Key figures for real estate investment: Rental income, cash flow, and other important figures

Investing in real estate can be profitable, but it requires careful planning and an understanding of basic financial concepts. In this article, we will go through key indicators and terms, such as rental yield, cash flow, and return on equity, which you can use to assess the profitability and risks of an investment property.

1. Cash flow

Cash flow represents the difference between the income (rental income) and expenses (maintenance charges, loan servicing costs, etc.) of an investment property.

• Positive cash flow means that the apartment generates more income than it costs to maintain and service the loan.
• Negative cash flow, on the other hand, means that the investor must cover part of the costs themselves.

Sample calculation:

Let's calculate the cash flow for a property with the following rental income and expenses: 

• Rental income: €800/month
• Maintenance fee: €200/month
• Loan servicing costs: €400/month

Cash flow is calculated as follows: €800 – €200 – €400 – €50 = €150/month (positive)

2. Rental income

Rental yield indicates how much rental income a property generates in relation to its value. It is usually calculated as a percentage per annum and helps to compare the profitability of different properties. When calculating rental yield, it is important to take into account all expenses, such as maintenance charges and loan servicing costs. 

Sample calculation of rental income:

Rental income can be calculated using a simple formula: (Rent – Expenses) * 12 / Debt-free price * 100 = Rental income %

• Value of the apartment: €150,000
• Rental income: €800/month (€9,600/year)
• Maintenance fee: €200/month (€2,400/year)
• Loan servicing costs: €400/month (€4,800/year)

In this case, the rental income is calculated as follows: (800 – 200 – 400) * 12 / €150,000 * 100 = 1.6%

It is important to note that there are different methods of calculating rental income, which can affect the figures obtained. Generally speaking, rental income can be considered poor if it is less than 4%, as in the example above. In this case, the yield may not be sufficient to cover all expenses, especially in connection with debt financing. 

A good rental yield on an investment property is usually 4-9%, which covers expenses and generates a reasonable cash flow. A rental yield of over 10% can be considered excellent, generating significant cash flow from the investment.

Example of an investment apartment with excellent rental yield

One good example of an investment apartment with a really good rental yield is a studio apartment in Lahti that is currently for sale on our website. The debt-free price of the property is €40,000, the tenant pays €500 per month in rent, and the maintenance fee is €163.3 per month.

The rental yield for this property is calculated as follows: (500 – 163.3) * 12 / €40,000 * 100 = 10.1%

The rental yield of the property when purchased with cash is as high as 10.1%, which is excellent. The property is therefore a truly profitable investment when purchased with cash.

Using debt financing, the rental yield is 26.5%, which is extremely high. The use of leverage significantly improves the yield. In both cases, the rental yield of the property is extremely good. Debt financing significantly improves the rental yield of the property, but it also involves greater risk.

The profitability of the target is therefore excellent, but the final decision depends on the investor's risk tolerance and investment strategy.

You can find more examples of investment apartments with a rental yield of over 10% here 

3. Return on equity

Return on equity (ROE) describes the return on investment in relation to the investor's own capital. It helps to assess how effectively the investor utilizes their own capital in the investment. The use of leverage can increase the return on equity, but at the same time it increases the risk.

Return on equity is calculated using the following formula:

Return on equity = (Annual cash flow / Equity) * 100

Using the example mentioned earlier information on a good rental yield investment apartment , assuming that the property was purchased with 70% financing.

Let's assume that you are buying an investment apartment with the following details:

• Value of the apartment: €40,000
• Equity capital: €12,000
• Rent: €500/month
• Maintenance fee: €163.3/month
• Loan: €28,000 (20-year loan term, 3.5% total interest rate)
• Loan repayment (including interest): €83/month

First, let's calculate the monthly cash flow:

• Monthly cash flow = Rent – Maintenance charges – Loan repayment
• Monthly cash flow = €500 – €163.3 – €83 = €253.7
• Annual cash flow: €253.7/month * 12 months = €3,044.4

Now we can calculate the return on equity: (€3,044.4 / €12,000) * 100 = 25.37%

In this example , the return on equity is therefore 25.37%.

4. Debt ratio

The debt ratio describes the amount of debt used to purchase an investment property in relation to equity. A high debt ratio can increase returns, but at the same time it increases risk if property prices fall or rental income decreases.

Sample calculation:

• Value of the apartment: €150,000
• Equity capital: €30,000
• Amount of debt: €120,000
• Debt ratio: (€120,000 / €30,000) * 100 = 400%

5. Maintenance charge

The maintenance charge is a monthly fee paid by shareholders to the housing company, which covers the property's running costs, such as heating, water, waste management, property management, and property maintenance. The maintenance charge is one of the most significant factors affecting the return on an investment apartment, and it is therefore important to carefully compare the charges for different properties.

The Real Estate Association's 2024 survey of maintenance charges for housing companies provides an up-to-date picture of the level of maintenance charges for apartment buildings in Finland. The survey examined average maintenance charges (€/month) and changes in them between 2021 and 2024 in the following areas:

Capital region: 5.22

Other Southern Finland: 4.53

Western Finland: 4.08

Eastern Finland: 4.44

Northern Finland: 4.03

You can read the entire report here: https://www.kiinteistoliitto.fi/media/jrtieqoo/hoitovastikekysely2024keskeisettulokset.pdf

6. Loan servicing costs

Loan servicing costs consist of loan interest and other costs, such as loan servicing fees. The amount of loan servicing costs depends on the loan amount, interest rate, and loan term. It is important to compare the interest rates and costs of different loans before taking out a loan.

Sample calculation:

• Loan amount: €120,000
• Reference rate (12-month Euribor): 2.41%
• Margin: 0.65%
• Total interest rate: 3.06%
• Annual interest expenses: €120,000 * 0.0306 = €3,672

7. Condition and location of the apartment

The condition and location of an apartment play a key role in determining its rentability and value. An apartment in good condition, located in a desirable area close to amenities, attracts more potential tenants. This higher demand allows the landlord to set a higher rent, which in turn leads to a better rental yield. A higher rent is therefore justified because it reflects the added value of the apartment's features and location.

8. Financial situation of the housing company

The financial position of the housing company has a decisive impact on the market value of the apartments and the maintenance charges. It is essential for apartment buyers to thoroughly familiarize themselves with the housing company's finances before making a purchase decision. In practice, this means carefully reviewing the financial statements, annual report, and long-term maintenance plan (PTS).

Financial statements: The financial statements are the "report card" for the housing company's finances. It is particularly important to examine the following figures:

• Care revenue (turnover): Care revenue should cover care costs. If revenue is consistently lower than costs, the fee will probably need to be increased.
• Maintenance costs: The cost structure shows where the housing association's money goes. Large unexpected expenses may be a sign of problems.
• Result for the financial year (profit/loss): A continuous deficit is a warning sign. A surplus may indicate good financial management, but it may also mean that necessary repairs have been postponed.
• Loans: A large amount of debt in relation to treatment income is a risk. Check the interest rates and repayment schedules for your loans.
• Equity: Positive and sufficiently high equity indicates financial stability.
• Cash reserves: Does the housing association have cash reserves for unexpected expenses?

PTS (Long-Term Plan): The PTS outlines the renovations planned for the housing company over the next 5–10 years and their estimated costs. It is particularly worth checking the timing and cost estimates for major renovations (e.g., plumbing, facade, roof, and elevator renovations) in the LTP.

Annual report: The annual report supplements the figures in the financial statements and presents the board's view of the housing company's situation and future prospects.

Summary

Understanding financial indicators enables real estate investors to make informed investment decisions and assess the risks and expected returns associated with their investments. However, real estate investment always involves risks, so decisions should be made on the basis of careful consideration and analysis of one's own financial situation.

In addition to economic indicators, broader factors affecting the attractiveness and yield potential of an investment target must also be taken into account. These include the development prospects of the area, population growth, and the employment situation, all of which affect housing demand, rental income, and the value development of housing. Utilizing expert services may be particularly justified in the early stages of real estate investment.