How to calculate the profitability of a rental: methods and keys to maximise your investment

Investing in rental properties can be a smart financial decision, but to make it truly profitable, you need to understand and know how to calculate rental profitability.

That's why, to help you a bit more with this topic, throughout this article, we want to explain in detail how to calculate rental profitability, what factors affect this calculation, and what tools you can use to make the process easier.

Pay attention!

Why it's important to know rental profitability

Calculating rental profitability not only allows you to measure the economic viability of your investment, but it also helps you make informed decisions to maximize your income and reduce risks.

Gross Profitability vs. Net Profitability: Key Differences

There are two main types of profitability you should know:

  • Gross Profitability: measures the annual income obtained from the rent as a percentage of the total cost of the property, without considering additional expenses.
  • Basic formula: Gross Profitability = Annual rental income / Total property cost x 100
  • Net Profitability: includes in the calculation recurring expenses such as taxes, insurance, maintenance, and other costs associated with the property. This indicator is more realistic for evaluating the return on investment.
  • Basic formula: Net Profitability = Annual net income / Total property cost × 100

How profitability affects a real estate investment

Profitability is a key parameter for comparing different investment options. Here's an example:

If a property offers a 5% gross profitability and another offers 3%, at first glance, the first seems more profitable. However, when you include expenses and calculate net profitability, the second property might be more beneficial because it has lower maintenance or tax costs.

Profitability also tells you how long it will take to recover your initial investment, which is crucial for your financial planning.

Methods for calculating rental profitability

There are several methods for calculating the profitability of an apartment, from basic formulas to advanced tools that simplify more complex calculations.

Formula to calculate the gross profitability of a rental

The calculation of gross profitability is the simplest starting point:

  • Determine the annual income the property generates. For example, if you rent for 800 € per month, the annual income will be 800×12 = 9600€
  • Divide the annual income by the total acquisition cost of the property, including the purchase price, taxes, and deed costs.
  • Multiply the result by 100 to get the percentage.

Example:
Purchase price: 150,000 €
Annual income: 9600 €
Gross Profitability = 9600 / 150,000 × 100 = 6.4%

How to calculate net profitability including expenses and deductions

The calculation of net profitability is more detailed because it requires accounting for all the associated annual expenses:

  • Identify the expenses: includes maintenance, insurance, taxes, community fees, and possible periods when the property is not rented.
  • Subtract the expenses from the annual rental income.
  • Apply the formula.

Continuing with the previous example:
Annual income: 9600 €
Annual expenses (maintenance: 500 €, insurance: 300 €, taxes: 700 €): 1,500 €
Net income: 9600 − 1500 = 8100€
Net Profitability = 8100 / 150,000 × 100 = 5.4%

Practical example of profitability calculation

Let's suppose we buy a property for 200,000 €, rent it for 1,000 € per month, and have annual expenses of 3,000 €.

  • Gross profitability calculation: 12,000 / 200,000 x 100 = 6%
  • Net profitability calculation: Net income: 12,000 – 3000 = 9000€
    Net Profitability: 9000 / 200,000 x 100 = 4.5%

ow to calculate net rental profitability in Dénia

Tools to simplify profitability calculation

Nowadays, there are several digital tools that simplify profitability calculations.

  • Online financial calculators: platforms like Excel or Google Sheets have pre-configured formulas that you can customize.
  • Specialized applications: tools like IRR Calculator or Real Estate ROI Calculator allow you to analyze multiple scenarios at the same time.
  • Generic financial software: programs like Quicken or YNAB also offer modules for managing and evaluating real estate investments.

These tools can be especially useful for running simulations and making data-driven decisions.

Key factors for calculating the profitability of a real estate investment

To accurately evaluate the profitability of a real estate investment, it is essential to consider several factors that can affect your earnings. These elements not only influence the investment's performance but also its long-term sustainability.

Impact of location on rental profitability

Location is one of the most determining factors in rental profitability:

  • Rental demand: central areas, well-connected and with nearby services tend to have high demand, which allows for higher prices and reduces vacancy periods.
  • Local market: in large cities, such as Madrid or Barcelona, ​​yields can vary significantly between neighborhoods due to specific supply and demand.
  • Property appreciation: a location with potential for appreciation can also increase the total return on investment in the long term, in addition to rental income.

Example: a property in a university area may guarantee constant occupancy, while one in rural areas may have lower demand, directly affecting profitability.

Effects of financing

The way you finance your investment also has a significant impact on profitability. Here are the reasons:

  • Mortgages and interest rates: if you finance the purchase with a mortgage, the interest paid will reduce net profitability. Choosing a fixed or variable interest rate can also influence depending on the economic context.
  • Financed percentage: the higher the financed percentage, the lower the initial investment, but the interest costs will increase.
  • Financial leverage: while using financing can increase your investment capacity, it also carries risks, such as not being able to cover the installments in case of periods without tenants.

Example: if you invest 50,000 € in cash instead of financing the purchase, you will avoid paying interest, but the percentage profitability of your investment may be lower due to the high initial cost.

Costs associated with the investment: maintenance, taxes, and insurance

Costs associated with the property are a crucial element in calculating net profitability. Some of the most common expenses are:

  • Maintenance: repairs, renovations, and general care of the property are necessary to keep it in optimal condition and attract tenants.
  • Taxes: includes property taxes (IBI), capital gains, and, in some cases, rental taxes.
  • Insurance: homeowner insurance protects the investment from risks like fires, damages, or unpaid rent, but it is a recurring expense.
  • Community fees: if the property is part of a building or development, community fees are unavoidable.
  • Vacancy periods: you should anticipate periods when the property is not rented, which will directly affect your income.

We recommend creating a detailed budget and considering conservative scenarios to ensure that the income is enough to cover these costs.

Got more questions about profitability? We’re here to advise you

Understanding rental profitability is crucial for making informed decisions in the real estate market. However, we know that each investment has its particularities. If you have more questions or need personalized advice, at Emiris Homes, we are here to help.

We can analyze your needs and offer you personalized strategies to maximize your profitability and minimize risks. Come visit our real estate agency in Dénia and tell us your case, we’ll be happy to contribute our expertise.

Latest news
© 2025 Emiris Homes - All Rights Reserved Software Inmobiliario Sooprema
Manage consent

We use our own and third-party cookies to personalize the web, analyze our services and show you advertising based on your browsing habits and preferences. For more information visit our Cookies Policy

Accept cookies Configuration Reject cookies