Rental yield measures what your investment returns, set against what it cost you. The basic formula fits on one line, but two errors of method are enough to turn a mediocre yield into a flattering one - and to distort the entire decision.
Gross yield
The formula:
Gross yield (%) = (annual rent / purchase price) × 100
A home rented at €900 a month, i.e. €10,800 a year, bought for €240,000, shows a gross yield of 4.5%.
The first mistake is to put the advertised price in the denominator. The right figure is the all-in purchase price: the price paid plus the acquisition costs (registration duties, deed costs, any credit costs). These costs represent a significant amount, paid in cash; ignoring them overstates the yield from the outset.
Net yield
Gross yield ignores everything you will pay each year to own and rent out the property. Net yield deducts them:
- the property tax (précompte immobilier, an annual regional tax);
- the non-recoverable charges that cannot be passed on to the tenant;
- the owner's insurance and, in co-ownership, the share of major maintenance;
- routine maintenance and a provision for major works;
- rental vacancy: a property is never rented 12 months out of 12 over the whole period you own it;
- management, whether you delegate it (fees) or handle it yourself (your time).
In practice, net yield is markedly lower than gross. It is this figure that should guide the decision, not the one shown in investment listings, which is almost always the gross.
The mistake of reasoning on the rent
A high rent does not make a good investment: what matters is the ratio to the price paid. An expensive property in a sought-after neighbourhood may offer a lower yield than a modest one elsewhere, while presenting other advantages (potential for capital gains, rarer vacancy). Yield and capital gains are two distinct logics to be weighed against each other, not confused.
The real starting point: the price
Since the purchase price is in the denominator, it is the price that drives the yield. Paying too much weighs down profitability whatever the rent. Before reasoning about yield, you therefore need to know whether the asking price is aligned with the local market: for a comparable neighbourhood and type of property, where does it sit within the range of recent sales? It is this benchmark, and not the hoped-for rent, that tells you whether the deal is starting on solid ground.