HOW TO CALCULATE THE PROFITABILITY OF A PROPERTY?

Credit rates ended the year 2016 at the bottom and the announced increase for 2017 is expected to remain limited. If you hesitate to launch a rental investment, do not hesitate and go! It’s always a good time to invest. You want to know what is its profitability, that is to say, how much will you return your property each year? To your calculators!

Good news for investors, the credit rate ended the year 2016 on the floor and the increase announced for 2017 should remain limited. If you hesitate to launch a rental investment, do not hesitate and go! To know the profitability of your property, there are 3 levels of calculation. First, the gross yield, which takes into account only rents. Then the net return which includes the charges and work. But the most realistic profitability is that calculated after tax, called net profitability.

Calculation of the gross profitability of an asset

HOW TO CALCULATE THE PROFITABILITY OF A PROPERTY3

The calculation is simple and fast and already gives you a reliable benchmark to know if this is a good deal.

Simply divide the annual rental income (ie rent X 12) by the purchase price of the property including agency fees (FAI) and multiply X 100

Example: If you rent an apartment to your tenant $1200 per month (ie an annual rental income of  $14 400), and you bought this property $250 000, the gross rate of return is 5.7%.

At your calculators: 14 400: 250 000 X 100 = 5.7

Be careful not to do the opposite, it is especially not divided 250,000 by 14 400 X 100 otherwise, the result would be wrong.

Should the notary fees be included in the purchase price of the property?

“Yes you can, it will always refine your calculation a bit,” says Bertrand de Raymond, President of the company Capucine, specializing in old rental investment.

As for credit-related costs, “it’s always a bit difficult to include them at this level of profitability, but if you have a pre-estimate of your credit, why not put them on?” (On the other hand, they will have to be included to calculate your net profitability, Editor’s note).

What minimum gross rate of return is required to consider it for a good investment?

“In cities like Bordeaux or Lyon, you can reach 4.5% of gross profitability without difficulty. On the other hand, in cities like Paris, profitability is reduced by land that is relatively expensive.

Below 4 or 5% of gross profitability, it is not advisable to launch, because net there will not be much left.

In some provincial towns, gross yields can easily reach 7 or 8%, or even more! An example? In Aix-en-Provence, a studio to renovate of 16 square meters on the ground floor of the rule Duperrier has changed hands for $66,000 FAI. The cost of the renovation: $10 000. It rents $500 per month including charges, giving an interesting gross yield of 7.8%. The return can really be optimized in the context of a student colocation. For proof, in Nancy, near the college of Arts, Boulevard Albert 1 er, an investor has purchased a T3 of 60 square meters to $108 000 FAI with about 10 000 of work required. It has transformed the stay in a room, which makes 3 rooms, each rent $400 per month. Either a maximum profitability of 12.2%!

Calculation of the net profitability of a property

HOW TO CALCULATE THE PROFITABILITY OF A PROPERTY

I deduct a number of expenses and work from my annual rental income. Then I divide the amount obtained by the purchase price of the property agency fee and notary fees included. And I multiply by 100.

{[Annual rental income – (Expenses + Works)] / Property purchase price} x 100 = Net profitability of the property.The calculation seems simple, but in terms of loads, the list can be long.

The costs to be taken into account are the annual property tax (on average one month’s rent), the costs of co-ownership (maintenance of the building, maintenance of green areas, caretaker, cleaning of public areas, etc.) , The fees of the professional in charge of rental management (8 to 10% of the rent), the maintenance of the apartment, the work … You will be able to recover the garbage tax on the tenant (not to forget in Your statement!)

You will understand, the net profitability of the property thus evolves from year to year, “according to the work carried out in the apartment. You may be forced to paint, repair a cumulus … These costs will come to diminish your profitability. On the other hand, it is very important to maintain your property to be able to rent it easily and that the tenant is content, “says Bertrand de Raymond.

What are the charges of condominiums recoverable from the tenant?

“The cleaning of the building and the electricity of the common parts essentially”.

Note that you can plan a month of rent to be able to absorb a possible month of rental deficiency or to anticipate future expenses.

Check This Out: Opportunities galore in Real Estate Chennai

Calculation of the profitability of a property after tax

HOW TO CALCULATE THE PROFITABILITY OF A PROPERTY

This profitability is by far the most realistic because it takes into account your taxation.

Professionals talk about internal rates of return.

“The internal rate of return is the true profitability of a property, since everything is taken into account on a real estate product (including the taxation of the property and the tax benefit if you make the land shortfall, a Pinel law in the ‘Or the non-professional furnished renter (LMNP), “explains Bertrand de Raymond.

The internal rate of return, therefore, takes into account the tax advantage. In the end, the net profitability of a good may be greater than the gross profitability. Indeed, we can go from 4% gross profitability to 6% net profit after tax thanks to the tax advantage included in the calculation! The tax advantage is leveraged. This makes all the difference between an investor who buys property without work and another investor who chooses a property with jobs and will be able to do what is called the land shortfall (so it will pay less tax on its property income).

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