Rental profitability with short-term rentals
When investing in real estate to rent one or more properties, various terms need to be aware of. The expression “rental profitability” is one of them. What is it about? What about rental performance with short-term rental returns? Our answers.
What is rental profitability?
Do you want to invest in real estate to rent out? The concept of rental profitability (or rental yield) is a must. Because, when we invest in stone to rent, we generally do so hoping for the highest possible profitability. But what is rental profitability? This is the relationship between the investment made and the rents received each year. The basic formula for calculating gross rental income is as follows:
(Monthly rent X 12 months) X 100/purchase price of the property.
When evaluating the profitability of a rental investment, it is imperative to take into account various factors that can influence rental performance beyond the aspects commonly mentioned. In addition to the cost of acquisition and the risk of vacancy, a crucial element to consider is the intrinsic nature of the property. For example, it is often found that smaller units, such as studios or T1 apartments, tend to generate more lucrative returns than larger units like T4, T5, or houses. However, it is important to note that while smaller units may have higher incomes, they may also be subject to more frequent turnover and vacancy rates.
With this formula, you get a so-called return percentage. Depending on the city in France, rental profitability can vary from 3.5% to 10% gross. More concretely, if you rent a property and the rental yield is 4%, for example, this means that the amount of annual rent will bring you (always gross) 4% of the amount invested in the property (4000 euros gross for a property of 100,000 euros, for example).
The location of the property also plays a key role, especially in popular neighborhoods where real estate prices are higher, potentially leading to lower rental returns. This is a crucial aspect to consider before making any investment decision. In addition, the length of periods of vacancy can have a negative impact on overall performance. For example, if a property is only rented for 10 months a year, the profitability will be lower than that of a property rented throughout the year.
The overall condition of the property should not be overlooked. Major renovations or repairs may be required, and while rental income may cover these expenses, it may not generate substantial profits. Finally, property taxes also have a significant impact on rental yield. Tax rates that vary from city to city can significantly affect the overall profitability of an apartment or house.
In conclusion, to assess the factors affecting rental profitability, it is essential to consider not only the cost of acquisition and the risk of vacancy, but also the nature of the property, its location, its condition and the applicable taxes. Careful evaluation of these elements allows investors to make informed decisions and optimize their rental performance.
Differentiating rental return and return on investment (ROI)
As we told you earlier, many terms are used in the real estate world and it is important to know them especially when you want to invest. We have just explained to you what rental yield is. Note that this term is different from return on investment (ROI), also known as financial return. The ROI (return on investment) is also expressed as a percentage, but the formula for calculating it differs from that of the gross rental return. To calculate the ROI, you need to do:
(money earned or lost with the investment — cost of this investment)/cost of the investment
For an investment of 100,000 euros with 9,000 euros in annual earnings, we arrive at an ROI equal to: (9,000 — 100,000)/100,000 = — 0.91%. So a negative ROI.
Short-term rental and rental profitability
Buying to offer short-term rentals? It's not always easy! In Paris, landlords offering short rentals are being hunted, while in condominiums, this category of rentals is often prohibited. In addition, in terms of cleaning and management costs, short-term rentals are expensive, especially if you use a dedicated company. If you take care of these tasks yourself, be aware that they are relatively time-consuming.
In addition, who says regular change of tenant (s) says greater and faster wear and tear on the property. You will also have more visits to manage throughout the year, which requires time. Finally, note that the development of sites like AirBnb has caused short-term rental prices to fall. If, despite these few negative points, you still want to opt for short rentals, various tips should be followed:
Know the market well;
Perform various preliminary calculations and verify its financing;
Be realistic about rental profitability goals;
Offer a property in very good condition (work done, neutral decoration...);
Set the rent accurately;
Be sure to inquire about interested tenants;
Verify that you are in compliance with the most recent laws (and the oldest ones as well);
Make an inventory of the incoming and outgoing premises with photographs and accurate notes.
A short-term rental can be synonymous with very high rental profitability. But it's a complex choice. You must therefore carefully weigh the pros and cons and be sure of yourself before starting.
In summary of short-term rental profitability
Rental profitability is obtained by performing the following calculation: (monthly rent X 12 months) X 100/purchase price of the property. It is different from the return on investment, which is calculated in this way: (money earned or lost with the investment — cost of this investment)/cost of the investment. With a short-term rental, it can be as low as it is high. You must therefore be sure of your choice before making a commitment.
Are you looking for a property in the Paris region? Do you want to invest and then rent? Entrust the research and other steps to us, and save time and money. Do not hesitate to contact us for more information and/or to arrange an appointment date.
