Holiday properties are attractive capital investments that have become very popular. Ideal for partial owner-occupation, as a retirement property or financial provision in old age, holiday properties are usually more suitable than many other financial investments. An accurate yield calculation for holiday properties is necessary, however, because not every in-demand holiday property is equally lucrative as an investment. Apart from the location, amenities and size of the holiday properties, investors are therefore primarily interested in the financial aspects of the investment. How much return can you achieve with a holiday property? We show you what options there are for calculating the return on a holiday property and how you can determine it yourself.
What is the gross yield and how can it be calculated?
The gross yield or gross rental yield indicates what percentage of the purchase price of the holiday property the annual rental income represents. For example, the income in the form of a basic rent from letting the holiday property amounts to 24,000 euros or $24,596 USD per year. If the purchase price is 350,000 euros or $357,837 USD, this means that the gross yield is 6.86 percent. To calculate the gross yield, simply multiply the annual basic rent by 100 and then divide by the purchase price. The gross yield thus compares the rental income with the purchase price. It serves as a simple yield calculation of a holiday property, but does not take into account the utility costs and maintenance expenses.
- Example calculation of gross yield: 24,000 euros/$24,596.34 USD basic rent x 100 / 350,000 euros/$357,836.64 USD purchase price
What factors influence the net yield?
In addition to the calculation base of the gross yield, the net rental yield also takes into account the incidental acquisition costs and other consequential costs. After all, it is not only the value of a property that is taken into account when calculating the yield. The purchase of a holiday property entails incidental acquisition costs that are part of the investment. The rental itself also incurs consequential costs. These are therefore important elements when calculating the exact yield of holiday properties. This is because they are part of the non-apportionable operating costs borne by the owners of a holiday property and not its tenants. To calculate the net yield, reduce the annual rental income by the non-apportionable operating costs and the annual reserve for maintenance work. The result is the net rental income. Multiply this again by 100 and divide by the investment costs.
- Calculation of net rental income = basic rent – operating costs – reserves
- Calculation of investment costs = purchase price + incidental acquisition costs
What are the costs for a holiday property?
Depending on the holiday region, the exact location and the type of holiday property, the purchase prices can vary significantly. A villa with a wellness area and pool as well as a fantastic panoramic view costs a lot more, but at the same time yields higher rental income. A small apartment is much more affordable. On the other hand, the rental income is lower and there may be shared costs for communal facilities. The yield calculation shows in each individual case which holiday property is suitable as a yield property. Even the purchase of a holiday property incurs additional incidental costs. This includes, for example, the notarial purchase agreement and the land register entry. Regardless of whether you only let the holiday property or partly use it yourself, you will incur basic charges for electricity, water, gas, telephone and internet. Likewise, the property manager, the cleaning staff and the garden maintenance staff also need to be paid. These expenses are ongoing, regardless of whether the holiday property is let or vacant. The higher the occupancy rate, the more wear and tear on the holiday property. Depending on the condition and age of the holiday property, expenses for maintenance and renovation may be incurred over time. You should make provisions for these in good time. The following costs are to be expected when investing in a holiday property:Incidental acquisition costs:
- purchase price
- notary fees
- brokerage fee
- land register entry
- property transfer tax
- financing costs
Non-apportionable operating costs:
- development costs
- road construction
- garden redevelopment
- property management
- utility costs during vacancy
Detailed yield calculation for a holiday property
While the gross yield only takes into account the actual purchase price of the property as well as the net rental income, the net yield is much more meaningful. It takes into account all investment and operating costs as well as reserves for future repairs. If you want a very detailed yield calculation for your holiday property, you can also take into account a vacancy rate or the owner-occupancy rate. Depending on the holiday region and location, you can expect different rental occupancy rates. While holiday properties in ski regions are suitable for rental in summer as well as winter, most holiday apartments and houses generate the highest yield in the summer peak season. Tax incentives make the purchase of a holiday property even more attractive. It should be noted here that owner-occupation can reduce or eliminate the tax rebate if you fall short of the required local minimum occupancy rate. If you are planning a longer period of owner-occupation during the peak season, you may miss out on valuable rental income. And this in turn then affects the yield of your holiday property.
What is important when buying a yield holiday property?
If you know how you want to use the holiday property, you should choose the best location for it. A pure capital investment usually brings the best return in popular holiday regions that make high occupancy rates possible. Beachfront or seaside holiday properties require a higher investment. As a rule, you will achieve significantly higher rental income in prime locations than in peripheral locations. Nevertheless, even holiday properties in peripheral locations can achieve an attractive return if the purchase price and the general conditions are correspondingly good. Holiday properties intended to serve as retirement domiciles later on require a corresponding infrastructure as well as age-appropriate furnishings. Accordingly, senior citizens are particularly suitable as a target group for these holiday homes and apartments when it comes to letting them out. Families with children, on the other hand, prefer outdoor pools, playgrounds and other tourist attractions in the surrounding area. Romantic holidays or a quiet location in the countryside is optimal for holidaymakers seeking peace and quiet. When choosing a holiday property, you should consider your investment potential on the one hand and the target group and their requirements on the other. The legal aspects should also be examined before buying a holiday property. Can the property be used for any purpose? May a holiday apartment be let out or used as a retirement domicile under the terms of the owner’s agreement?
As a Broker with Engel & Völkers, I will be happy to advise you in more detail on the subject of calculating the yield of holiday properties. Take advantage of our many years of expertise and find your high-yield holiday home or lucrative holiday apartment with us that meets all your requirements.