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There are three manners to calculate the profitability of a real estate investment, we explain them to you …
The gross profitability:
She is calculated with regard to the purchase price of the property and takes into account only the annual received raw rent.
The calculation is the following one: rate of gross profitability = 100 x (monthly rent x 12) divided by the Purchase price of the property.
The purchase price also includes expenses relative to this acquisition (solicitor, real estate agency, credit).
The gross profitability is an indicator often used as selling point but do not generally reflect the reality, because it takes into account only the rents.
The net profitability of expenses and loads :
It is calculated with regard to the purchase price but by taking into account expenses bound to the maintenance and the management of the real property.
It leaves the principle that a real estate investment requires expenses to be able to continue to be rented in market prices or to value it. Most of the loads are taken into account for this rate.
The calculation is the fallowing one:
Rate of net profitability = 100 x (monthly rent x12)
Less the Taxe Foncière
Less the none recoverable loads
Less management fees.
divided by the purchise price of the property
Expenses taken into account for the calculation of the net profitability of expenses and loads are:
- The Taxe Foncière (one month rent approximately, that is more or less 8 % of the annual rents). The not recoverable loads with the tenants as the fees of management agent.
- Tenants changes (or renting holidays) in the course of which the rent is not perceived (generally 1 month every 3 years, more for the small surfaces where the rate of rotation is more important)
- The current maintenance works.
- More the management fees and the possible insurances unpaid rents.
The net profitability:
It is calculated by tabing into account recippes after taxes, as well as possible deductions obtaine by specifi programs (Borloo, Robien) or from works of rehabilitation. It’s the rate the closest to the reality but also the most complex to be calculated because it depends on the tax system of the lessor. However, this rate is valid only if the situation of the investor does not change.
Indeed, income less(pension, unemployment) or additional can modify its fiscal situation and influence the profitability (the more the investor pays of taxes, the more economy will be important for example).
The differences between the gross profitability and the net profitability can turn out important. However, the level of profitability of an accommodation (housing) does not have to be the only criterion of choice to invest in the renting real estate. Indeed, even if the accommodation offers a low profitability, a real property can offer other advantages, as that to accommodate members of his family or serve as holiday home, and he allows especially to establish a heritage. Furthermore, the rate of profitability does not take into account the possible capital gain (increase in value) which can be realized in the case of a resale of the property.
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