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Formula to calculate rental profitability

Posted by Michel B. on 04/03/2022

Calculate all the expenses to know the profitability of the rental

Before launching to buy a home to rent, it is necessary to carefully analyze all the expenses that the operation will entail. Only then can we calculate profitability.

Investment: Here the price of the house, the relevant reforms, the taxes derived from the sale, the VAT (10% for purchases), notary, the AJD and the Tax on Property Transfers (ITP) -both depend on the autonomous communities -, real estate agency commission, etc.

Maintenance: All homes require maintenance and repairs that must be taken into account in order to calculate an estimate. For example, if the washing machine breaks, spills, etc.

Fixed expenses: The community, the garbage rate, the IBI, home insurance, rental insurance (if you have one), etc.

Formula to calculate rental profitability

If we are clear about the fixed costs of the house, the maintenance costs, the investment capital and the rent that we are going to charge the tenants, we can calculate what profitability we will obtain from our rental home. To do this, we will have to perform the following formula with the calculator:

Rental yield =
Annual rental income – fixed expenses and maintenance ÷ investment x 100

Let’s take the following case as an example:

Annual rental income: 12,000 euros (the sum of all monthly rents).
Annual fixed expenses: 1,700 euros (maintenance expenses also enter)
Investment: 200,000 euros (sale, taxes, notary, etc.).
We would have to do the following operation:

12,000 – 1,700 ÷ 200,000 x 100 = 5.15% annual net return.

Calculating this profitability can guide us in a future sale. Thanks to the rental profitability formula, we can know if at any given time it is more profitable to sell or rent.

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