Rental Yields on Real Estate Investment
Renting out a property can be a great way to generate passive income, but it's important to understand the potential return on investment through rental yields.
I've already done a couple of posts about houses which you can find here and here. However, rental yield can vary depending on a number of factors, such as location, property type, and the current state of the rental market.
One of the key factors that affects rental yield is location. Properties in urban areas tend to have higher rental yields than those in rural areas. This is due to higher demand for housing in urban areas. Properties in areas with strong job markets, good schools, and amenities, such as shopping, restaurants, and transportation, also tend to have higher rental yields.
Another important factor is property type. Single-family homes tend to have higher rental yields than multi-unit buildings or apartments, due to the ability to charge higher rent for a standalone unit. Additionally, properties in good condition and with desirable amenities such as updated appliances, central air conditioning, or a backyard, tend to have higher rental yields.
The state of the rental market is also an important factor in determining rental yield. In a hot rental market, properties may be able to command higher rent and have higher rental yields. Conversely, in a slow rental market, rental yields may be lower.
Rental yields are typically calculated by dividing the annual rental income by the value of the property. For example, if a property is valued at €200,000 and generates €12,000 in annual rental income, the rental yield would be 6% (12,000 / 200,000).
It's important to keep in mind that rental yield is just one aspect of investing in rental properties. Other factors, such as property appreciation, can also impact the overall return on investment.
Average European capital rental yields
According to data from the National Association of Realtors, the average rental yield, or the annual return on an investment in rental property, is around 4-5%. Despite these data, the average yield of a rental property can vary greatly depending on the geographical area where it is located. For example, according to data from 2020, the average yields for rental properties in major European capitals are as follows:
Paris, France: average yield of 2.5%
Berlin, Germany: average yield of 3.5%
Madrid, Spain: average yield of 4.5%
London, United Kingdom: average yield of 4.5%
Rome, Italy: average yield of 5.0%
Vienna, Austria: average yield of 5.5%
Understanding the Average Expenses
The annual expenses for managing a rental property can vary based on factors such as location, property size, condition of the property, and landlord needs. However, some common expenses include:
Property taxes: property taxes are due annually and vary based on location and property value. Insurance: it is important to insure the property against fires, floods, theft and other damages to protect your investment.
Maintenance and repairs: tenants can cause damages to the property during their stay, so it is important to budget for repairs and maintenance.
Legal expenses: if necessary, legal expenses may be incurred for issues related to renting, such as resolving disputes with tenants or preparing rental contracts.
Management fees: some property management companies require a fee for managing the property, this can vary from 6% to 12% of the rent.
Cleaning and tidy up expenses: if the property is not returned in acceptable conditions after the tenants leave, additional costs may be incurred for cleaning and tidying up the property.
These are just some of the common expenses associated with managing a rental property. It's important to consider all of these expenses and any others when evaluating the potential return on a real estate investment. On average, annual maintenance expenses for a rental property can range from 5% to 10% of the annual rental income. This can include expenses such as property taxes, insurance, cleaning, repairs, and maintenance.
Other Data affecting rental yields
Here is an overview of the average vacancy rates in 3 of the major European capitals. As well as information on how these yields are calculated and the potential impact of non-payment of rent on rental income.
In London, the vacancy rate for rental properties is around 4-5%.
In Paris, the vacancy rate for rental properties is around 7-8%.
In Berlin the vacancy rate for rental properties is around 2-3%.
The potential impact of non-payment of rent on rental income can vary depending on the specific circumstances, but it can be significant. According to a study by the European Mortgage Federation, the average rate of rental arrears in Europe is around 5%. This means that on average, landlords may not receive rental income for around 5% of the rental period. Factors that can contribute to non-payment of rent include economic downturns and high unemployment rates, which can make it difficult for tenants to afford rent payments.
It's also important to note that rental income is subject to taxation in most countries. The tax rate can vary depending on the country and the specific circumstances. For example, in the UK, rental income is subject to income tax at the individual's marginal rate. In Germany, rental income is subject to a flat rate of 25%. It's always important to consult with a tax advisor to understand the specific tax implications of rental income in your country.
Rent an house simulation
To calculate how much you could earn from renting a €300,000 property in London, we need to consider several factors. I use London as an estimate because that's where I found the most data.
Rental Income: The average return on rental properties in London is 4.5%. Thus, the rental income for a €300,000 property would be €13,500 per year (300,000 x 4.5% = 13,500).
Annual Expenses: As I mentioned earlier, the annual expenses for maintaining a rental property can range from 5% to 10% of the annual rental income. So, for a rental income of €13,500, your annual expenses could be between €675 and €1,350. I take 5% for simplicity.
Vacancy rate: I eliminate another 5% from the annual value (€675)
Taxes: I consider property taxes because income taxation is also cumulative with the rest of the income. Furthermore, if we were to compare it to other forms of passive income we would have to pay taxes on those as well. The rate for calculating the tax due is 0.76% of the property value. It is calculated in proportion to the share of possession of the asset. And the months of the year in which the possession took place. (€2280)
We now take into account all these factor. The annual net income for a €300,000 property in London could be €9870 per year, after deducting expenses and taxes.
3,29% of annual return similarly to a dividend. 🥳
However, this is only a rough estimate. It may vary depending on property market conditions and the specifics of the property in question. Additionally, appreciation of the property should also be considered in real estate transactions. This requires additional estimates. Also, I meant this post to focus on rental income only.
Wealthy's Opinion
I still prefer stock dividends, as they are more liquid and more diversifiable. I also have less bang even though the MSCI World's dividend yield is lower 1.4-2%.
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