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Investing in a luxury mountain chalet can appeal to many people, whether for its prestige or its potential rental yield. Calculating the rental return on this type of property requires a methodical and precise approach. A number of factors need to be taken into account, including rents, associated costs and the tax regime. This article guides you through the various stages involved in assessing the profitability of your property investment.
The essentials for calculating rental profitability
Identifying rental income
To estimate the rental profitability of a luxury chalet, the first step is to identify the potential rental income. These rents vary according to location, size, services offered and time of year. For example, a chalet located near the ski slopes generally generates higher rents during the winter season.
It’s vital to gather precise information on the rents charged in the region and to estimate an average annual rent:
- Winter season (high season): 12 weeks at €3,000 per week = €36,000
- Summer season (low season): 10 weeks at €2,000 per week = €20,000
Total estimated annual rental income: €56,000
Taking into account costs and charges
Property-related costs play a significant role in calculating rental profitability. They include :
- Fixed costs: property tax, co-ownership charges, insurance
- Variable costs: maintenance, repairs, household services
- Specific costs: rental management costs if you use an agency
Example of annual costs :
- Property tax: €5,000
- Insurance: €2,500
- Maintenance and services: €8,000
Total estimated annual costs: €15,500
Calculate gross profitability
Gross profitability provides an initial, quick estimate of investment performance. It is calculated as follows:
Calculation formula: Gross return = (Annual rental income / Purchase price of the property) x 100
For example, for a chalet purchased for €800,000 with rental income of €56,000:
Gross return = (€56,000 / €800,000) x 100 = 7%.
Refine the calculation with net profitability
Take account of tax and the tax system
The tax regime applied to your rental will have a direct impact on your profitability. Common options :
- Micro-foncier scheme for gross income of less than €15,000/year, offering a flat-rate allowance of 30%.
- Régime réel, which deducts actual expenses but requires more administrative formalities.
Given rental income of €56,000, the actual scheme could be more advantageous for deducting all actual costs.
- Gross rental income: €56,000
- Annual costs: €15,500
Actual taxable income: €40,500
Income tax: varies according to marginal tax bracket.
Estimating other deductible expenses
Under the actual scheme, a number of expenses can still be deducted:
- Loan interest: for example, if you have a loan with annual interest of €10,000.
- Improvement costs (not reconstruction): various works to maintain the quality of the chalet.
After these deductions :
- Adjusted taxable income: €40,500 – €10,000 = €30,500
Other profitability indicators
Net-net return
This calculation takes into account all charges and taxes for a complete picture.
Calculation formula: Net yield = ((rent – charges – tax) / purchase price) x 100
Using our previous examples:
Net-net yield = ((€56,000 – €15,500 – €9,150) / €800,000) x 100 = 3.92%.
(where €9,150 represents simplified tax)
Cash flow
Cash flow indicates the capacity of the investment to generate a financial surplus after all expenditure.
Calculation formula: Cash flow = Rental income – Monthly repayments – Costs and charges
If your monthly loan payment is €2,500 :
Annual cash flow = €56,000 – (12 x €2,500) – €15,500 = €6,500
The leverage effect of borrowing
Using a loan to finance your investment can greatly increase your net profitability. It allows you to take advantage of historically low interest rates while maximising the tax deductions associated with interest on the loan.
