Profitability Calculator
How to calculate the profitability of your rental home
✅ If you are considering investing in a home to rent and obtain additional passive income, It is important that you know how to calculate the profitability of that investment. Before taking the step of buying a property, It is essential to analyze your profitability to make informed decisions. in this guide, We will explain what the profitability of a rental is and how to calculate it, giving you detailed information and practical examples.
✅ The profitability of a rental refers to the economic return that you will obtain from a real estate investment in terms of future benefits in relation to its cost. It is essential to understand this concept before making any investment to assess its feasibility and make sound decisions..
Calculating profitability of a rental home can help you:
✅ Predict the profitability of different assets in the medium term and compare various investment options.
✅ Determine the maximum price you can pay for a home based on the future income it will generate.
✅ Evaluate if it is more convenient to keep a property as a rental or to sell it, taking into account your needs and fluctuations in the real estate market.
Now, let's delve into the concepts of gross profitability and net profitability, as well as how to calculate them.
Gross profitability of a rental home.
Gross profitability is an indicator that relates the cost of acquiring a home with the income generated by the rental. It is expressed as a percentage and is calculated as follows:
gross profit = (Annual rental income / Home purchase price) X 100
To illustrate this calculation, consider the following example:
Suppose you are the owner of a house 2 bedrooms in the center of Malaga that you rent for €1000 per month, which is equivalent to €12,000 per year. If you bought the property for €120,000, applying the formula, we would obtain a gross return of 10%.
It is important to note that this calculation does not include other expenses associated with the purchase, property maintenance and repairs.
Net profitability of a rental home
Net profitability is a more realistic indicator that takes into account the real profits generated by the rental, but also consider the fixed and maintenance expenses associated with the property. It is calculated as follows:
net profit = [(Annual rental income – Fixed and maintenance expenses) / (Home purchase price + Acquisition expenses)] X 100
✅ To better understand this calculation, Let's continue with the previous example and suppose the following annual expenses: 500€ in community fees, 500€ in insurance installments, 400€ in tax expenses and €6,000 annual mortgage. Además, Let's consider an unforeseen expense of €400 for the purchase of a new washing machine.
✅ By subtracting these fixed and maintenance expenses from the annual income of €12,000, we obtain a real benefit of €4,200. If we add the acquisition costs of €20,000 to the €1,000,000 of the purchase price, we obtain a total of €120,000. Applying the formula, we would obtain a net return of 3.5%.
Determining optimal profitability and additional considerations
The optimal return depends on your personal expectations and varies by area and real estate market. To optimize your results and make the right decisions, We recommend you seek advice from one of our agents specialized in buying, selling and renting properties in the area of your interest.. If you need our help to calculate the profitability of your home, you just have to write to us in the form below.
✅ It is important to remember that this guide provides an overview of how to calculate the profitability of a rental home. However, other factors such as location, demand for rent, property status and changes in legislation can influence results and should be taken into account when making investment decisions.
✅ In summary, before investing in a home to rent, it is crucial to calculate your profitability both gross and net. These calculations will allow you to evaluate the viability of the investment, set proper prices, make informed decisions and maximize your benefits. Remember that having the advice of professionals specialized in the real estate market can help you obtain more accurate results and make the right decisions..
Questions Form