Calculating the yield when purchasing an apartment

So what’s the profit yield for the apartment in Berlin?

What’s the final price of the apartment? What is the yield, and how is it calculated? How do you read the data in a sales chart? To analyze the performance of an apartment, you should come equipped with a pen, a calculator, common sense and some basic insight. Sometimes the data missing from the chart are no less important than the data presented. A thorough understanding of the parameters according to which the data is calculated – such as the yield calculations – are crucial for reaching the right decisions.

The first part of this article will analyze the various components of the price chart and will teach you how to thoroughly understand the information presented, including the yield calculation. The second part of the article, which will be published later, will review the process of taking out a loan in Berlin and help you understand how to calculate the yield when taking a mortgage.

Let’s start from the basics. A standard apartment chart (as presented here) should include the following columns:

General information – area, floor, building (front/rear), monthly rent, price of the apartment, price per square meter, net yield and information regarding the management fee costs.

Calculating the apartment yield

When calculating the yield one must consider the final price of the apartment, including the peripheral costs of the purchase. Most assets in Berlin are marketed according to a certain X price, which does not include the 6% sales tax, 3.5-7% broker’s fee and 1.5-2% legal costs. In other words, 10-12% of the price of the apartment must usually be added to its cost before we can calculate the yield.
In order to make things easier for our purchasers, the tables of Inspiration Group also present the final cost of the apartment, grossing up the peripheral costs of the purchase. Therefore, it is easier to reach the yield calculation.

In the following example we present a studio apartment of 36 m2. In order to calculate the yield we need to multiply the monthly rent by 12, i.e. 250*12=3,000, and then divide the annual income from rent by the cost of the apartment – 3,000/57,000=5.26% yield.

1. The property management fee – each building in Berlin has a management company responsible for the building maintenance, rent collection from tenants and money transfer to the apartment owners. The average cost of a management company is 30 Euro per month, or 360 Euro per year.
2. Maintenance fees – in each apartment building there is a maintenance fee where apartment owners allocate funds for regular repairs. The money that accumulates in the joint account is used for more extensive renovations, when necessary–such as façade renovation. This is a bit like the asset management account of apartment buildings in Israel. In Inspiration Group buildings, we charge approximately 0.4 Euro per square meter for the maintenance fund. In case of Apartment 10 (36 m2), this comes down to 0.4*36=14 Euro per month or 173 Euro per year.

When weighing the management fees and maintenance fund, the annual income will be 3,000 360 173=2,467 Euro, and the net annual yield is 2,467/57,000=4.32%.

You should note that in most marketing materials, the yields of Berlin apartments are published without weighing in the regular expenses costs – the management fees and maintenance fund. The yield is also calculated according to the property cost without the peripheral addition costs, in a way that artificially inflates the presented yield.

For example, a similar apartment can be presented in the following manner:

Price: 57,000 Euros (in reality, approximately 10% peripheral costs will be added to this price, so it will be at least 62,700 Euros).
Annual rent: 3,000 Euros (but in reality, after management fees and maintenance fund payments are deducted, it will be 2,467 Euro).

Although the actual yield will be 2,467/62,670=3.9% it will be presented misleadingly as 3,000/57,000=5.3% – about 33% more than the actual yield!

In conclusion – the sales chart of apartments are a tool necessary for understanding the profitability of an investment. However, in order to optimally use this tool, one should inspect the data thoroughly and analyze the way various calculations were performed.