How Do You Calculate the Return on Real Estate?

There are two types of return we need to think about when buying property as an investment.

Rental yield:

Say you bought an apartment for ₪1.5 million and rent it out for ₪3,800 a month. How do you calculate your annual yield?

Here's the formula: (rent × 12 months) / cost of the investment × 100

So if we plug in our numbers: (3,800 × 12) / 1,500,000 × 100 = 3.04%

That's it! You have an annual yield of 3.04%. This means your investment earns you, on average, 3.04% of the investment cost every year.

Return from the property's rise in value:

Say you bought an apartment for ₪1.5 million and after 5 years it's worth ₪2 million – the apartment's value has risen by ₪500,000, or (33.3%), since the purchase.

Here's the formula: (increase in value / original investment / number of years) * 100 = annual return from revaluation.

Divide the total increase in value (₪500,000) by the original investment amount (₪1.5 million) and by the number of years that have passed (5 years in our example).

So here the annual return is (500,000 / 1,500,000 / 5) * 100 = 6.67%

This is essentially the average annual return on the capital you invested in the property, from the rise in its value over the years.

Note: to assess your return accurately, it's important to account for additional costs and add them to the cost of the investment – for example taxes, mortgage interest, renovation expenses (a solar water heater that breaks down and the owner has to fix at their own expense), and so on.