How to Calculate Rental Property Return on Investment

"This flat rents for €800 a month, it's a great deal." Is it really? Impossible to know without calculating the return. And not just any return — because there are several, and they don't tell the same story.

A property that looks profitable on the surface can turn out to be mediocre once you factor in expenses, taxation, and the cost of borrowing. Conversely, a modest property can be an excellent investment thanks to mortgage leverage.

This article gives you the formulas, examples, and pitfalls you need to evaluate a rental investment properly.

Three Levels of Return

Gross Yield: The First Filter

This is the simplest and quickest calculation. It's for filtering — not for deciding.

Gross yield = (Annual rent ÷ Purchase price) × 100

Example: you buy a flat for €200,000 and rent it for €800 per month.

Annual rent = 800 × 12 = €9,600 Gross yield = 9,600 ÷ 200,000 × 100 = 4.8%

It's an order of magnitude. Useful for quickly comparing two properties, but insufficient for making a decision — because it doesn't account for expenses, taxes, or acquisition costs.

Benchmarks: in France, a gross yield of 3-4% is common in major cities (Paris, Lyon, Bordeaux). In medium-sized cities, 5-7% is more typical. Above 8%, check the risk carefully (vacancy, neighbourhood, property condition).

Net Yield: The Reality of Expenses

Net yield incorporates the real costs you'll bear as a landlord.

Net yield = ((Annual rent − Annual expenses) ÷ (Purchase price + Acquisition costs)) × 100

Annual expenses include: non-recoverable service charges, property tax, landlord insurance, management fees (6-8% of rent if using an agency), vacancy provision (budget 1 month per year, or 8% discount), and maintenance provision.

Acquisition costs include: notary fees (7-8% for existing properties in France, 2-3% for new builds), agency fees where applicable, and initial refurbishment costs.

Let's revisit our example with realistic figures:

• Purchase price: €200,000
• Notary fees: €16,000 (8%)
• Annual rent: €9,600
• Non-recoverable charges: €600
• Property tax: €1,200
• Landlord insurance: €200
• Vacancy provision (1 month): €800
• Maintenance provision: €500

Net rent = 9,600 − 600 − 1,200 − 200 − 800 − 500 = €6,300 Total cost = 200,000 + 16,000 = €216,000 Net yield = 6,300 ÷ 216,000 × 100 = 2.9%

We've gone from 4.8% gross to 2.9% net. This is the reality of many rental investments in major cities. Net yield is what actually goes into your pocket before tax.

After-Tax Return: The Bottom Line

The final level incorporates taxation — and this is where it gets complicated, because taxation depends on your tax regime, your other income, and your personal situation.

Tax treatment varies enormously by country. In France, rental income can be taxed at your marginal income tax rate plus social charges (17.2%), or benefit from various deductions depending on whether the property is furnished or unfurnished. In the UK, mortgage interest relief has been restricted but other deductions remain available.

The after-tax return is what truly matters — it's what you're left with at the end of the day. But it's personal: two people buying the same property at the same price will have different after-tax returns depending on their tax situation.

The Leverage Effect: The Real Engine of Rental Property

If rental property were limited to a 3% net return, nobody would bother — a good ETF does better with less hassle.

What makes rental property interesting is mortgage leverage. You invest with the bank's money, and the tenant repays the mortgage for you.

Let's take an example:

• You buy a property for €200,000 with a €20,000 deposit and a €180,000 mortgage
• Monthly rent: €800. Monthly mortgage payment: €750
• After expenses and tax, you break even (the investment costs you nothing each month)

After 20 years, the mortgage is paid off. You own a property worth €200,000 (probably more with appreciation) for an initial investment of €20,000. That's a considerable return on equity.

It's also a risk: if the property loses value or you experience prolonged vacancy, the mortgage still needs paying. Leverage amplifies gains, but also losses.

Pitfalls to Avoid

Only looking at gross yield. This is the most common mistake. A property advertised at 8% gross can drop to 3% net once expenses and vacancy are factored in. Always do the full calculation.

Underestimating vacancy. One month of vacancy is 8% of your annual rent gone. In some cities, that's realistic. In others, it's optimistic. Research the local rental market before buying.

Forgetting maintenance. An attractive older property can hide significant works: roof, facade, compliance upgrades. Budget at least 1% of the property value per year for maintenance.

Ignoring taxation. The choice of tax regime can tip an investment from profitable to mediocre (or the reverse). The difference between regimes can be 2 percentage points of return.

Buying in a city you don't know. Paper returns say nothing about neighbourhood quality, rental demand, or future prospects. Real estate is local by nature.

Integrating Rental Property into Your Overall Wealth

A rental investment doesn't exist in isolation. It's part of your overall wealth, and should be evaluated in that context.

If your primary residence is worth €300,000 and you buy a rental property for €200,000, real estate suddenly represents over 80% of your wealth. That's a concentration worth thinking about.

Similarly, the associated mortgage impacts your debt-to-asset ratio. A ratio going from 30% to 55% with the rental purchase changes your risk profile.

That's why a wealth simulation is so useful before buying: it shows you the impact of the rental property on your entire wealth — not just the isolated return of the property itself.

Conclusion

Calculating rental property return isn't just dividing rent by purchase price. It's a three-level exercise — gross, net, after-tax — that gives you an increasingly realistic view of what the property will actually earn you.

Rental property remains an excellent wealth-building vehicle, especially thanks to leverage. But it's an investment that needs to be calculated, simulated and tracked — not a bet based on a feeling.

Do the maths before buying. Integrate the property into your overall wealth picture. And track its performance over time, like any other asset.