Investment properties

News from DL MoneyPark and information on the financial market and Swiss romande real estate

Author : Kristen

Gross & Net Returns

The investor's task is to judge the estimated profitability of the property investment by assuming that the buyer's requested price will be paid:

We calculate the ratio of gross and net return using the formula below:

Gross return = Rent / Purchase Price

Net return = Net profit / Personal equity

Return calculation

Purchase price of the property   CHF 7,500,000
Mortgage loan   CHF 6,000,000
Invested personal equity   CHF 1,500,000
     
Annual rental state   CHF 450,000
Gross return CHF 450,000 / CHF 7,500,000 = 6 %
Operating costs 20 % de l'état locatif = CHF 90'000
Profit before interest and taxes rental state - operating costs = CHF 360,000
Interest 2.5 % * CHF 6,000,000 = CHF 150,000
Profit before taxes CHF 360,000 - CHF 150,000 = CHF 210,000
Net return before taxes CHF 210,000 / CHF 1,500,000 = 14 %
Taxes Marginal tax rate of 40 % = CHF 84,000
Net profit CHF 210,000 - CHF 84,000 = CHF 126,000
Net return after taxes CHF 126,000 / CHF 1,500,000 = 8.4 %

This is a gross return of 6% for a net return of 8.4%. We can conclude at this point that using the gross return result, a very simple calculation, does not provide a real basis to make an investment decision.

The amount of the mortgage loan is therefore considered capital in the investment decision, in order to be able to better understand the financial risks that will increase the volatility of operating cash flows.

 

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