Real estate yield: what it is and how it is calculated

Real estate yield: what it is and how it is calculated

24 July 2023





The real estate rental sector in Italy has provided investors with an average revaluation of 43.3 percent over 25 years (1998 - 2022), according to the conclusion reached by a recent survey by an Italian operator in the sector. A revaluation that does not leave savers interested in real estate and the real estate yield that precisely can be derived from it indifferent.

The data refer only to rentals and not to the entire Italian real estate sector, which is also composed of the buying and selling of real estate. However, it is indicative of the real estate return that can be derived over the long term.

Our purpose is precisely to understand what return can be derived from investing in real estate, illustrating in detail the importance of calculating and evaluating the return on a property well, as well as conducting in-depth analyses on the type of property and the geographical area where we are potentially interested in buying.

What is real estate yield

Before we get to the calculation of a property's yield, it is important to understand what real estate yield is and how it is defined. In practice, yield comes from the investment of one's savings in the purchase of real estate (commercial premises, land) for resale at higher prices or through the rental of the same.

After deducting purchase, management and tax costs, a real estate yield is obtained, which can be:

  • continuous when the real estate asset is leased out
  • through real estate capital gain when buying and selling is practiced

Definition of real estate yield

If we wanted to find a definition of real estate return, we can infer it from the more general economic return on an investment.

"The return, or economic return, on real estate investment is obtained as a function of the purchase price of a property and the cash flow generated."

In fact, the real estate return is nothing more than an economic return on an investment of money made to purchase the property and on which we expect a gain over the short term (buying and selling) or the long term (rent).

Importance of real estate return in real estate investment

From the definition just read, it can be understood that the return from real estate investment is basic when one decides to commit sums of money (one's savings) to the real estate sector.

Specifically, the real estate return in real estate investment is the expected gain at the end of the buying and selling transaction, or year after year from the rent. This is, of course, net of management fees and taxes due.

Before embarking on any form of real estate investment, therefore, it is imperative to estimate the real estate return that will result from the use of one's cash.

Types of real estate yield

Regarding the types of real estate returns, we must first distinguish between the available ways of entering the real estate sector:

  • investment in shares of real estate companies
  • direct purchase of real estate
  • real estate equity crowdfunding

Each mode of entry generates a different return. In the case of shares, the return comes from any dividend recognized on the shares held and the capital gain generated when the shares are sold.

The direct purchase of real estate, on the other hand, generates a real estate annuity upon completion of the sale of the real estate or on the rent.

Real estate equity crowdfunding, on the other hand, provides a return from the shares acquired. A real estate crowdfunding project aims to finance the purchase of a property for renovation or construction, which will be marketed (often sold) to make a profit. As we will see, this mode of investment is among the most profitable.

How to calculate real estate yield

Having understood the importance of real estate yield and the main types of real estate investments that can generate a financial return, let's move on to calculations to understand concretely how much an investment in real estate can yield.

Formula for calculating real estate yield

To calculate the return on a property, whether commercial or residential, we use a procedure that first involves calculating the property's annual gross income, which is composed of operating costs and taxes. Then we subtract the costs (management and taxes) to get the net return.

Then we calculate the rate of return by relating the net income and its original price. The formula for calculating the net property return (in percent) is as follows:

Profitability % = (Net Income / Total Property Cost) x 100.

To understand how much a real estate investment can yield, let's draw a parallel between two investments that are similar in time and amount invested. In our example, let's assume a €250,000 investment over 24 months.

Buying the property directly, we immediately realize that the amount invested is not enough because it does not cover taxes, the notary and other expenses related to the management of the same, which out of the total are well over 20 thousand euros. In contrast, the total costs in real estate crowdfunding are zero. The difference can also be seen in the gross return on annual rent, which is €21,600 in real estate investment and €60,000 in real estate crowdfunding. The latter is the only item on which the real estate crowdfunding investor will have to pay something, namely the 26 percent tax on capital gains calculated at €15,600. At the end of the two-year investment, therefore, traditional real estate will have returned 3.86 percent net annually, while real estate crowdfunding will have returned 8.52 percent net.

Evaluation and interpretation of the result

How to evaluate the result obtained from the real estate return calculation? You can make an initial assessment by comparing the percentage return with annual inflation in Italy, the official figure for which is provided by Istat.

If your goal is to invest through real estate equity crowdfunding, in this case the returns go up due to the fact that the costs are diluted among the many participants in the investment.

With Mamacrowd, for example, the return on an investment through real estate crowdfunding is between 12 percent and 15 percent with an average duration of 24 months. A return that beats inflation by far, allowing real returns to be collected.

How to assess the potential of a real estate investment

Calculating the value of a property using the above formula is a starting point, but not a sufficient one in the valuation process. When evaluating thepotential of an investment property, there are many factors to take into account.

You will have to take into account the purpose of the property (commercial use, storage, tourist, etc.), the location and the urban dynamics at work in the neighborhood where the property is located.

In a nutshell, you will need to conduct a proper real estate market analysis.

Real estate market analysis

Where to start when conducting a good real estate market analysis? The options on the table are many and are not mutually exclusive; on the contrary, they complement each other.

Starting by reading specialized articles published in business newspapers is useful to get an overview of real estate market trends in Italy.

For deeper analysis on the regional level, the data made available by the Internal Revenue Service through the Real Estate Market Observatory, whose publications offer quarterly statistics on real estate market trends, as well as regional statistics and reports on residential and nonresidential properties, are valuable.

Industry studies made available by real estate companies will also prove useful to your analysis.

Identifying the geographic area and type of property

Having gathered initial information and conducted a more "macro" analysis, you move on to choosing the type of property and identifying a geographic area of interest.

In terms of geographic area, this means not only choosing a city (Milan, Bologna, Bari), but also assessing individual neighborhoods in the city or cities of interest. Evaluation of the municipalities (or neighborhoods) to be done taking into account any master plan and developments taking place in the area: redevelopment from post-industrial to service center; conversion to residential area.

The choice of property can be made a priori according to a well-defined strategy, or according to the "vocation" of the selected geographic area.

Let's say we want to invest in real estate related to summer and winter tourism activities. The choice of the type of property will have to be made in two distinct locations, which may be a seaside location and one related to winter tourism. In both cases we will not choose a city, but rather towns facing the sea and with ski facilities that are highly attractive.

Consideration of costs and income

Of course, we must keep in mind what the costs of the property are. If real estate in the Alpine location costs more than our finances, we will probably have to reconsider the type of property or choose a different location.

Income must also be considered, and it is good not to take it for granted right away. We may be interested in buying commercial premises on the main streets of a busy city or large urban center, however, exogenous economic factors could lead to the closure of some businesses or the slow reopening of new ones. This dynamic would leave the premises or premises vacant for a longer or shorter period.

How to maximize real estate investment returns

The overview so far on real estate returns and factors to take into account when deciding to invest in real estate brings us to the crux of the matter: maximizing profits on real estate investment.

Investing in the direct purchase of land, commercial premises or apartments to resell or lease out is an activity that requires at least decent capital to commit, involves costs and demanding management.

Not only that, the valuation made upstream may turn out to be incorrect due to a number of factors and we may end up with a vacant or unsold property for a long time. An adverse case that can occur and lower the property's yield.

The advantages offered by real estate crowdfunding

The alternative to buying real estate units exists and it is called real estate crowdfunding. Real estate equity crowdfunding is a form of crowdinvesting in which multiple actors are part of a real estate investment project.

On one side we find the proposing actor with a well-defined real estate project. In the middle is a host platform, then an audience of investors.

The latter have on their side the advantage of reducing risk because they share the investment with a large number of people. In addition, they can divide the capital to be invested in several real estate projects, avoiding concentrating everything in the purchase of a single room, or land or apartment.

Another advantage, many stages of analysis on whether or not to invest in a particular geographic area have already been conducted by the proposer and evaluated by the platform hosting the crowdfunding project. Mamacrowd, in the facts of the case, carefully evaluates proposals before submitting them to investors and, often, published projects have already been validated by the investment partners with whom Mamacrowd collaborates.

Last but not least, the return on a real estate investment made through equity crowdfunding yields more.

In the case of real estate projects proposed by Mamacrowd, the return ranges from 12 percent to 15 percent. A real estate return far higher than the 5% to 9% that one can tend to get by purchasing a property in the more traditional ways.


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