If you want to invest money in real estate, you should be aware of the profitability of the purchase. After all, there are not only absolutely worthwhile objects to buy on the market. Some mis-purchases ultimately result in the buyer making losses. Especially for people who make a real estate purchase on the basis of an investment, profitability should be known. So are those who create an investment themselves and are concerned about building finance. On the net we find some profitability calculators, which should provide clarity about whether a property is profitable or not. Find out everything you need to know to determine your return.
On good luck, no one buys a property these days. At least not those who have dealt with the issue of investment or investment in advance. After all, the goal of each investor is to quickly amortize the invested money and, in addition, to continue to make profits. This is quite possible if the choice is the right property. And even private buyers and self-residents should only buy a property if it is profitable in the future. The same applies, of course, to builders who build a residential complex themselves.
No, because each investment has its own criteria to determine the return. The planned investment must be examined in detail. Investments in real estate therefore play a role in other factors than in the case of equities and securities. You should know exactly what matters when buying a property long before the first visits. Only then can you be sure that the purchase of the property will be really profitable.
You calculate the average annual return on the capital employed, including the interest rate, using the return on equity formula. All income and expenditure on financing are taken into account and the interest rate also plays a role. However, after the calculation, you do not yet have any meaningful figures, but only information that you close due to the past. It also does not take into account a possible increase in value, as well as various repayments and special payments.
You calculate the return on equity by multiplying the return, minus taxes, by a factor of 100, and then dividing it by tied equity. For the formula, of course, you need your personal tax rate and the individual interest rate on the debt. You can also consider annual depreciation on acquisition costs.
The property return also takes into account all income and expenses from the property. This means that the acquisition costs, rental income, tax burdens and savings are included here. Financing itself is not one of them. The return on property is used when different properties are to be compared with each other. This allows you to find out which property is more profitable if you have multiple properties to choose from. Of course, you should focus on comparable properties. It is of no use if you compare an object in the middle of convenient transport connections with an outside land object.
The metric is also suitable for identifying the economic effect. We are talking here about the leverage effect, i.e. the extent to which the use of debt capital in financing affects profitability. The use of debt capital is only worthwhile if the after-tax return from the total capital exceeds that of debt capital.
Calculate the maintenance costs and the tax burden from the rental income and calculate the property return with this simple formula.
The return represents the annual yield of an investment and is calculated as a percentage. If your property is a pure investment, the rental yield and the property return are important. In the case of the rental yield, the gross rental yield and the net rental yield must first be determined. The net rental yield is always more meaningful, because the gross rent does not take into account many relevant costs. The net return determines the success of an investment. For example, this information includes ancillary purchase costs, such as notary fees and brokercommission commission. Ancillary purchase costs can sometimes account for up to 20 of the purchase price and thus become significantly significant. Nevertheless, the net return is still not a value that can determine the complete return. It does not include the financing costs or your personal tax rate.
Important: Do not underestimate the tax aspect when buying a property.
You calculate the gross rental yield by multiplying the annual net cold rent by a factor of 100 and dividing it by the purchase price. Now you will receive a percentage. For the net rental yield, add the purchase ancillary costs to the purchase price. Then deduct the management and maintenance costs from the net cold rent. The calculated annual net income is divided by the investment costs.
There is no fixed formula for selecting the correct object. Nevertheless, various factors play a significant role. Your gut feeling, you may leave at home at this point. It is important that you, as an investor, pursue purely economic backgrounds. The following basic aspects of your purchase should be taken into account when searching the Internet for a property:
Be careful with big returns. Real estate agents often advertise with inflated gross rental yields. You usually have to calculate the net return yourself in order to get a really honest assessment. Last but not least, you can remember the rule of thumb: “The profit is in purchasing!”. The cheaper a property was, the higher the potential yields. Structurally weak areas have cheap real estate, but the profits are no better here. It is mediocrity that ultimately decides. An attractive purchase price can potentially involve a high vacancy risk and this is always a problem for landlords.
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Of course, an investment does not have to be already in place, it can be built in the first place. Investors must be able to calculate precisely whether the investment in a construction project is worthwhile at all. In this case, quite different sums are usually on the agenda than is the case with already habitual real estate or existing single-family houses. The advantage: The property can be perfectly tailored to your own ideas and built. Builders do not have to make any concessions when buying, but can decide in all aspects. For example, particularly energy-efficient residential complexes can be built, which will increase the return on investment in the future. For example, by building a solar or photovoltaic system. There are also no initial modernisation or refurbishment and maintenance measures. It is then a new building, which has more value from the outset.
Construction funding is, of course, still on the way. First, you should be aware of the construction price. This varies depending on the project. In many cases, it even makes sense to build a larger residential complex and rent out several apartments. After all, all that is needed is a construction. The planning for a new building is of course much more complex and the financial planning also takes longer. Always get offers and compare different construction companies. Finally, you calculate the purchase price by adding all construction costs up to completion and the price of the property. Do not forget to take into account various grants that are sometimes available from the KFW.
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.
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