Is your apartment building a secure investment or an unpredictable risk? The answer lies in a single key figure: the net rental yield. We show you how to accurately calculate this crucial figure online and avoid costly mistakes.
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The topic briefly and concisely
The net rental yield is the crucial metric, as unlike the gross yield, it takes into account all costs such as incidental acquisition costs and non-allocable expenses.
Incidental purchase costs (such as property transfer tax, notary, and estate agent fees) can amount to 10-15% of the purchase price and must be fully included in the return calculation.
Ongoing non-chargeable costs such as maintenance reserves (approximately €12-15/m²/year) and administrative costs significantly reduce the actual yield.
Many property owners rely on rough estimates when valuing their multi-family homes. However, only a precise, data-driven calculation of rental yields can prevent poor investment decisions and reveal the true potential of your property. In this article, you will learn which factors are crucial, from incidental purchase costs to non-recoverable operating costs. We guide you step by step through the necessary calculations so you can make informed decisions for your assets.
Das Fundament: Understanding Gross vs. Net Rental Yield
The first step to an accurate assessment is distinguishing between two key concepts. The gross rental yield is a quick but often misleading metric that only relates the annual cold rent to the pure purchase price. In Germany's top cities, gross yields often only range from 2.8% to 4.0%. Much more meaningful is the net rental yield, as it includes all relevant costs and thus presents a realistic picture of profitability. A good net rental yield should ideally be over 3.5% to be considered a solid investment. To determine this, we first need to consider the total investment costs.
Step 1: Accurately specify the total investment costs
The purchase price is just one part of the total investment. The so-called incidental purchase costs make up a significant portion and must be fully included in the calculation. In Germany, these costs can amount to between 10% and 15% of the purchase price. A detailed breakdown is therefore essential.
The main incidental purchase costs include:
Property transfer tax: Depending on the federal state, this ranges from 3.5% to 6.5% of the purchase price.
Notary and land registry fees: Approximately 1.5% to 2.0% are due for notarising the purchase contract and registering it in the land register.
Brokerage commission: If a broker is involved, up to 3.57% of the purchase price is usually payable by the buyer.
For a purchase price of €1,000,000, just these incidental costs alone can quickly exceed €100,000. For precise calculations, you can use our rental yield calculator which takes these items into account. Once the total acquisition costs are established, ongoing expenses must be analysed.
Step 2: Identify ongoing costs that reduce returns
A common mistake is underestimating the ongoing costs that you, as a landlord, cannot pass on to tenants. These non-recoverable incidental costs directly eat into your returns. They are the main reason why the net return is often significantly lower than the gross return. Accurate recording of these costs is crucial for a realistic calculation.
You need to consider the following items:
Maintenance reserve: Experts recommend setting aside between €12 and €15 per square metre of living space annually for future repairs.
Administrative costs: Hiring a property management company incurs costs that cannot be passed on to the tenants.
Repair costs: Unforeseen repairs, such as to the heating system or the roof, must be borne by the owner.
Rental default risk: Factor in a risk for vacancies or payment defaults, often between 2% and 4% of the annual cold rent.
Ignoring these expenses leads to an embellished and unsustainable return calculation. Whether in these circumstances it is more worthwhile to let or sell depends on the exact amount of these costs. With all the numbers on the table, we can now calculate the net rental yield.
Step 3: Accurately calculate the net rental yield
Now, we bring together all the puzzle pieces to determine the actual profitability. The formula for calculating the net rental yield is more comprehensive but provides a reliable result. It is the central tool for assessing the economic viability of your apartment building.
The formula is:
(Annual cold rent – non-apportionable costs) / (Purchase price + incidental purchase costs) x 100 = Net rental yield in %
An example: An apartment building costs €1,200,000 with €120,000 incidental purchase costs. The annual cold rent is €60,000, and the non-apportionable costs (maintenance, management, etc.) are €15,000. The gross yield would be 5.0%, but the net yield is only 3.4%. This difference of 1.6 percentage points highlights why the gross yield alone is not informative. There are various valuation tools for investors that simplify this calculation. For an even deeper analysis, professionals also consider the return on equity.
Step 4: For Advanced Users – Return on Equity as Leverage
While the net rental yield measures the profitability of the overall asset, the Return on Equity (ROE) shows how efficiently your personal capital is being utilised. This metric is particularly important if you finance the purchase with a loan. By using borrowed capital, the return on your equity can be leveraged – this is known as the leverage effect.
The calculation is as follows:
(Net annual income – loan interest) / equity x 100 = Return on Equity in %
If your property's total return on capital is higher than the interest rate on the loan, the use of borrowed capital increases your Return on Equity. A good Return on Equity for properties should be over 7%. This value is particularly helpful for Auctoa for property investors in comparing different financing structures. However, all calculations are only as good as the data they are based on – and external factors play a significant role here.
Step 5: Consider location and risk factors
A single number does not make a good investment. The best calculated return is worthless if the location risks are ignored. The location of a property is a crucial factor for long-term value development and rental potential. A detailed site analysis examines both tangible and intangible factors, from transport connections to the district's image.
In A-cities like Munich or Hamburg, returns are often below 3%, but the risk of vacancies is minimal. In C or D locations, returns of over 5% can be enticing, yet the risk of vacancy and loss of value is significantly higher. A high return is often compensation for a higher risk. Especially with an inherited multi-family house, a neutral assessment of these risks is crucial. A data-driven analysis, like the one Auctoa offers, helps you evaluate these factors objectively.
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The online calculation of rental yield for a multi-family house is more than just a simple formula. It is a process that ranges from recording all costs to analyzing location and future risks. Only the net rental yield gives you a clear picture of the true earning potential of your property. Do not rely on estimates when it comes to your wealth. Use precise data and professional tools to make the right strategic decisions. A thorough analysis is the safest way to secure and enhance the value of your property in the long term.
Additional useful links
The Federal Statistical Office provides an overview of housing in Germany, including statistics and information on living conditions, costs, and construction.
The Federal Statistical Office offers detailed data and analyses on the housing market and living conditions in Germany in an Excel file.
The Deutsche Bundesbank provides an indicator system for the analysis and assessment of the German residential property market.
The ifo Institute addresses the precision of infrastructure investments in a press release.
The German Property Federation ZIA offers market data and information about the German property market.
The Federal Statistical Office covers construction prices and the property price index in Germany.
The German Tenants' Association provides numbers and facts about renting and housing from the perspective of tenants.
The Federal Institute for Research on Building, Urban Affairs, and Spatial Development (BBSR) refers to the housing and property report.
FAQ
Can I disregard the ancillary purchase costs when calculating returns?
No, absolutely not. The additional purchasing costs can amount to as much as 15% of the purchase price. If they are ignored, the return appears artificially high and the calculation is flawed, which can lead to costly mistakes.
What is the difference between maintenance and repair?
Maintenance refers to planned measures to preserve the value of the building, such as servicing the heating system or creating a reserve fund. Repairs are unforeseen measures to rectify damage, such as a burst water pipe. Both are non-apportionable costs.
How can I account for vacancy risk in my calculations?
The risk of vacancy is represented by the risk of rent loss. As a rule of thumb, you can deduct 2% to 4% of the annual net cold rent from your income. In more risky locations, this rate may be set higher.
Why is the return on equity important to me as an investor?
The return on equity shows you how profitably your invested money is working. If you use financing, this metric can be significantly higher than the net rental yield of the property due to the leverage effect. It helps you assess the profitability of your personal investment.
Which online tools help calculate the rental yield?
There are various online calculators that help with calculating rental yield. For a comprehensive and data-driven analysis that also includes market data and risk factors, specialized tools like Auctoa ImmoGPT are recommended, as they provide a neutral and AI-supported evaluation.
Are the costs for calculating the rental yield tax-deductible?
Yes, many of the non-recoverable costs, such as maintenance, administration, and the interest on a loan, can be claimed as advertising costs against income from renting and leasing for tax purposes. This reduces your tax burden and improves the net yield after taxes.
