Calculate Gross Return

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1. Which input parameters do you need to calculate the gross return?

Please provide the purchase price, the basic rent and the time unit (per month or per year) of the basic rent. Usually, the gross return is defined by the raw purchase price not including the additional costs such as realtor provision or notarial charges.

2. What is the basic rent?

The basic rent does neither contain the transferable nor the non-transferable operation expenses. The basic rent is the rent paid by the tenant, which covers only the surrender of use of the property. You can find the basic rent in the rental agreement. The basic rent is also called net rent or net rental income.

3. Why do you need the gross return?

The gross return might be used as a first rough assessment of an investment. It represents the percentage of the annual basic rent on the purchase price.

4. How to calculate the gross return?

You can calculate the gross return by multiplying the annual basic rent with 100 % and then divide by the purchase price:
$$\text{gross return p.a.} = \frac{\text{basic rent p.a.} * 100\%}{\text{purchase price}}$$
Usually, the purchase price used here is without additional buying costs such as transfer tax, notarial charges or realtor provision.
The basic rent is the rent, which covers only the surrender of use of the property. Important values, which influence the investor's cashflow, such as the non-transferable operating expenses or the maintenance fee are not included here.
From the landlord's point of view the basic rental income per year is the same as the gross rental income per year. However, this should not be confused with the gross rent, since the gross rent is a term used from the tenant's point of view, since it includes all operating expenses for the tenant.

5. How to interpret the gross return?

The gross return represents the percentage of the annual basic rent on the purchase price. The higher the gross return, the faster the property can amortize itself theoretically. An amortization takes place, if the investment is able to pay for itself from the incoming cashflow solely.
There is a general saying, that the higher the return on an investment, the higher the risk of this investment. However, the gross return is not able to provide a realistic statement, since many factors are not taken into account. For a more realistic assessment you should consider the negative cashflow positions, such as the non-transferable operating costs or the maintenance fee. These factors can influence the actual return on the investment, or the actual cashflow quite considerably. Furthermore, the state of the property should be taken into account as well, since planned or unplanned restorations can decrease the ROI (return on investment) at least in the short-term. Additionally, possible financing costs should be kept in mind to calculate the ROI for the property investment.

6. How high should the gross return be?

The gross return is a number, that is determined by each investor individually, since it reflects his/her personal investment desires. The gross return is applied as a rough first assessment to pre-select investments. The following questions might be useful for your considerations:
  • Do I want a property investment to grow my capital using a positive cashflow?
  • How important is a long-term increase of the property value to me?
  • Are there high costs up front for restorations or repairs?
  • Do I need financing and if yes how high are the costs?
  • Do I want to have a tax reduction with my property investment?
It is important that you become aware of your individual needs as an investor. Once you've figured that out for yourself, you can start observing the property market and make your own calculations to get a feeling for the current prices and return rates. Please keep in mind, that the gross return is only a rough indicator, since important cashflow factors such as the non-transferable operating costs and maintenance fee are not taken into account. That's why you can sort our property investment search results using the more meaningful net return.
Last modifed: Jan 28, 2022
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