Rental property returns: gross, net and equity yield calculation

Return calculation is the fundamental step of any rental property investment. This detailed guide covers the different calculation methods — gross yield, net yield and return on equity — with concrete worked examples to assess the real profitability of your investment in Switzerland.

The three levels of return

There are several ways to measure the return on a rental investment. Each provides different information and all are necessary for a complete analysis.

1. Gross yield

Gross yield is the simplest calculation. It allows a quick first assessment and comparison between different properties.

Gross yield = (Annual rental income / Purchase price) x 100

Gross yield does not account for charges, financing or taxation. It is useful as a comparison indicator but insufficient to assess real profitability.

2. Net yield (before financing)

Net yield deducts the property's operating costs, giving a more realistic picture of operational profitability.

Net yield = ((Rental income - Charges) / Purchase price) x 100

Charges to deduct include:

• Maintenance and repairs: 0.5% to 1.5% of property value per year (depending on age and condition)
• Management fees: 3% to 5% of rent (if management is delegated)
• Insurance: Building, landlord liability, possibly loss of rent
• Vacancy provision: 2% to 5% of rent (risk of periods without tenants)
• Property taxes: Variable by canton
• Miscellaneous costs: Accounting, potential legal fees

3. Return on equity (after financing)

This is the most relevant return for the investor: it measures the effective profitability of your invested capital, taking into account the leverage effect of the mortgage.

Return on equity = ((Rental income - Charges - Interest - Amort.) / Equity) x 100

Complete worked example

Let us take a rental apartment in Canton Vaud to illustrate the three levels of return:

Gross yield

CHF 33,600 / CHF 850,000 x 100 = 3.95%

Net yield (before financing)

(CHF 33,600 - CHF 12,252) / CHF 850,000 x 100 = 2.51%

Return on equity

CHF 4,098 / CHF 212,500 x 100 = 1.93% (before income tax)

This return may seem modest, but it does not account for two important factors: capital appreciation (potential increase in property value) and debt amortisation by the tenant (rent finances mortgage repayment). Over the long term, total return (cash flow + appreciation + amortisation) is generally more attractive.

Mortgage leverage effect

The leverage effect is the mechanism by which mortgage financing amplifies the return on equity. It works as long as the property return (before interest) exceeds the mortgage cost.

Leverage multiplies the return on equity by 1.6x in this example. This effect is positive as long as the mortgage rate remains below the net property yield. If rates rise above the net yield, leverage becomes negative (known as the "mace effect").

Affordability for rental property

Banks assess affordability differently for rental property. Two methods are common:

Method 1: Global affordability

Rental property charges are added to primary residence charges. The total must not exceed 33% of total gross income (salary + 80% of rental income). This is the most common method.

Method 2: Standalone affordability

Some banks assess the rental property independently: the property's charges (theoretical interest + maintenance + amortisation) must be covered by rental income (taken at 80%). If the property "carries itself", the impact on personal affordability is limited.

Key profitability factors

Location

Location remains the determining factor for long-term profitability. A well-located property offers better rental security (less vacancy), higher quality tenants and greater capital appreciation potential.

Property condition

A recent or renovated property requires less maintenance and offers more predictable charges. An older property may offer a higher gross yield, but maintenance and renovation costs can significantly erode net returns.

Tenant mix

For an apartment building, tenant diversification (apartment sizes, tenant types) reduces overall vacancy risk. A building with only large apartments is more vulnerable than a mix of studios, 2- and 3-room units.

Taxation

Tax optimisation is an important lever. Deductible mortgage interest and maintenance costs reduce taxation of rental income. The choice between flat-rate and actual cost deduction should be reviewed each year.

Yields by region (indicative)

These yields are indicative and vary depending on the specific property, its condition, tenant quality and market conditions. A detailed analysis of each property is essential before any investment.

Key points for investors

• Do not overestimate rents: Base your calculations on actual market rents, not optimistic projections
• Budget for maintenance: A rental property requires regular maintenance. Underestimating these costs is a common mistake
• Anticipate rate increases: Verify that your investment remains profitable with higher mortgage rates (+1 to 2 percentage points)
• Diversify: Do not concentrate all your wealth in a single property
• Plan the exit: Assess the property's liquidity (ease of resale) before purchase
• Consider management: Self-managed or delegated? The cost and time of management impact real profitability