Calculating rental yieldhow property investors get the numbers right

Gross rental yield

Formula: annual net cold rent (Jahresnettokaltmiete) ÷ purchase price × 100

Example: a freehold flat in Hof, 70 m², purchase price €140,000, cold rent €490 per month (€7.00/m²).

Annual rent: €490 × 12 = €5,880
Gross rental yield: 5,880 ÷ 140,000 × 100 = 4.2%

The gross yield is quick to calculate and good for a first comparison – nothing more.

The price-to-rent multiple

Formula: purchase price ÷ annual net cold rent

In the example: 140,000 ÷ 5,880 = 23.8. The multiple (Kaufpreisfaktor) tells you how many years' rent the purchase price corresponds to. In Oberfranken, typical multiples for apartment buildings are between 13 and 20, and somewhat higher for freehold flats in good locations. In Munich and Frankfurt, multiples above 30 are common.

Net rental yield

Formula: (annual net cold rent − non-recoverable costs) ÷ (purchase price + purchase costs) × 100

Non-recoverable costs are mainly management, maintenance and the risk of rent loss.

Continuing the example:

Here the net yield is 1.3 percentage points below the gross yield – which is typical.

Return on equity

Borrowing changes the picture. Suppose you finance €120,000 at 3.6% interest and put in €32,600 of equity:

If the loan interest rate is higher than the property's yield, financing pushes down the return on equity (negative leverage). Only rent increases, repayment, value growth and tax effects (depreciation, AfA) make the investment attractive. That is why higher starting yields – such as apartment buildings in Oberfranken often offer – are crucial for financed investments.

Don't forget cash flow

Besides the yield, cash flow counts: net operating income minus interest and repayment. A negative cash flow has to be covered from your ongoing income. For tax purposes, interest and depreciation count as deductible expenses (Werbungskosten) – see Depreciation on property.

Rules of thumb for Oberfranken

• Gross yields below 4% are usually only worthwhile in very good locations with potential for value growth.
• Apartment buildings with a gross yield of 5.5 to 7.5% are realistic in Hof, Kulmbach, Marktredwitz or Selb – provided the condition and tenant structure are checked carefully.
• Very high yields (over 9%) almost always point to risks: vacancy, a maintenance backlog, a weak location.

Second example: apartment building in Selb with positive leverage

An apartment building with eight flats, built in 1958, new roof and new heating in 2015, 520 m² of living space, purchase price €480,000, net cold rent €6.20/m².

Here the property's yield is above the loan interest rate – the leverage works positively. The price for this: higher risk in case of vacancy, an older building, and a location with weaker population trends than Bamberg or Bayreuth. Exactly this trade-off belongs in every decision. You will find suitable properties under Apartment buildings and Income properties.

Tax changes the calculation

Rental income is subject to income tax – but interest, depreciation (AfA) and running costs are deducted. For the apartment building in Selb, assuming an 80% building share and 2% depreciation:

At a personal tax rate of 35%, around €3,000 of income tax is due. Because depreciation is not an actual outgoing, the real cash inflow stays higher than the taxable profit. Details in the guides Depreciation on property and Tax-efficient investment.

Think over ten years

Returns do not come from the ongoing rent alone. A simple ten-year view for the flat in Hof from the first example:

Even an investment with a low starting yield can build wealth over time in this way – provided the location and lettability are right. At the same time, value growth is not guaranteed. In parts of Oberfranken with a falling population, you should not count on it. Data on this in the market report Demographics.

Sensitivity: what happens if …

A serious calculation tests how robust the investment is. For the apartment building in Selb:

If the unfavourable scenarios would not put you in difficulty, you have planned soundly. Also check the local rent index (Mietspiegel) before factoring in rent increases – see Rent index Oberfranken and Rent increases.

The key figures at a glance

Check the location before you calculate

The best yield calculation is of little use if the location is wrong. Before every investment, check:

The market report Demographics provides population data, and the Rent index Oberfranken provides rent levels.

Typical calculation mistakes

1. Asking rent instead of actual rent: the calculation uses the rent in the brochure that can supposedly be achieved on re-letting – not the actual contractual rent.
2. Treating the entire service charge (Hausgeld) as tenant costs: management and the reserve are paid by the owner.
3. No maintenance for the private unit: the bathroom, floors and kitchen age too.
4. Ignoring vacancy: even good flats stand empty for a few weeks when tenants change.
5. Forgetting the purchase costs: they increase the total investment by up to 9%.
6. Counting tax as a blanket positive: depreciation helps, but taxable surpluses also cost tax.

Yield and risk in Oberfranken

A balanced strategy often combines stable properties in the university towns with higher-yielding buildings in mid-sized towns. For commercial property see Valuing commercial property, for strategies Portfolio.

Rental yield for furnished letting

Furnished flats – for students, commuters or project staff, for instance – achieve higher rents. However, the calculation must account for additional costs: furnishings, faster wear and tear, more frequent tenant changes, cleaning and more management effort. The furnishings are depreciated for tax purposes over their useful life. In Bamberg and Bayreuth this can pay off; in locations with little demand for furnished housing, less so.