the next step is to take into account the fact that rental income must be reduced by operating costs.

Calculation example

  • Equity = / 100,000€ = 0.34
  • The operating cost-adjusted return on equity is therefore 34.

Please keep in mind that, depending on the situation, a vacancy should be taken into account. This has a mitigating effect on the annual rent achieved. The more in demand the situation, the shorter the vacancy rate will be. The clientele and the associated fluctuation also influence the vacancy. Students, for example, usually spend no more than three years in an apartment. Pensioners, on the other hand, have no interest in moving, as living conditions rarely change. If renovation work is due in the event of a change of tenant, this affects the period of vacancy. In the following, we price the vacancy with 5 of the rental income into the calculation of the return on equity.

Calculation example

  • / Equity = / 100,000€ = 0.31
  • Taking into account the vacancy, the return on equity is therefore 31.

The personal tax situation

Income from the rental and leasing of real estate(investment properties) is taxable. However, the calculation is highly dependent on the personal situation and should be done by your tax advisor.

Conclusion: Beware of property yields

The calculation of real estate returns is complicated and varies from case to case. Do not rely on the calculations specified in the exposé. In most cases, these are very blue-eyed and not tailored to your situation. Always take the exam yourself and make sure that any costs are included.

Usually, additional purchase costs, as well as operating costs, are not taken into account. So it’s easy to make an investment. At the end of the day, however, it is important that you make a reasonable profit that justifies the risk you take. Check exactly what non-payable costs you will incur. You can find the information about this in the administrator’s utility statement. In addition, you should evaluate the amount of the monthly maintenance payment and compare it with the condition of the property, as well as the planned maintenance. These can be found in the minutes of the owners’ meeting.

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