The three levels of return
Analysing the return on a buy-to-let investment relies on three distinct indicators that are essential to differentiate properly in order to evaluate the actual performance of your property investment.
Gross return gives a quick first approximation. Net return (after charges) refines the calculation by factoring in running expenses. Net-net return (after tax) reflects the yield actually received by the investor after taxes.
Calculating gross return
The gross return formula is the simplest:
Gross return = (Annual rent / Total acquisition cost) x 100
The total acquisition cost includes the property price, notary fees (approximately 7 to 8% for existing properties, 2 to 3% for new-builds) and any renovation work.
Take a T2 apartment purchased for 180 000 euros in Lyon, with 14 000 euros of notary fees and 6 000 euros of refurbishment work, giving a total cost of 200 000 euros. The monthly rent is 750 euros, i.e. 9 000 euros per year.
Gross return = (9 000 / 200 000) x 100 = 4.5%
Calculating net return
The net return factors in all charges that cannot be recovered from the tenant:
Net return = ((Annual rent - Annual charges) / Total acquisition cost) x 100
Charges to deduct include:
- Property tax (taxe fonciere): approximately 1 200 euros/year for our Lyon T2
- Non-recoverable co-ownership charges: approximately 600 euros/year
- Non-occupying owner insurance (PNO): approximately 150 euros/year
- Rent guarantee insurance (GLI): approximately 2.5% of rents = 225 euros/year
- Vacancy provision: 1 month's rent = 750 euros/year
- Maintenance and repairs provision: approximately 500 euros/year
- Property management fees (if using an agency): 7% of rents = 630 euros/year
Total annual charges: 4 055 euros
Net return = ((9 000 - 4 055) / 200 000) x 100 = 2.47%
The gap between gross return (4.5%) and net return (2.47%) is considerable and illustrates why gross return alone is a misleading indicator.
Calculating net-net return
The final step factors in taxation. For an investor under the real expenses regime for property income (regime reel des revenus fonciers), taxed at the 30% bracket:
Net taxable property income (after deducting charges) is subject to the progressive income tax scale (30%) and social contributions (17.2%), i.e. a combined rate of 47.2%.
Net taxable property income: approximately 4 945 euros (9 000 - 4 055) Tax: 4 945 x 47.2% = 2 334 euros Net income after tax: 4 945 - 2 334 = 2 611 euros
Net-net return = (2 611 / 200 000) x 100 = 1.31%
This result may seem disappointing, but it does not account for the potential capital gain on resale or the leverage effect of borrowing.
The impact of leverage
A mortgage transforms the equation radically. If you finance our Lyon T2 with a 40 000 euro deposit and a 160 000 euro loan over 20 years at 3.2%, the monthly repayments amount to 908 euros.
The rent of 750 euros does not cover the monthly repayment, generating a shortfall of 158 euros per month. However, over 20 years, you will have invested 40 000 euros as a deposit + 37 920 euros in cash top-ups = 77 920 euros of your own money for a property that will be worth (with a modest appreciation of 1.5% per year) approximately 248 000 euros. The return on invested capital is then much more attractive.
Complementary indicators
Beyond the return, other indicators enrich the analysis:
Monthly cash flow measures the difference between rents received and all expenses (mortgage repayment, charges, taxes). A positive cash flow means the property is self-financing. In our example, the cash flow is negative at -158 euros before tax.
The IRR (Internal Rate of Return) factors in all flows over the holding period, including the capital gain on resale. It is the most comprehensive indicator for comparing a buy-to-let investment with other investments.
Optimising returns
Several levers allow you to improve the return on a buy-to-let investment:
- Furnished letting (LMNP) offers significantly more favourable taxation thanks to the accounting depreciation of the property.
- Flat-sharing (colocation) increases rental yield by 20 to 40% compared to standard letting.
- Short-term letting can double rental income in tourist areas, but involves heavier management.
- Choice of city is decisive: mid-sized cities often offer gross returns of 6 to 9%, compared with 3 to 5% in major cities.
When is a buy-to-let investment worthwhile?
A buy-to-let investment is considered attractive when the net return exceeds 3.5% or when the cash flow is positive or slightly negative. Below that, it is worth comparing with alternatives such as SCPI or financial investments, which offer similar returns with fewer constraints.