Gross rental yield
The simplest figure, and the one found in almost every listing:
Formula
It is quick to calculate and good for a rough comparison of offers. But it leaves out everything that reduces the return: purchase costs, management, maintenance and vacancy. A listing that only states the gross yield shows the flat from its best side.
Price-to-rent ratio
The price-to-rent ratio (in Germany: Kaufpreisfaktor) says how many years of cold rent the price equals. It is the inverse of the gross yield and the more common figure in conversations with agents and banks:
Formula
| Price-to-rent ratio | Gross yield | Price at €1,000 cold rent |
|---|---|---|
| 15 | 6.7 % | €180,000 |
| 20 | 5.0 % | €240,000 |
| 25 | 4.0 % | €300,000 |
| 30 | 3.3 % | €360,000 |
| 35 | 2.9 % | €420,000 |
The higher the ratio, the more you pay for one euro of rent. High ratios are common in sought-after locations, because buyers there expect rents and values to rise; in regions with falling demand the ratio is lower, because the risk of vacancy and loss of value is higher. A low ratio is therefore not automatically the better deal.
Net rental yield
The net rental yield says more. It deducts the costs you carry as the owner from the rent and adds the purchase costs to the capital invested:
Formula
Non-recoverable costs
Everything you carry as the owner and may not pass on to the tenant: management of the owners’ association and, where applicable, a letting agent, maintenance and the maintenance reserve, repairs, account and loan fees. Which operating costs are recoverable is set out in the German Operating Costs Ordinance; the service charge statement shows which part stays with you.
Purchase costs
Real estate transfer tax, notary and land registry, and an agent’s commission where applicable. Depending on the state and the commission, they add up to roughly 5 to 12 % of the price; the rates for each state are in the guide How much house can I afford? Purchase costs are spent and do not come back on sale, which is why they belong to the capital invested.
Vacancy allowance
Empty months between two tenants, missed payments, a legal dispute: if you calculate cautiously, deduct a flat 2 to 4 % of the annual rent.
A worked example
Lindenstraße 14 from the Wertavo demo portfolio: purchase price €268,000, purchase costs €21,400, cold rent €970 a month, non-recoverable costs €155 a month. Financed with €68,000 of equity and a loan of €221,400 at 1.5 %.
| Figure | Calculation | Result |
|---|---|---|
| Gross rental yield | €11,640 ÷ €268,000 | 4.3 % |
| Price-to-rent ratio | €268,000 ÷ €11,640 | 23.0 |
| Net rental yield | €9,780 ÷ €289,400 | 3.4 % |
| Return on equity | (€9,780 − €3,321) ÷ €68,000 | 9.5 % |
Four numbers, all correct, and yet they range from 3.4 to 9.5 %. With a vacancy allowance of 2 %, the net yield drops to 3.3 %. What matters is that it always says which one is meant.
With your numbers
Prefilled with the example. The non-recoverable costs are on the service charge statement, the interest rate in your loan agreement.
Net rental yield
3.4 %
Gross 4.3 % · price-to-rent ratio 23.0
Return on equity, depending on the loan rate
Loan rate
The loan raises your return on equity: its rate is below the net yield of 3.4 %.
Before tax and before principal. Net yield: rent minus vacancy allowance and non-recoverable costs, divided by price plus purchase costs. Return on equity: the same minus interest, divided by equity.
Return on equity and leverage
The net yield describes the whole property, regardless of how it is financed. What usually matters to you is what your own money earns. If a loan pays for part of the purchase, before tax:
Leverage effect
As long as the loan costs less than the property earns, every borrowed euro earns the difference for you. In the example: 3.38 % + (3.38 % − 1.5 %) × €221,400 ÷ €68,000 = 9.5 %.
If the loan costs more than the net yield, the effect reverses. At a 3.8 % rate, the same flat only returns 2.0 % on equity, less than without any loan. Leverage also works on risk: the higher the loan share, the harder vacancy, repairs or a higher follow-up rate hit your equity.
Principal does not appear in this calculation. It is not an expense but wealth you build, yet it weighs on the monthly surplus; how, is shown in the guide Cash flow after debt service.
Common mistakes
- Warm rent instead of cold rent: the recoverable service charges are paid by the tenant; they pass through and do not belong in the yield.
- Forgetting purchase costs: they belong to the capital invested, even when the listing leaves them out.
- Underestimating maintenance: older buildings need more, and special levies of the owners’ association come on top of the regular reserve.
- Comparing gross with net: a 5 % gross yield can be below 4 % net once costs and purchase costs come off.
- Mixing before and after tax: all figures here are before tax, so comparing them with an after-tax investment goes wrong.
What is a good rental yield?
There is no threshold that holds in general, and Wertavo does not draw one. More helpful are four questions you can put to any number:
- Is the net yield above the loan rate? Only then does the loan raise your return on equity.
- Does the flat carry itself after interest and principal, and if not, how much do you have to add for the long term?
- How much value growth is in your expectation, and would the numbers still work without it?
- How high is the risk of vacancy and major repairs in this building and this location?
Rental yield and value growth
Rental yield is only part of the return. If the property gains in value, the growth adds to it; if it loses value, the loss comes off. Roughly, for the whole property:
Approximation
At 3.4 % net and 2 % value growth, that is about 5.4 % a year before tax. Only at this level is a comparison with an ETF portfolio fair, and even then only with the same assumptions on costs, tax and risk. How the paths develop over 25 years is worked through in Own home, buy-to-let or ETFs? For tax, rental income minus interest, costs and depreciation counts; more in Depreciation on rental property.
Sources
Rules and figures as of