Rental yield

The return on rental property (or rental return for short ) is a return that the landlord achieves from the capitalized earnings value of rented property .

General

Investors , whether private investors or institutional investors to choose their investment decision to an investment rule out the return as a key investment criterion. As a price, the rate of return exercises the important signaling function for capital providers, among other things, for directing capital towards the most advantageous risk / return combinations. However, while high prices signal a shortage of goods and services , returns have a reciprocal signaling function: high returns signal low scarcity and high risk and vice versa. This is due to the calculation parameters underlying the returns. At a given nominal interest rate , the lower the stock exchange price , the higher the return on a bond . A low stock exchange price shows that there is little scarcity. The same rules apply to real estate as to capital investments, because high rental yields signal a high risk of rent default and vice versa.

The calculation parameters for the rental yield are the annual rental income and the purchase price of a property. The higher the purchase price (and thus the scarcity), the lower the rental income given the rental income and vice versa. The rental yield is therefore also a measure of the risk assessment, as it indicates how quickly investors would like to get their purchase price back.

Residential properties ( condominiums , apartment buildings ) and commercial properties (for example, medical practices , law firms , shops of all kinds, supermarkets , shopping centers , warehouses , industrial properties , business parks , industrial parks , technology parks , administrative buildings , office buildings , business centers , hotels , hospitals or sanatoriums ) come into question as rental properties .

calculation

When calculating the rental return, a distinction must be made between the reference values gross rental return , net rental return, return on equity and return on total capital .

How do you correctly calculate the rental yield?

Gross Rental Return

The annual gross rental income and the purchase price of the property serve as reference values:

{\ displaystyle {\ text {Gross Rental Return}} = {\ frac {\ text {Annual gross rental income}} {\ text {Purchase price}}} \, \ cdot 100 \, \%}

This value is of little informative value for a realistic assessment, as the gross rental income is not completely available to the landlord, but is reduced by operating costs and similar expenses.

Net rental return

This reduction in the annual gross rental income from the basic rent is taken into account in the net rental return. The annual net rental income and the purchase price including ancillary costs of the property serve as reference values. The starting value is the annual gross rental income:

   Jahresbruttomieteinnahmen
   - nicht umlagefähige Betriebskosten
   - Instandhaltungsrücklagen
   - Rückstellungen für Reparaturen und Leerstandszeiten
   - Verwaltungskosten
   = Jahresnettomieteinnahmen

The annual net rental income is based on the following formula:

{\ displaystyle {\ text {Net rental return}} = {\ frac {\ text {Annual net rental income}} {\ text {Purchase price including additional costs}}} \, \ cdot 100 \, \%}

The one-off ancillary costs when purchasing real estate can amount to between 8.5% and 12% of the purchase price:

   Kaufpreis
   + Maklergebühr
   + Grunderwerbsteuer
   + Notargebühren
   + Grundbuchgebühr
   + Gutachter-/Schätzungsgebühren
   + etwaige Renovierungskosten
   = Kaufpreis einschließlich einmalige Nebenkosten

For condominiums, the annual net rental return should be at least 4% of the purchase price, for older properties at least 6%. According to a study by PWC Germany , the rental yields for office and retail properties in a prime location are between risk-free 4.18% ( Munich ) and risky 7.5% ( Magdeburg ). The fact that rental yields on commercial properties tend to be higher than on residential properties is due to higher commercial rents, shorter notice periods with higher tenant fluctuation and a higher risk of vacancy .

The multiplier for a rental yield of 4% is 25, for 6% it is 16.7. For example, if the annual net rent is 8,000 euros and the rental yield is 4%, the purchase price must not exceed 200,000 euros.

Return on equity

If a rental property is financed exclusively with equity , the missing interest income from an alternative capital investment should correctly be added to the purchase price as opportunity costs . The investor does not invest his equity in securities , but instead opts for a rental property:

   Kaufpreis einschließlich einmalige Nebenkosten
   + Opportunitätskosten
   = Kaufpreis nach Opportunitätskosten

If a rental property is to be partially financed with outside capital , the interest expense for the loans must be deducted:

   Jahresnettomieteinnahmen
   - Zinsaufwand
   = Jahresnettomieteinnahmen nach Finanzierungskosten

With rising lending rates or higher use of outside capital , the rental yield decreases. Whether a rented property is profitable for the investor depends on two parameters, namely the net rental return and the interest rate on debt financing. If the net rental return is above the effective interest rate or the interest level , a purchase makes sense.

Total return on investment

The return on investment provides information on the extent to which, given the rental return , debt capital may also be used to finance the purchase price. If, for example, the purchase price including ancillary costs is 1,000,000 euros and if 400,000 euros are borrowed at 5% interest, the following calculation results:

   Jahresbruttomiete     100.000 Euro
   - Nebenkosten          10.000 Euro
   - Abschreibungen       30.000 Euro
   - Zinsaufwand          20.000 Euro
   = Jahresnettomiete     40.000 Euro

The total return on capital is 4% according to the following formula:

{\ displaystyle {\ text {Return on total capital}} = {\ frac {\ text {Annual net rent}} {\ text {Total capital}}} \, \ cdot 100 \, \%}

Due to the leverage effect, an increasing interest expense is only worthwhile as long as the total return on capital is above the interest expense. If the lending rate rises to 7%, the return on total investment falls to 3.2%. If the debt component rises to EUR 600,000 with a 5% interest rate, the total return on capital falls to 3% due to the leverage effect; in both cases the external financing is too high.

Influencing factors on the rental yield

Factors influencing the rental yield (and the purchase price of a property) are in particular the purchase price itself, the risk of rent default , the location , the vacancy risk and the rent. The lower the purchase price, the higher the rental yield and vice versa. The higher the rental return, the higher the risk of rent default and vice versa. If the rental property is in a bad location, there is a higher rental return with a high risk of vacancy and rent default. The higher the rent per square meter, the higher the rental yield and vice versa. Higher returns can therefore indicate a real estate risk. For this reason, economically healthier cities with higher purchasing power show a lower rental return, while cities with oversupply (high number of apartments per inhabitant) have a higher return. In cities with a positive population forecast, rental yields are lower than in cities with a negative outlook.

Importance of the rental yield

From an investor's point of view, the rental yield is of considerable importance with regard to the valuation of the investment . However, the calculation only reflects part of the investment in real estate. In order to be able to make a final assessment, additional