"Many fall victim to the yield trap"
- Caution advised when viewing property advertisements
- Net yield is crucial
A profound fear of inflation triggered by the debt crisis has fuelled the demand for rental properties. Residential property is seen as a safe investment, and many first-time investors are currently investing in apartments or flats. It is essential that the risk-return profile of residential property investments be evaluated correctly so that buyers do not fall for questionable yield promises. "Many fall into the yield trap and confuse net return with gross return", explains Robert Anzenberger, managing director of Bank Austria ImmobilienService (BA-IS).
'Attractive flat for an investment return of 7%': statements such as this are constantly being used to advertise property. "At a time when interest rates are low, yield descriptions like this can be very tempting. However, many people fail to realise that this is the gross yield," observes Anzenberger. The net yield should be the deciding factor, since this denotes the actual investment earnings.
A simple formula is used to calculate the gross yield: the annual rent x 100, divided by the purchase price of the property. For example: Given a purchase price of EUR 550,000 and an annual rental yield (net) of EUR 42,000, the gross yield is calculated as follows: EUR 42,000 x100 / EUR 550,000 = 7.6 %. "Of course, these figures look great", admits Anzenberger. "But the real calculation only starts now. Essentially, all additional costs incurred must be deducted from the gross yield. These can be deducted from tax, but they cannot be apportioned to the tenant. These include the acquisition costs (around 10% of the purchase price), maintenance fees (between 6 and 12 euro per square metre annually), and property management fees (between 200 and 300 euro per year).
The risk-return profile also changes when a loan is taken out. According to Anzenberger, "it is important to bear this in mind when investing in property, because this type of investment is seldom financed in full". When finance is obtained through borrowing, the loan interest must also be deducted from the gross yield.
"There is also a risk of losing rental income", Anzenberger points out. The location of the property is therefore a crucial factor. "In popular cities and regions, where accommodation may be in short supply, it is highly improbable that the rental property will be vacant." In addition, the expected yield is influenced by the condition of the property. If renovation work causes a holdup, the necessary capital investment pushes down the profit.
Calculating the gross yield is not an art. According to BA-IS, however, the net yield depends on a myriad of factors. A qualified analysis of the individual aspects should therefore precede every transaction. Anzenberger advises prospective buyers, as well as those selling property, to consult a specialist. "Ultimately, anyone who blatantly advertises rented properties with the gross yield should not be regarded as trustworthy".
Bank Austria ImmobilienService, a subsidiary of UniCredit, was founded in 2001 for the purpose of expanding Bank Austria's customer services. The company has for ten years been specialising in offering real estate brokerage services while also advising customers and meeting their specific needs.
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