The key idea
Evaluate operating yield before financing separately from cash left after loan repayments. A positive yield does not mean rent will cover every monthly cash outflow.
Use a consistent comparison basis
A percentage needs a clearly defined denominator. An advertised gross yield may use the purchase price alone; an assessment of the full project can include acquisition costs and refurbishment.
Our fictional property costs €180,000. With €14,000 in acquisition costs and €6,000 in works, the total investment is €200,000. Monthly rent of €800, excluding tenant charges, would generate €9,600 with full occupancy.
Gross yield on the purchase price is €9,600 / €180,000 × 100 = 5.33%. On the full project cost it is 4.80%. Both figures describe the same property using different methods.
Only compare yields calculated on the same basis.
Move from potential rent to net income
Allow for owner-paid maintenance, insurance, management and non-recoverable expenses. For French properties, ANIL also highlights local market conditions and property-specific constraints.
Assume one vacant month and €2,400 in annual owner expenses. This leaves €6,400 before loan payments and rental income tax. Against the €200,000 total investment, the net yield defined here is 3.20%.
Source : ANIL — Investissement locatif (in French)
| Item | Amount |
|---|---|
| Potential rent: €800 × 12 | €9,600 |
| One vacant month | −€800 |
| Annual owner expenses | −€2,400 |
| Net income before loan and income tax | €6,400 |
| Yield on full project cost | 3.20% |
Calculate cash left after the loan
Now assume monthly loan payments including insurance of €700, or €8,400 a year. The €6,400 net operating income does not cover them: annual cash flow is −€2,000, averaging approximately −€167 a month before tax.
An annual average does not reflect payment dates. Repairs or property tax may fall due in a lump sum, so cash reserves must also cover those timings.
For cash-flow purposes, the whole loan payment is an outflow. However, principal repayments reduce the debt. Cash flow and changes in wealth are different measures. A total investment return would also account for eventual resale, transaction costs and taxes.
€6,400 − (€700 × 12) = −€2,000 a year before tax.
Test a less favourable year
Two vacant months instead of one reduce receipts by another €800. Annual cash flow becomes −€2,800, or about −€233 a month on average. An additional €1,500 repair would bring that year to −€4,300.
These scenarios are not forecasts. They show the cash you would need if assumptions worsen. Replace the example amounts with property documents, quotes and comparable rents.
Tax treatment depends on the rental arrangement and applicable regime. Pre-tax cash flow is not after-tax disposable income. Assess taxation separately and ensure that no expense is deducted twice.
- Allow for longer vacancies and unexpected work.
- Check precisely which expenses a quoted yield includes.
- Assess cash flow, taxes and resale value separately.
Before you take the next step
- I included acquisition costs and works.
- Rent excludes tenant charges and vacancy is explicit.
- I distinguish operating yield from cash flow after financing.
- I tested a weaker year and assessed tax separately.
Try your own numbers
Terms in this guide
Educational content. Examples are illustrative and simulations are not personalised advice.