By calculating your expected rental profit, you can delve deep into the rental market and avoid hastily made decisions. The calculation requires you to familiarize yourself with the investment property and the local rent prices, not forgetting the overhead and possible repair needs. You shouldn’t ever compromise your profit goals even if a property ticks all the boxes otherwise.
After regulations were eased off in the early 90s, rental profits have remained at approximately 3 to 4 percent. The best rental profit is made in smaller university towns. The Finnish Landlord Association and Pellervo Economic Research PTT publish an annual forecast on future real estate investment profits. The forecast includes 24 cities and looks at rental profit, increase in value and regional factors. The report is available here.
Profit calculation
In order to calculate your rental profit, you must find out the annual accumulated rent and overhead costs. You should also pay attention to normal wear and tear, possible periods of non-use, and future major renovations.
There are a number of ways to calculate your rental profit. There is no single ’correct’ way. The most important thing is to have your own (critical) way of looking at things and to use the same formula every time. The simplest way to calculate your gross rental profit is as follows:
As you calculate your profit, try various scenarios. For instance, you may add one month of non-use in your formula, calculate the profit with the lowest rent within the annual fluctuation range or add a renovation reserve for both common maintenance and major renovations in the housing company. This reserve may total e.g. 0.5 to 1% of the apartment value per year for maintenance and 500 to 800 euros per square meter for housing company renovations depending on what is recorded in the report on maintenance needs, what the building’s repair history looks like, and how old the building is.
If your strategy includes leveraging, you should also take a possible increase of interest rates into consideration as you calculate return on equity. Use a significantly higher rate than the current market rate, such as five percent.
Cash flow
Cash flow is another common topic of real estate investment. Cash flow refers to the remaining net profit after all expenses have been deducted. If your cash flow is positive, the rent is sufficient to cover all expenses, instalments, and interest. A positive cash flow means that your investment property makes you money every month.
However, if your cash flow is negative, you must finance your operation with your own money each month. Negative cash flow is a risk especially to investors with several properties in their portfolio. A positive cash flow is not only the result of rental profit but also the leveraging used to acquire the apartment. If your leverage ratio is high, interest rates and instalments reduce your cash flow.
Profit calculator in Finnish
Enter the gross rental profit percentage (according to above formula) into the profit calculator. Also note that you must pay a capital income tax which is 30% or 34% depending on how much rental income you have. If you are using leverage, you may develop the formula for calculating your rental profit further by adding your leverage ratio and the resulting return on equity.