How to calculate rental profitability?

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Everyone will tell you: investing in brick is one of the best financial investments to date. And this is particularly true with regard to the interest rates of the exceptionally low deposit books currently. Therefore, making the most of a real estate investment via leasing can be lucrative in the short and long term.

Let’s get away with a conventional wisdom: you do not have to run on gold to invest in real estate. Certainly, if your starting income is modest, you probably cannot buy your house and invest in the rental at the same time. You must make a choice.

If you opt for investment, here are some helpful tips:

 

1) Buy well!

Negotiate the lowest selling price from the start by taking account of market prices. The rule is simple: you must make a profit from the purchase, not the resale. If you pay too much, even by managing your property optimally, profitability is not guaranteed.

2) Learn about rental market trends

Before investing in a rental project, probe the offer and demand of the current market. What is the average rent for a similar property in the same municipality? Do not buy a property if the rent prospects are equal to or lower than your monthly mortgage repayment. It would be an assured disaster! The ideal would be a rent which is 15% higher than the repayment of monthly loan to pay the fixed costs.

3) Calculate the yield

It is essential to make a realistic estimation of rental income.
To do this, two types of calculation exist: gross profitability and net profitability.The gross profitability doesn’t take account of the acquisition, management and maintenance costs of the real estate but only takes account of the rents. However, a real estate investment requires fees to be able to continue to be rented at market prices or to value it.Gross profitability calculation alone can be misleading.

How is net profitability calculated?

Net profitability is obtained by the following calculation:The monthly rent is multiplied by 10 and divided by the total purchase price (purchase price + expenses)

Why multiply rent by 10 when there are 12 months in a year?

It is estimated that the various costs to be provided by an owner for the management of his property represent 1 to 2 months rent including:

-The property tax: it is the tax due every year by the owner of a property.

-Changes in tenants: it is expected that a property has a rental vacancy of approximately one month every 3 years.

-Any management fees if the management is done by a third party.

-Non-recoverable charges to tenants such as trustee fees.

-Maintenance work and development costs (painting, blinds, furniture…, etc.)

 

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