Buy-to-Let Investment: How to calculate your return
How much do you make each year on your buy-to-let investment? In order to know, you must first calculate the profitability of your asset. Find out the difference between gross and net return below:
Why calculate the profitability of a buy-to-let investment?
If you are hoping to make a property investment with the intention of letting the asset, you must calculate the profitability to know how much you gain.
It is one of the most important indicators to help you make your decision. In effect, it allows you to know how much capital your investment gains over the course of a year. Profitability is calculated as a percentage, in relation to the sum that you invested in your property.
Gross Return: Watch out for additional fees
Agents and promoters usually work on gross profitability. It is wise to stay wary of this information, as gross return does not take into account fees, charges or taxes you are liable for as an owner.
The calculation for gross return is simple: just divide the rent by the purchasing price and multiply the result by 100. For example, an apartment purchased for 100,000 euros, with a rent of 5,000 euros per year will have a gross profitability (gross return) of 5%. This is a valuable return, especially in comparison to traditional savings accounts that rarely offer above 0.5%.
It must be noted that the gross return is calculated without taking into account additional fees.
Calculate the return net of fees
As we have seen, gross return can appear different to the actual financial gain you make on an investment.
In effect, buy-to-let investment comes with some fees. To get a better idea of the return from a property investment, you must work based on net return.
In order to do this, you need to calculate the amount, taking into account fees charged to you as an owner:
- It is common to take out a mortgage or loan to finance your investment. As a result, the first expenses incurred often relate to financing your project: interest fees, loan insurance, guarantees.
- Property tax then needs to be added: this is charged to the owner. The amount usually represents around one month’s rent. Also, some expenses cannot be recovered from tenants. This is particularly the case when it comes to trustee’s fees: these must also be added to the calculation.
- If you choose to hand over property management to an agency, you also need to add management fees and bear in mind costs from insuring against unpaid rent.
- Finally, you need to add the costs of property upkeep, which allows you to continue renting your apartment or house at market price and see its value grow.
Net return is the figure closest to reality, but it is also the most difficult sum to calculate accurately. In addition to unforeseen costs, the sum of your return will also be affected by income tax.
However, tax benefits can also increase your return. For example, the French buy-to-let scheme enables long-term tax reductions for your investment.
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