Difference: purchase price factor and rental yield

For the calculation of both results, the same factors are used. The annual rental income and the investment costs. The difference lies only in the preparation of the calculation and thus in the result.

Both give an indication of profitability.

Rental yield: result says…. Definition

Result for rental yield calculation:

Rental yield > How much surplus remains each month to cover repayments, interest and reserves for repairs or capital accumulation?

Purchase price factor: result tells… Definition

Result for purchase price factor calculation:

Purchase price factor > In how many years will the investment costs be paid off by the annual rental income?

Simplified, the formulas you’re about to learn look like this:

• X / Y = Z1
• Y / X = Z2

Z = Profitability

My recommendation for beginners: rental yield

As a real estate beginner, you’ll need ongoing income quickly because most of your equity is probably in your first property. For beginners, it therefore makes sense to compare properties on the basis of rental yields. This way, you immediately know what monthly surplus an individual property can generate (for you).

The purchase price factor is more interesting for longer-term investments (target: appreciation and 10, 20, 30 years; before that you pay monthly), where short-term cash flow is not important.

• Tip. Read more about the difference here, on my new project, specifically for real estate buyers! The subtleties between yield & investment real estate – external

Either way, both calculations aim to help them compare different property listings and do it quickly!

Rental yield: Example

Let’s look at both forms of profitability calculation again in detail, with examples.

Once again, briefly the definition: If you calculate the gross rental yield, the result tells you what surplus remains monthly and forms your cash flow. For the repayment and interest (financing of the bank), as well as reserves for maintenance, or everything that then remains for your own, additional asset accumulation.

Formula and comparison

Rental yield = annual net income / investment * 100

Purchase price is 100,000, annual rent 3,200. Calculation looks like this:

• 3,2 = 3.200 / 100.000 * 100
• Result: 3.2

Calculate rental yield: Offer comparison (example)

The result of this calculation is always a percentage. This tells you how much surplus remains to cover the costs (repayment, interest, reserves for maintenance) and ideally a further surplus remains for you as an investor in the property.

With the current interest rate situation, you can expect approx:

• 2 % redemption
• 2% interest
• 2 % Management and maintenance reserves

reckon. Accordingly, properties with a yield of over 6% are interesting for you as a buyer.

• Yield therefore 6% + X

Just like the purchase price factor, you compare different offers in a quick way, based on two factors, the purchase price and the achievable annual rent.

• Object A: Rental yield 6.8%
• Object B: Rental yield 5.3%
• Object C: Rental yield 7.5%
• Property D: Rental yield 4.2%
• …

Accordingly, you would choose to look more closely at Property C, with a 7.5% yield (+1.5% over target of 6%). So the tenant pays off your property and you would have additional monthly income. Also, property A, with still 6.8% yield.

For object B, with 5.3%, you could check later, with your own experience and even more knowledge, whether there are any optimization possibilities, e.g. rent increase, if no adjustments are made by the landlord for a long time.

Learn even more about the return on investment!

At Real Estate-Experience.com, I’ll show you even more about rental yield and ways to make quick valuations, including looking at property location. Learn all about the here:

• Rental yield

Purchase price factor: Example

Again, as a reminder, the definition: if you calculate the purchase price factor as a result, it tells them in how many years the rental income, the investment costs covered.

Calculate purchase price factor: Offer comparison

The purchase price factor is typically between 10 and 40, depending on the region and location of the property, condition and so on. In Berlin the value is between 30 and 38, in cities like Düsseldorf it is between 18 and 24.

Formula and comparison

Purchase price factor = investment / annual net income

Purchase price is 100,000, annual rent 3,200. Calculation looks like this:

• 31,25 = 100.000 / 3.200
• Result: 31.25, so ~ 31

Accordingly, your comparison of real estate listings will look something like this:

• Object A: Purchase price factor 18
• Object B: Purchase price factor 21
• Object C: Purchase price factor 19
• Object D: Purchase price factor 17

So property D is the most profitable, because the financing would be paid by the rent within 17 years. Property A would be paid off within 18 years, property C within 19 years and property B, would need 21 years to pay off the entire financing, through the rental income.

Therefore this tip for you!

Tip. Calculate annual rent

How can you actually calculate the possible annual rent? You are probably looking for your property on a real estate portal, such as ImmobilienScout24, Immonet or another provider. Simply change your search filter from buy to rent. You can already see what rental prices are being charged for comparable properties in the same area or, even better, neighbourhood (1 km radius search). From this, you can forecast the possible annual rent that can be achieved for your property.

Of course, independent of the rent optimization just mentioned, if the previous owner has not made any rent adjustments for a long time, in addition there are upgrading possibilities and expansion possibilities, depending on the type of property.

Conclusion: Purchase price factor and rental yield simply explained

I hope you have found here the simplest explanation there is for purchase price factor and rental yield! If you want to learn even more on the subject of buying a property, whether owner-occupation or investment, numerous articles, guides and checklists, all free and available 24 hours online, with us!

Apartment, house, apartment building, everything for real estate beginners!

Now new on Immobilien-Erfahrung.de:

• Buying real estate: learn – external

In addition, for all beginners, still this tip:

• First property purchase

Real estate balance sheet: investment to surplus

If you don’t have the possibility to watch the video (plane, train, etc.): You can find the transcript with all tips directly below the video.

Tip. Taxes, finances: It’s a boss thing. I’ve been following Alex as a real estate investor for almost a year. Most recently I also attended his tax coaching, read more about that time and what I learned in tax coaching here: Alex Fischer Experience.

How real estate works as an investment

you actually only have to pay 10,000 euros once and immediately get a value of 100,000 euros. Once again, you don’t have this value of 100,000 euros in 30 years, but you have it immediately, the increase in value can take place immediately. How does that work? I’m going to show you right now!

The interesting thing about real estate is, real estate is a balance sheet. That means it has an income side and an expense side. Another special feature of real estate is that you don’t have to have 100,000 euros. Normally, if you want to invest money in a share fund or in a building society, you have to have 100,000 euros in order to make a 100,000 euro building society or 100,000 euro investment.

Here’s how it works with real estate: If you earn well enough, for example. I.e. you have a net income of more than 2,000 euros as a single person or more than 2,500 euros as a married person. Then this means that you already pay taxes, that you have a good name for the bank. This means that the bank thinks you are a good customer. For this reason, the bank lends you 100,000 euros and takes the property as collateral.

Reading Tip! Real estate financing: How does the bank think?

Now let’s look at that record.

Income and expenditure side of a property

I have already said: The balance sheet has an income side and an expenditure side. On the income side, the first factor is “rent”. Here we calculate approximately with a size of 5% rental income, which corresponds to 5,000 euros per year. Then we have a tax advantage. This corresponds approximately to 1% per year, which would be 1,000 euros. That would be the income side. The expenditure side: there we have interest; important with the interest, this is debt interest. you have borrowed money and you have to pay debt interest to the bank, for the fact that you have debts with the bank. That’s sort of the loan fee on the money. Not to be confused with interest on credit. That’s different. That’s when the bank owes you money, then you get money. We’ll put this interest at 4%. That would be about 4,000 euros.

In fact, interest rates are even lower at the moment. But I prefer to calculate a little longer term and a little worse for the property, so that you see that even in the case of an interest rate increase, the whole thing would still work. On the subject of interest rate increases, etc. you will learn a lot later.

Revenue side of the balance sheet:

• Rental income (5%) = 5,000 Euro / year
• Tax advantage (1%) = 1,000 Euro / year

expense side of the balance

• Debt interest (4%) = 4,000 Euro / year

What is important in this example is to understand the principle of real estate.

Redemption and disruptive factors

Now let’s move on to repayment. Repayment is nothing more than the repayment of the money. Interest is the loan of money, repayment is the repayment. So you make sure that the debt becomes less and less.

We now set the repayment here in the example at 2%. That corresponds to a term of about 25-30 years. This corresponds to 2,000 euros per year. Then we have costs that we have to calculate. These include maintenance, for example, if something needs to be repaired on the property, or the costs for property management. These cannot be transferred to the tenant. In other words, these are costs that you really have to pay out of your own pocket. These can be calculated with 1%, a good average value, which corresponds to 1,000 euros in this example.

Calculate own investment: After repayment and costs

Now we draw a line. 4,000 euros plus 2,000 euros plus 1,000 euros, that’s a total of 7,000 euros a year. A balance sheet must be balanced.

New on the expense side:

• Repayment (2%) = 2,000 Euro / year
• Duration: 25-30 years
• Running costs (1%) = 1,000 Euro / year
• [Debt interest (4%) = 4,000 euros / year from above].

If we add it up now, we see “Gee, there’s 1,000 euros missing”. That is the personal investment. We set this calculated to 1%, so 1,000 euros, mind you, per year. Means with a 100,000 euro real estate that are approximately 80 euro in the month. For these 80 euros a month we get a property worth 100,000 euros. Now I told you before that the great thing about real estate is that you have to invest 10,000 euros once and not even immediately, but in installments. For that you get immediately a value of 100,000 euros.

This (screenshot) is a time track. Starting in the year zero. That would be the year of purchase. In year 30, that’s the year the property is paid off. The property with 2% amortization would be paid off in about 30 years. Why and why, I’ll explain later. Now, I’ve simply marked intermediate years here: Year 10, Year 20. So we have to pay (initially) 1,000 euros of our own contribution per year. That means we pay 1,000 euros a year, times 10 years. So in total we have to pay 10,000 euros.

Excerpt (video above, 6:15 minutes)

Source: Alex Fischer Youtube

Factor rent increase and term

Then let’s say this: In year 10, we increase the rent by 20% on a one-time basis. Of course, no one does that, but the point here is to understand the principle of real estate and that’s why we keep it simple. We do not increase every year in a row, in a small percentage, but we do nothing for 10 years and then increase once by 20%.

Calculation example: Zero runner

Then after 20 years we do the same game again. Now let’s look at how that affects our balance sheet. In year 10 we increase by 20%, that is 5,000 euros is our previous rent, we increase that by 20%, then all of a sudden we have 6,000 euros rent. 6,000 euros rent plus 1,000 euros tax advantage, is 7,000 euros, 7,000 euros we need, that is, our own investment falls away. So that means from year 10 to 20 we’re paying plus minus zero all the time.

• Rent (first 9 years): 5.000 Euro / year
• Rent (10-19 years): 6.000 Euro / year (+20%)
• Plus tax advantage (above): 1,000 euros / year
• Total income: 7.000 Euro / year
• Own investment (from year 11): 0 Euro

Calculation example: Positive cash flow

Then in year 20 we increase the rent again by 20%. That would be here, 20%, we now have 6,000 euros rental income, means we then have 7,200 euros rental income. Means we now have plus 1,200 euros here. Why? 7,200 euros we have, 1,000 euros tax advantage is 8,200 euros, 7,000 we need only, that is, we have a surplus of 1,200 euros. Means: In year 20-30 we get plus 12,000 euros back out.

• Rent (20-29 years): 7,200 euros / year (+20%)
• Plus tax advantage (above): 1,000 euros / year
• Total income: 8.2000 Euro / year
• Surplus: 1.200 Euro / year

Optimize cash flow and automate process

You need to sharpen your eye for “cash flow opportunities” (ways to generate passive cash flow) first. Learn more about optimizing cash flow and automating your process here. How to increase your cash flow (external).

1. Step: Real estate financing and purchase
2. Step: Optimize cash flow

Source: Alex Fischer

Real value of a property: value stability against inflation

But now I originally said we have to invest 10,000 euros once to get a property for 100,000 euros immediately. That’s because I didn’t take that part into account here. Because I leave this part for the unforeseen. For example, the apartment might not be rented out at some point or it might need a major repair. Another advantage of real estate is that normally if you have 100,000 euros of credit, inflation reduces that credit every year.

3% inflation leaves you with only 97,000 euros after one year, or 40,100 euros after 25 years.

The beauty of real estate is you have a tangible asset, that tangible asset increases in value due to inflation. How this works exactly, we explain again in further lessons.

Loan decreases, asset value increases

Credits are positive monetary values, loans are negative monetary values. The loan with which you bought the property is a kind of negative monetary value. This negative monetary value, of course, is also subject to inflation. That is:

After 30 years, 100.000 Euro debts, i.e. negative monetary value, are only worth 40.100 Euro.

This scissor that property goes up and debt goes down at the same time is what’s really fun with real estate.

Remember: Creditworthiness is everything

One or two of you may be asking yourselves, gosh, if this is so awesome. Why doesn’t everyone do it? Quite simply, not everyone can do it. In order to do it, you have to a) pay proper taxes and b) have a good name with the bank. When does one have a good name at the bank? When you earn at least 2,000 euros net as a single person or at least 2,500 euros net as a married person.

Real estate or investment fund?

Real estate or investment fund? The difference between real estate and a conventional investment is that you could never have a full 200,000 euros with 5,000 euros in a conventional investment. That will never work. With investment property it does. Why it is smart to invest your money in real estate instead of, for example, in funds and how real estate works as an investment, I’ll explain here!

• Real estate or investment fund? (external)

Sell property

Everything to procedure, building law, real estate agent, notary, costs & taxes:

• Sell land