Rental yield: definition & calculation

Should you decide on a yield property for your real estate investment, the question quickly arises:

Is this property worthwhile as an investment?

After all, buying real estate does not only entail immense costs at the beginning. There are also ongoing operating costs to be paid later on during the rental period. So to make sure that this expense is worthwhile, there is the rental yield. In other words, the rental yield puts your investment in relation to the potential rental income.

Formula for gross rental yield: percentage

To calculate the rental yield, the cold rent (without operating costs) and the purchase price of the property must be put into relation. The complete formula is:

Annual net income / investment * 100 = rental yield

The result is then in percent. The higher the percentage, the better the return. And the better the return, the more you earn from the property. As a real estate investor, you should ideally build up wealth again directly so that you can then invest it in further real estate as a capital investment.

Yield & location: A, B & C location

The decisive factor for the rental yield is the location of your property. Is the property in an A, B or C location? What about the macro and micro location? And is it a yield or investment property? Depending on the location, the respective property types have different rental yields.

A-location: Frankfurt & Munich

Typical for A-locations are low yields and a steady increase in value. Over the long term, therefore, rental yields rise here just as the value of the property itself does. The best examples of this are top A locations such as Munich and Frankfurt:

• Munich Ø Yield ~ 3
• Frankfurt Ø Yield ~ 4

B-location: Dresden & Nuremberg

In principle, B locations also have good returns. In addition, there has also been a significant increase in value here. The ideal rental yield in B locations is between 5 and 6 percent:

• Dresden Ø Yield ~ 5
• Nuremberg Ø Yield ~ 6

C-location: Wuppertal, Chemnitz, Krefeld

Gross rental yields are highest in C locations. On the other hand, there is no increase in value and the risk of vacancy is higher. Here are some examples:

• Wuppertal Ø Yield ~ 7
• Chemnitz Ø Yield ~ 8
• Krefeld Ø Yield ~10

Conclusion: What is the minimum rental yield?

The amount of the rental yield is therefore calculated according to a fixed formula and varies depending on the location and type of property. In principle, the higher the yield, the more profit is made. And the better the location, the lower the yield. Thus, yield properties are worthwhile above all in B and C locations, while you should choose properties in A locations above all for investment properties.

Learn more about rental yield here:

• Rental yield: Return on real estate (external)

If you want to learn even more on the subject of buying a property, whether owner-occupied or capital investment, numerous articles, guides on the subject of rented vs unrented, as well as checklists, all free and 24 hours online available, with us!

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

Now new on Immobilien-Erfahrung.de:

• Buy property: learn – external

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Real estate for own use: location

So if you want to buy a property and move in directly, you should like it first and foremost! Compared to real estate as an investment, the rental yield is therefore unimportant. Instead, it is important to think about what you want from the environment of your property. After all, your personal goals and ideas are in the foreground.

Your personal goals are important for the choice of the location

Maintain or increase resale value

In addition, you should always keep the resale value of the property in mind. After all, you may one day decide to sell your dream property again. A professional reorientation, family growth, old age or illness are often reasons for a resale. Our tip: When buying your property, always opt for a (very) good location to prevent any loss of value in the future.

(very) good location = preservation or increase of resale value

A, B & C location: buy dream property outside the city?

Above all, avoid real estate in C-location here. This location is defined primarily by negative economic development, weak infrastructure and low demand. Even if a property in the middle of the countryside far away from the hustle and bustle of the big city sounds tempting, you have to expect a strong loss of value in the future. In the worst case, your property will only be worth the price of the land in a few years.

• Read more here: A-, B- & C-Lage

Important criteria: Infrastructure, cultural offerings & Co.

City or country? Big city or small town? Once you have defined the rough location for yourself, the next step is to determine the exact neighborhood. How good are the connections to public transportation? Are there many cultural offerings? Is the neighborhood safe and quiet? Where is the nearest hospital? These criteria of the micro-location of your property are also important.

Here are some other important criteria:

• Infrastructure
• Security
• Cultural offers
• Proximity to public facilities
• Security
• Cleanliness

Real estate as an investment: Location

You would like to acquire a yield or investment property? In this case, the criteria already mentioned, such as infrastructure, security, etc., are also important, but take a back seat depending on the strategy and goal. While you should definitely look around in B and C locations for a yield property in order to generate direct cash flow through a high rental yield, properties in A locations are particularly worthwhile for investment properties.

Conclusion: Individual goals & personal strategy

So the location of your property depends on both its goals and your strategy. Thus, depending on the type of property, different factors are important. While personal preferences and an increase in resale value are the most important factors for owner-occupied property, the rental yield is the main consideration for income property. And in the case of investment property, it pays to look in A-locations in particular.

If you want to know even more about the respective investment strategies and the perfect locations, then take a look at our guide:

• The perfect location of a property (external)

Der Beitrag Location for house & apartment: strategies & tips for owner-occupiers and capital investors erschien zuerst auf ℄ Real Estates.

Different layer types explained: A, B & C layer

In principle, a distinction is made between three types of location when searching for real estate:

• A-location (metropolis)
• B-location (large city / city with positive development)
• C-location (small town / city with stagnant development)

Why are location types important? It’s simple: As a real estate buyer, you have ideally thought about your goals before buying the property. Do you want to buy the property for personal use or as an investment? Is this a yield or investment property? Depending on the answer to this question, the location you should look at also differs.

So now let’s look at the different definitions.

A-location: coveted metropolises, such as Berlin and Hamburg

As a rule, metropolises and capitals are considered A-locations. They are sought-after places to live, as they are often home to internationally based companies. The economy is thriving, the education system has a lot to offer and life is never boring. Germany’s metropolises are also home to the most beautiful and historic neighborhoods. If you buy a property here, you can expect a high purchase price but a low return.

Typical for A-locations: expensive purchase price & low yields

Investment property purchase: Low risk & high purchase price

Due to the high purchase price and the low return, we advise you to look for investment properties in A-locations. After all, the high prices per square meter are hardly covered by rental income. In other words, due to the coveted demand in metropolitan areas, you can enjoy an increase in the value of your property at a low risk. Why low risk? The popularity of locations such as Munich, Berlin and Hamburg is highly unlikely to wane in the next few years – after all, more and more young people are drawn to these very cities.

Aim of a property in A-location: Later & profitable resale

If you do not expect a direct cash flow shortly after the purchase of the property, then real estate in an A-location is exactly the right thing for you. Yielding properties, on the other hand, are less likely to be found here. So here is a brief summary:

• Purchase price: High
• Yield: Low
• Advantage: Low risk
• Property type: Investment property
• Goal: Later, profitable resale

A-location in Germany: Examples

Which cities generally count as A-locations? Here according to population:

• Berlin
• Hamburg
• Munich
• Cologne
• Frankfurt on the Main
• Stuttgart
• Düsseldorf

B-location: economically strong major cities, such as Nuremberg and Leipzig

Properties in B locations, on the other hand, are characterized by their high returns. After all, B locations are close to popular metropolitan areas and are thus also considered popular places to live.

Typical for B-location: moderate purchase price & high returns

Yield property purchase: Moderate purchase prices & cost-covering rent

While the high price per square meter in A locations means that rents cannot cover these costs, this problem does not exist for properties in B and C locations. Thus, properties in B-locations are considered perfect yield properties.

Here are the advantages at a glance:

• Purchase price: Moderate
• Yield: High
• Advantage: Cost-covering rent
• Property type: Yield property
• Goal: Immediate cash flow

B-location in Germany: Examples

B locations include:

• Leipzig
• Dortmund
• Food
• Bremen
• Hanover
• Nuremberg
• Wuppertal

Somewhat outside the major metropolises are sought-after B locations:

C-location: Low-cost real estate with high risk

C locations are therefore also suitable for investment properties. These are locations with weak infrastructure and only low or moderate economic strength. Here you can enjoy a lower purchase price, but must also expect higher risks, such as vacancy, rent arrears & Co. The yield properties here are therefore characterized by a high risk.

Real estate in C location briefly summarized:

• Purchase price: Low
• Advantage: Real estate bargain
• Property type: High risk return property
• Goal: Immediate cash flow

Here a typical prefabricated building in C-location:

Conclusion: Decide depending on the type of property

While A-locations are sought-after metropolitan areas, B-locations are characterized by their economic strength. C-locations are less desirable and have a weak infrastructure, but even here it can be worthwhile to invest in an investment property. It is best to consider in advance what goal you are pursuing with your property purchase and what type of property you are interested in. Then the choice of location will be much easier for you. Once you have decided on an A, B or C location, the second step is to analyze the macro, meso and micro location.

Learn more here: Macro, Meso & Microlocation

Tip. Read here the complete comparison between A-location, B-location and C-location including examples on my new project for real estate buyers (Immobilien-Erfahrung.de):

• Property location: A-, B-, C-location – external

Der Beitrag Real estate location: A-, B-, C-location for house and apartment – definition, example & comparison erschien zuerst auf ℄ Real Estates.

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

Der Beitrag Rental yield vs purchase price factor: Explained! Calculate for quick valuation / comparison of real estate erschien zuerst auf ℄ Real Estates.

Buying real estate for beginners: New now!

For the first property, house or apartment, as an investment or for owner-occupiers, here we now collect knowledge and tools (formulas, etc.) for real estate beginners. In fact, we receive many emails, the questions become more and more, hence the idea to create a new project that specializes exclusively on the subject:

• Buy property – Immobilien-Erfahrung.de

Of course, with a focus on real estate as an investment (for rental, further sale), after all, you want to earn money with real estate! The first condo, the second condo, the third and fourth. Learn the basics here, with tips, experiences and mistakes. That way, you’ll be optimally prepared to buy your first property! You can find the entire guide now on Immobilien-Erfahrung.de.

After the cover (link to page), I’ll still introduce you to the steps involved in buying a condo or house.

PS: The book cover by me is just to clarify, it’s a lot of knowledge! I wish you much success in buying your first condo(s) or house(s)!

Let’s take a look at the contents together, in a brief overview.

Criteria of the property: goals?

Step number 1: We define your personal goals. Simply put:

• Real estate for own use and / or
• Real estate as an investment
• Real estate as a capital investment (with sufficient creditworthiness)

So before it goes into the real estate search process, think about your goals as a real estate investor. Are you simply concerned with self-interest or do you want the famous “financial freedom”, “never work again” and “live off real estate”, in other words “live very well”.

Retirement provision Self-interest – Stop!

It’s interesting that many get a property for their own use and then assume “I’ll never have to pay rent again!”

Many people make the mistake of thinking that if I buy a property for my own use, I’ll be set for my old age and live rent-free! A fatal mistake, because operating costs are always incurred. If the property is later 20, 30 or even 40 years old, there will also be many repairs, renovations and modernizations.

Therefore you think also with the goal “only” own use, about a second real estate, as capital investment!

At least to pay the operating costs in old age, as well as repairs and for a monthly, small return from the rent, the by then, already paid off property.

In addition to self-interest vs capital investment, it’s about examining your own financial situation. The big question:

How much real estate can you afford?

But you also get to know parameters, e.g. the location.

The perfect segue to your property search criteria.

Location, apartment type and condition

The following is about finding the right location for your real estate investment. There are different types of camps.

What are the 3 types of location for real estate?

You know the saying of all real estate agents and investors: “Location, location, location”. They are right, because location is a big parameter in your (later) profitability calculation.

In 99.9% of the cases we speak of A, B and C position.

A-location: Investment property

A-location in real estate means:

• Price: Very high purchase prices / prices per square metre
• Purchase of investment property (speculation on future)
• Locations like Munich

B-location: Yield property

B-location in real estate means:

• Price: High / “average” purchase prices
• Purchase of income property (cash flow from rental)
• Locations like Wiesbaden

C-location: risk property

C-location in real estate means:

• Small towns / municipalities in structurally weak regions
• Demographic, stagnant or declining development

Choice of location and proximity of the property(ies)

Ideally, you are looking for / buying a property in a location that is not too far away from your “life”. You yourself live in Hanover, but your family lives in Munich? Then sometimes locations that are on the way can also come into question. Practical for viewings and also the later work on and with the property.

On the way are, here in the example, good cities in B-location (more profitable than Hannover, Munich itself), like:

• Kassel
• Nuremberg
• Ingolstadt
• Göttingen
• Würzburg
• Erfurt
• Jena
• Bamberg

Here’s how your site selection works as a real estate newbie, simply put.

That is, the choice of location refers again to the preparation in step 1. A property that is hundreds of kilometers away and visits are associated with great effort, is not recommended as the first property.

What type of property fits your location, financial situation and demographics? As a real estate investor, there are many different types of apartments and houses available to you. The question is, what type of property best fits your personal goals that you defined in Step 1?

Equity: Financing? Credit rating?

We’ve already discussed the question, “how much property can I afford?”. Typically, the bank requires about 15% equity, depending on your credit rating, bank and contact person (+/- 5%). However, with good credit, you can manage to finance with 0% equity.

Creditworthiness, i.e. credit rating and available equity, are an important issue for real estate beginners, because who can pay cash for a property?

At the same time, opinions differ here: owner-occupiers should provide as much capital as possible. Investors, on the other hand, should try to provide as little equity as possible for the financing, ideally 0%.

Why and why, learn for free, on Immobilien-Erfahrung.de!

• Buy property

Find an apartment: Brokers, portals, …?

You have defined your goals, checked the location and found optimal regions and locations for you. You have checked your credit rating, the financing and maybe even a previous financing confirmation for amount XY.

Tip! With a prior confirmation of financing from your bank, you will get good, profitable properties much faster.

This means that the bank confirms in advance: We would finance Mr or Mrs XY a property worth XY.

Most people look for a property first and then go to their bank. This takes a lot of time and sometimes the seller quickly finds another person, especially in a real estate market like Germany, who buys the property and can provide the appropriate financing immediately.

After that, there are various ways and means to get real estate.

• Classified ads
• Classifieds on Ebay
• Real estate portals the ImmobilienScout24, Immonet and others
• Contact private network, “who knows someone who knows someone?”
• Real estate agent, also for accesses, real estate portal publication
• …

Learn more about property search and the options available to you as a prospective buyer now at Immobilien-Erfahrung.de.

Valuing a condominium: purchase price?

You have found a property in your predicted location, at a good price for you, perfect! But is there anything you can do about the price? In general:

Is the property, whether an apartment or a house, worth the money?

Remember this:

An offer price (e.g. real estate portal) is not a sales price.

Advantage for you!

At least if you know how to argue for a lower selling price, with meaningful facts. The biggest factor in the reduction of the purchase price is, of course, the substance of the property. But how do you value a property? What aspects are included in a property valuation? What do you have to consider when it comes to common property, living room, bathroom, kitchen, roof truss,…

A sound property valuation has the most effective impact when it comes to the purchase price design. You cannot find better arguments than clear facts.

You will also learn how to “value” a property from the first glance at the offer. More precisely, you calculate the profitability of the property when rented. This value (rental yield) gives an insight, through only 2 factors: purchase price and annual rent.

Tip for future real estate investors!

There are two things you will constantly need and hear: Rental yield, or more accurately gross rental yield, and the purchase price factor. Both help to quickly evaluate real estate listings. Learn more about the difference here and get to know my recommendation for you, as a real estate beginner:

• Rental yield vs purchase price factor

Purchase process, notary, land register, handover of keys?

Last but not least comes the purchase transaction. Everything from the notary, to the preliminary purchase agreement, the purchase contract, land registration, handover of keys and of course all the costs that you, as a real estate buyer, have to transfer to the various agencies.

In addition to the purchase price, there are also the ancillary purchase costs. The ancillary purchase costs, whether house or condominium, consist in most cases of:

• Notary fees
• Costs for the land register entry
• Brokerage costs
• Real estate transfer tax

For real estate buyers, important in the first step, the land transfer tax. The land transfer tax varies depending on the federal state, it is currently between 3.5% and 6.5% of the purchase price.

When the seller, the notary, if necessary the estate agent, as well as the tax office (land transfer tax) have been paid, the entry in the land register can be made.

Congratulations, you are the owner of your first property!

Learn this process in detail, with insider tips, checklists and much more. Best of all, all free of charge.

First apartment / first house: Learn for free

My thought behind the website? The entire buying process, on one page, in detail, with tips and insider tips. Not just one page with the typical 1, 2, 3 processes.

Learn completely free, 24 hours, 7 days a week online. With important calculations, of course, calculations and formulas, as well as their calculation methods, checklists but also valuable experience and mistakes.

If you have any additional questions, you can always write to me and my team on the website. We will then include these additional questions in our Q&A and.

This means that with every question you ask, our platform gets better! From the preparation on the real estate purchase, over the purchase price negotiation, up to the subsequent renting, if you buy your real estate as an investment.

• Real Estate Experience.com

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