Understanding how real estate investment and returns work
According to many professionals, real estate is currently a fairly profitable investment. It offers a return of at least 3%. When asked whether this figure is reliable, real estate professionals are unanimous in their response: yes, the return on such an investment is around the minimum of 3%.
However, it is important to put things into perspective by clearly understanding what type of return we are talking about. There are three types of return in real estate:gross return,net return, andfinancial return. Each type of return has its own characteristics that distinguish it from the others. It is therefore necessary to examine them on a case-by-case basis in order to gain a more accurate picture of the situation.
Gross yield
Most real estate professionals agree that a return of 3% is a proven fact. In his view, if the gross return on assets is below this figure, the property in question cannot be considered an investment property per se.
The gross yield is considered to be the result obtained by dividing the total annual rent by the purchase price of the building or apartment, taking into account any costs and potential renovation work.
Net yield
Net yield differs from gross yield in one detail. It consists of deducting all costs incurred from the initial amount of rent. The significance or otherwise of these costs generally depends on the type of property concerned.
Furthermore, when the owner does not want to manage their apartment themselves, they will need to hire a property manager. The latter will then be paid an average of 8% + VAT of the annual rent. In addition to this, agency fees must be taken into account for any re-letting of units that may become vacant over time. These fees are often equivalent to one month's rent, plus VAT.
In terms of taxation, the withholding tax that the owner must consider paying on their property depends on the nature of the building concerned. Thus, it will be higher for a new building than for an old building, which still benefits from an old cadastral income that has remained unchanged since 1970. As for insurance, the owner must take out a policy to cover the consequences of damage to the building, regardless of any insurance that the tenant may have taken out. It should be noted, however, that this insurance also covers the owner's civil liability in the event that their building causes damage to a third party. Similarly, guaranteed rent insurance would affect the property's return.
Maintenance and rental vacancies are other factors that could influence the profitability of a real estate investment. In the first case, maintenance costs will depend on the owner's DIY skills. They will also depend on the condition of the property and its age, depending on whether it is a new or very old building.
In the second case, rental vacancies would be rare if the property rents quickly and easily. In this scenario, the owner should not experience too many periods of vacancy when renting out their property. However, if they have a particular property that stands out due to its size, for example, they may have some difficulty renting it out. In this context, the rental vacancy period would be longer and would logically affect the return on investment.
Financial return
Financial return refers to return on equity, as distinct from return on assets. Investors need to understand this return, which should be considered the "true" return on their investment. This is the basic definition of return, which is applied in most cases to investments in the real estate sector. What return is obtained on the cash invested? By way of illustration, a return on assets of 4% for a building costing €1,000,000 can easily lead to a return on equity of around 10%, provided that the level of debt is properly controlled.
