Read this to learn how to calculate your property’s gross rental yield, see the rental property expenses you can expect to pay and use these to calculate your property’s net rental yield.
Rental yields: Gross vs. net
When purchasing a property and estimating its rental yield (how much rent you will earn as a percentage of the property value), there are two calculations you should perform: the property’s gross rental yield and the property’s net rental yield. In short, the difference is that gross yields do not take into account rental property expenses.
Putting it even more simply: Gross yields only take into account your rental collections. Net yields represent the money you can bank after you pay all costs related to your property.
Basic ongoing rental property expenses
Please keep in mind this article gives estimates so you can get an idea of what you can expect to earn from a rental property. One of the services we provide our clients is to prepare very accurate net rental yield calculations, specific to their properties.
Here are the key rental property expense categories:
1) Bills
2) Legal
3) Property rental platform fees
4) Management Fees
5) Taxes
6) Refurbishment & decoration costs
1–Bills
These fall into three categories: Utilities, community costs and home insurance.
The best way to estimate the total bills you will be responsbile for is to estimate the number of rooms you will have in your future property, then read our Bill Estimation Article to estimate your total expected bill spend.
In the above linked article, we elaborate on the following fees:
- Community Costs: Our estimate is 1€/month per m2. Thus if you have a 100 m2 apartment and the building has an elevator, you can expct to pay 100€/month, which sums to 1,200€ per year. Again, this is an initial estimate because each building association mandates their own cost structure. We always review this for our clients to make sure no increases are planned.
- Insurance: Typically this is not expensive, but does need to be taken into consideration. Estimate 1,5€/year per m2. Thus you can expect to pay 150€ per year for a 100 m2 apartment.
2–Legal
Assume 100-125€ per quarter, which sums to 300-400€ per year.
This includes setting up the legal paperwork to optimize the way you buy your property (either as an individual, company or via another investment vehicle).
3–Property rental platform fees
We recommend focusing on Airbnb as they are winning the apartment rental game and continue to grow market share.
The cost is 4% of the revenue from each booking.
4–Management fees
Short-term
Our recommended property management company charges 20% VAT, including VAT.
This includes:
- Four star linen rental
- A bathroom amenity pack with each cleaning
- Access to an owner’s platform you can access at anytime to check your bookings
- Key handover to guests
- A Welcome Pack for guests, which includes a city map, tourist highlights and restaurant recommendations
- Spotless cleaning
- Laundry services for guests
- Rapid response time to all messages, in multiple languages, 24/7. Quick response time is vital for Airbnb. Guests may be consulting several apartments simultaneously and, if you are able to contact them before any other host, you have the advantage.
- Profile optimization across several different platforms.
5–Taxes
Plan for 25% of net revenues , as well as depreciation and amortization (tax concepts we can explain. Book a FREE CONSULTATION if you want to learn the details).
Again, as in all fiscal matters, the specifics depend upon on your investment, the property and your personal situation. We give very specific estimates for all our clients.
6–Refurbishment & Redecoration costs
In our experience, these run 60 €/m2 for light refurb/decoration, 800 – 1200€/m2 for full refurbishment. We have found that every 1€ invested in refurbishment and/or redecoration increases return by 1.5€, so we almost always recommend a full refurbishment.
Rental property expenses summary
If you are looking to rent your Madrid apartment, expect your net yield to be half your gross yield. In other words, out of your total rental revenues, half will go towards rental property expenses.