How to Calculate the Profitability of Your Property

If you are considering buying a flat to rent it out, you are likely very interested in knowing the potential profitability because you are purchasing a property as an investment.

Investing in the real estate sector in 2022 was one of the main investment actions carried out in Spain. In September, the real estate sector recorded its best month in 15 years. According to experts on the real estate portal Idealista, "The total investment movement was approximately 15.2 billion euros during 2022." In 2023, it continues to be one of the top options for those who don't know where to invest their money safely in an environment of high stock market volatility and low returns on low-risk financial products.

Tips for Investing in Flats for Rent in Barcelona

At LuxHabitat, we evaluate many aspects when planning a new development and want to share some variables that help us create unique developments in Barcelona.

Here are aspects that help improve a property’s profitability:

• Is the location an ideal place to live? We recommend investigating if it is an area with high demand.
• Is it a comfortable and well-connected area?
• Are there urban amenities and services in the area?
• Is the location part of an interesting and promising urban development plan? This ensures that it is an area with potential for growth and improvement.
• Can an energy-efficient project be carried out?

Additionally, it is essential for investors to have a clear idea of what they are looking for in a property, regardless of whether they intend to live in it or not.

How to Calculate the Profitability of a Rental with a Mortgage

You can determine whether investing in a flat for rent is a good idea through various mathematical formulas. Before calculating the expected profitability, it is necessary to consider the price of the property you plan to buy and know its market value through an official appraisal. From there, it is also important to study the rental prices in the area to set the rental price future tenants will pay and determine if the operation is feasible and interesting in financial terms.

Calculate gross profitability, net profitability, and profitability with a mortgage using the formulas explained below; the results should be percentages:

Gross Rental Profitability

To calculate this figure, compare the relationship between the investment cost and the annual profit it generates.

Consider the following data:

• Purchase amount (a)
• Costs related to the purchase: taxes, notary, real estate fees... (b)
• Gross annual rental income (c)

Gross profitability: c / (a + b)

Net Rental Profitability

The difference between this result and the gross is that this one is more precise. It offers a real view by measuring the relationship between the investment cost and the profit it generates, considering fixed expenses.

Based on the previous structure:

• Purchase amount (a)
• Costs related to the purchase: taxes, notary, real estate fees... (b)
• Gross annual rental income (c)

Add the fixed expenses data:

• Rental expenses (taxes, community fees, other expenses): (d)
• Net annual rental income: (c - d) = (e)

Net rental profitability: e / (a + b)

Rental Profitability with a Mortgage

In most cases, people who choose to buy a property do so through a mortgage. It is necessary to be well informed of all loan details to make an accurate calculation. Let’s assume a partial mortgage, i.e., combining part of the loan with personal funds:

• Personal funds (a)
• Annual mortgage interest (b)
• Gross annual rental income (c)
• Rental expenses (d)
• Total expenses: (b + d) = e
• Net rental income: (c - e) = f

Net rental profitability with a mortgage: f / a

Obtaining Profitable Mortgages to Achieve Rental Profit Margins

If an investor needs a mortgage to finance the operation, simply relying on the price of a property is not enough; a cheap or economically profitable price can change its meaning when analyzing the conditions of that property.

When negotiating the mortgage, we recommend reviewing:

• The interest rate.
• Whether the mortgage is fixed or variable rate.
• If it involves the purchase of other financial products from the entity, such as life insurance, salary account, or other aspects.
• The cancellation conditions.

LuxHabitat and Its Promotions that Invite Investment

At LuxHabitat, we build homes with the well-being of their residents in mind. Innovation, sustainability, and quality are the fundamental aspects of our entire offer.

Come visit LuxHabitat's available developments that will make your investment a long-term profitability projection.