If you’re thinking about buying a rental property, it’s important to calculate the expected return to determine whether it’s a suitable investment for you. To do so, you will need to know the income and expenses associated with the property.
In this article, you’ll learn how you can calculate the profitability of a buy-to-let property.
Gross and net returns
It’s essential to have a complete overview of the costs when renting out your property, in order to correctly calculate the net return you will get. You should consider not only the total cost of the investment and the rents collected but also all additional expenses such as taxes, insurance, repairs and maintenance.
Be sure to make a rigorous assessment of all the costs involved in the investment and establish an appropriate strategy to maximise your long-term benefits. In doing so, you will be taking steps to ensure that your investment is profitable and sustainable over the long term.
Aspects to bear in mind
Investment costs
The investment costs associated with buying a property can add a significant amount to the purchase price. If you’re thinking about buying a property, it’s important to be aware of what costs may be involved in addition to the sale price.
One of the first expenses you will have to assume will be the Notary’s fees, since as the buyer you will have to pay for the Public Deed before a Notary. This cost is between 700 and 800 euros.
In addition, if the property needs any refurbishments or modernisation, you will need to take this additional cost into account. To get the property in top condition, you may need to invest around 3,000 euros, although this will depend on the current state of the property.
If you’ve hired a Buyer’s Agent or Personal Shopper to assist you in the process, you should be aware that this professional will require a fee.
It is also important to consider the taxes you will have to pay, such as transfer tax or IVA (VAT) in the case of new builds.
Expenses you will have every month
Fixed costs are those that must be paid on a monthly basis regardless of whether or not rent is received. It’s important to take these costs into account in order to assess possible risks such as non-payment or lack of tenants for a few months.
Among the most common fixed costs are community fees, which include ordinary costs but do not include exceptional expenses. It’s also advisable to take out renter’s insurance to cover possible damage to the property or non-payment by tenants. In addition, it’s important to consider the Property Tax (IBI), which is an annual tax that can be paid in instalments.
Even if the property is empty and no utilities are consumed, it’s important to keep the minimum services registered in order to avoid problems with the utility company in case they are needed. It’s also possible to consider hiring a rental manager to take care of the management, although this is not compulsory, and the cost is usually a percentage of the monthly rent.
In conclusion, fixed costs are an important thing to consider when renting a property, and it’s important to assess them in order to ensure financial stability and avoid unpleasant surprises in the future.
Related costs
It’s important to take into account any repairs that may be needed due to the daily use of the property. If this is normal wear and tear and has not been caused by negligence on the part of the tenant, it will be the landlord’s responsibility to take care of it. However, estimating the cost of these repairs can be tricky.
When a tenant moves out, it’s best to service and refurbish the property so that the next tenant will find everything in good condition. This will help to keep the property in optimal condition.
Additional community expenses may also be a reality in the property, although they can be hard to calculate. The cost will depend on the age of the building, its current condition and the level of maintenance that has been carried out.
The basic formula for calculating profitability
Now that we are clear on the costs, it’s time to employ the profitability formula.
Profitability = (Revenues – Expenses) / Investment
*Revenue: the total amount of revenue to be generated by the property.
*Expenses: the total amount of expenses associated with the property, including maintenance costs, taxes, insurance, and anything else necessary to keep the property in good condition.
*Investment: the total amount of money you will invest in the property, including the initial outlay, processing costs and anything else necessary to acquire the property.
In summary, when buying a rental property, it’s important to calculate the expected return to determine whether it is a suitable investment for you. To do this, you will need to know the income and expenses associated with the property and use the profitability formula to calculate the return on investment.
