Rental yield ratio applies only to cash purchases

The rental yield ratio is only valid if a property is purchased in cash, according to a report. It is calculated as annual net rent divided by the purchase price, measuring the return on investment for a full cash purchase. When purchasing on credit, the full price of the property is not mobilized, and instead, monthly savings efforts should be compared to the final gain. This effort includes monthly payments, unrecoverable charges, and property tax, minus rent.

Example of a cash purchase calculation

A concrete example involves a new T1 bis apartment priced at 130,000 euros. Assuming a monthly rent of 500 euros, a 100 percent loan over 20 years at 3.5 percent, unrecoverable charges of 30 euros per month, and property tax of 500 euros per year, the net annual income for a cash purchase is 5,140 euros, resulting in a net rental yield ratio of 3.95 percent.

Example of a credit purchase calculation

For a purchase on credit, the monthly payment is 754 euros, plus charges and property tax of 72 euros, minus rent of 500 euros. The monthly effort is 326 euros. Over time, the total paid amounts to 39,100 euros, with a resale value of 53,800 euros after 10 years, yielding a gain of +38 percent without an initial deposit.

Credit financing increases returns

The same apartment yields 1.6 times more when financed with credit compared to a cash purchase, according to the report. The leverage effect also applies to the property's value. A 1 percent annual revaluation results in a 10.7 percent annual return, while a 2 percent annual revaluation results in a 14.5 percent annual return.

Tax schemes reduce costs and increase returns

In new properties, the Jeanbrun and LLI-Jeanbrun schemes allow for the reduction or neutralization of the taxation of rent. These schemes further reduce the monthly effort and increase the return.

Expert advice on real estate investment

"A real estate investment should not be judged by its stated yield, but by what it costs you each month and what it leaves you with at the end. With the leverage of credit and an appropriate tax scheme, new properties become a powerful tool for building wealth," according to Patrick-Olivier EQUOY, Director General of the SMCI group. SMCI, a real estate developer in Besancon, Lyon, and Paris, performs simulations of actual effort and guides individuals toward the most suitable scheme for their situation. The simulation is indicative and excludes borrower insurance, notary fees, rental vacancy, and taxation.