1. Rental Yield
Rental yield is how much money you make from renting out a property compared to how much the property costs. It’s usually expressed as a percentage.
Example:
You buy a property for €300,000.
You rent it out for short-term stays and make €50,000 per year in rental income.
This €50,000 assumes a 70% occupancy rate over 365 days, based on rental rates of similar properties in the area. It's worth noting that some comparable properties achieve over 90% occupancy throughout the year, but we use 70% here to remain conservative in our calculations.
To calculate the rental yield:
Rental Yield = (Rental Income ÷ Property Price) × 100
Rental Yield = (€50,000 ÷ €300,000) × 100 = 16.67%
So, your rental yield is 16.67%. This tells you how much income you’re getting from your property as a percentage of what you paid for it.
2. Annual Growth
Definition: Annual growth measures how much the property’s value increases each year.
Example:
- Initial property price: €300,000
- Value after 1 year: €315,000 (5% growth)
Annual growth is calculated as:
((New Value - Old Value) ÷ Old Value) × 100
In this case: ((€315,000 - €300,000) ÷ €300,000) × 100 = 5%
So, the property’s annual growth rate is 5%.
3. ROI (Return on Investment)
ROI measures the total return on your investment, including rental income, property appreciation, and deducting costs like maintenance or management fees.
Example:
You bought the property for €300,000.
- Annual rental income: €50,000
- Property value increase (5% annual growth): €15,000
- Annual costs (20% of rental income): €10,000
To calculate ROI:
ROI = [(Profit from Rental Income + Capital Gain - Costs) ÷ Total Investment] × 100
Where:
Profit = Rental Income + Capital Gain - Costs = €50,000 + €15,000 - €10,000 = €55,000
Total Investment = Property Price = €300,000
ROI = (55,000 ÷ 300,000) × 100 = 18.33%
So, your ROI is 18.33%, reflecting combined returns from rental income and property appreciation, after accounting for costs.
How Long Does It Take to Double Your Investment?
Combining Rental Income and Annual Growth
Using our example:
- Net annual rental income after costs: €40,000
- Annual growth in property value: €15,000
- Total annual return: €40,000 + €15,000 = €55,000
To double the initial investment (€300,000 → €600,000):
Time to Double = Initial Investment ÷ Annual Return
Time to Double = 300,000 ÷ 55,000 ≈ 5.45 years
How to Apply These Metrics Yourself
To better understand the potential of a property investment, try applying this formula and these metrics in your own research. Find a villa of similar standards and location on platforms like Booking.com or Airbnb. Estimate its rental potential by assuming a 70-90% occupancy rate over 365 days, and calculate the annual rental income. From there, you can calculate the rental yield and ROI based on your findings. This simple exercise can give you confidence and clarity when evaluating properties.
How These Metrics Work Together
- Rental Yield tells you how much income you’re generating annually.
- ROI combines rental income, appreciation, and costs to show overall profitability.
- Annual Growth highlights how much the property’s value increases year over year, which contributes to higher ROI.
Together, these metrics provide a clear and comprehensive view of your property investment’s performance, helping you make smarter financial decisions.
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