Investing in real estate may seem like a safe choice, but it is essential to fully understand the net yield that a rental property can generate.

Net yield is not just a measure of the money coming in, but the result of a careful analysis of the income and expenses associated with the property.

In some cases, real estate returns can be much lower than expected, which may lead investors to consider selling the property and reallocating the capital toward more profitable financial investments, such as an ETF portfolio.

In this article, we will analyze how to calculate the net yield of a rental property and assess whether it is worth keeping. Thy study will be done considering the Italy as base country.

Here’s what you’ll find:

• Rental yield calculation: a rational analysis
• Taxes and management costs: how much do they impact?
• Rental property management: costs and risks

Rental yield calculation: a rational analysis

To calculate the net yield of a property, we need to start with some key elements.

First of all, it is necessary to know the real market value of the property.

This is not always easy to estimate, especially when relying on non-objective sources, such as real estate agents who may inflate the value in order to secure a sales mandate.

To estimate the market value of a property, you have two options:

• make an approximate estimate using the real estate price database of the Italian Revenue Agency;
• request a valuation from real estate professionals.

Let’s look at them one by one.

Italian Revenue Agency Real Estate Price Database

To estimate the market value of the property, you need to enter the following parameters:

• Province
• Semester (always select the most recent one)
• Municipality
• Area/Zone (if you cannot find the exact one, choose the closest match)
• Type of use (residential for a primary residence; otherwise, evaluate based on the type of property)

In the end, you will obtain an approximate price per square meter based on statistical surveys, which cannot be fully accurate because they do not take into account the specific characteristics of your property.

For this reason, it is advisable to rely on professionals who specialize in property valuation.

Professional Appraisal by a Qualified Expert

This is the most accurate way to determine the market value of a property at a specific point in time, provided that the professional appointed has no conflict of interest.

Do not entrust the valuation of your property to someone who offers a free appraisal solely to secure a future mandate to sell your property.

Look for a professional who deals exclusively (or almost exclusively) with the valuation of residential or commercial properties.

You pay a fee and receive an impartial valuation of your property.

Once the value of the property has been determined, we can move on to calculating the gross annual rental yield, which is the total amount the tenant pays in rent each year.

Let’s assume your property is worth €200,000 and you receive €10,000 per year in rent.

At this point, we can calculate the gross yield percentage by dividing the gross annual rent by the value of the property.

In our example, the gross yield would be 5% (€10,000 / €200,000).

However, gross yield does not tell the whole story.

We must also consider all the expenses associated with the property, from property taxes (IMU, etc.) to ordinary and extraordinary maintenance costs.

For example, if the total annual expenses for the property amount to €3,000, the net rental income is reduced to €7,000.

The net yield percentage would then drop to 3.5% (€7,000 / €200,000).

This calculation is essential to assess whether the real estate investment is worthwhile or whether it might be better to sell the property and invest the capital in something more profitable.

Taxes and Management Costs: How Much Do They Impact Returns?

One aspect that property owners often overlook is the weight of taxes and ongoing expenses.

In Italy, for any property other than your primary residence, you are required to pay property taxes, such as IMU.

On top of that, there are taxes on rental income, which depend on the tax regime you choose, such as the cedolare secca, which applies a rate of 21% or 10% for regulated rental agreements.

These taxes further reduce the gross rental yield.

If your rental income is €10,000 and you pay the 21% cedolare secca, you immediately lose €2,100 in taxes.

Then there are property management and operating costs.

These include ordinary maintenance, such as repairing appliances or building systems, as well as potential extraordinary expenses, like roof replacement or energy efficiency upgrades.

According to ISTAT, ordinary maintenance costs for an average property can range between €1,000 and €2,500 per year.

If extraordinary interventions are required, such as a full renovation of the property, these costs can increase significantly.

When all these factors are taken into account, it is not uncommon for a property with an attractive gross yield to turn into an investment with a very low net return.

Managing Rental Properties: Costs and Risks

Managing rental properties is not just about receiving regular income.

The reality is that renting out a property involves various risks and challenges that can further erode net returns.

The first risk is tenant default: not all tenants pay on time, and payment delays can turn into months of unpaid rent.

In addition, if a tenant leaves the property, you may be left without income for weeks or even months while you look for a new renter.

Rental property management costs may also include fees paid to a real estate agency to find new tenants, as well as expenses related to handling potential legal disputes.

According to estimates from Immobiliare.it, management costs can easily reach 10% of a property’s annual income, further reducing net returns.

Given all these costs and risks, you are faced with a crucial question: is the property generating a return that justifies all these complications?

If your net yield is below 2% after accounting for all expenses and risks, it may be time to consider more profitable alternatives.

Investing in a distributing ETF portfolio could provide a more stable and higher income stream, with lower risks and management costs.

If, on the other hand, your goal is capital growth, you might opt for an accumulating portfolio, allowing you to maximize long-term returns without the difficulties associated with property management.

The underlying idea is that real estate ownership is not always the best investment.

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