Real Estate Calculator

What this calculator tells you

A property purchase can earn money in two ways: the rise in its value between buying and selling, and the rent it produces while you own it. This calculator combines both to show the total return on a property over the holding period, and the average return per year.

It takes account of the costs of buying and selling, which often reduce the return by more than people expect. The result is an estimate, and it depends on the prices and rents you enter, which may not be realised.

How the return is worked out

The total gain is the sale price minus the total cost of buying, including fees and any major upgrades, plus the net rent received over the holding period. The total return is that gain divided by the total cost. The annual return is found by taking the total growth factor to the power of one divided by the number of years, and subtracting one. Net rent means rent after running costs such as maintenance, insurance and property tax.

A worked example

Suppose you buy a property for 300,000 including purchase costs, sell it after five years for 340,000, and collect 60,000 of net rent over the period. The gain is 340,000 minus 300,000 plus 60,000, which is 100,000. The total return is 100,000 divided by 300,000, or about 33%. Spread across five years, that is roughly 5.9% a year, using the compound annual growth method.

Costs that change the answer

Buying costs, such as legal fees, transfer taxes and survey charges, add to the cost base. Selling costs, such as agent fees, reduce the sale proceeds. Both can be several percent of the property value, and they weigh more heavily on short holding periods. Include them in the figures rather than assuming the headline price is the whole cost.

Limits of the calculation

The calculator assumes the property is sold at the end of the period at the price you enter, and that rent is received without long vacancies. Property prices can fall as well as rise, and the sale price may be lower than hoped. Financing costs, such as mortgage interest, are not included in the total return, so a leveraged purchase can behave differently. Taxes on rent and on the gain are excluded, and rules differ widely by country.

Testing the result against bad outcomes

Run the calculation with a sale price 10% lower than your estimate and with one year of empty rent. If the return turns negative, consider how much money you could afford to lose and whether the property would still suit your needs. Stress tests like this reveal risks that a single average figure can hide.

Also consider the time needed to sell. A property may take months to sell in a weak market, and holding costs continue during that time, which reduces the realised return.

Using the result

Use the result to compare a property with other investments, on the same basis of total return and time. Test a lower sale price and lower rent, and check the cost of holding the property if it stays empty. The result is only as good as the assumptions behind it.

Comparing property with other investments

To judge whether a property is worth its risk, compare the annual return with what a lower-risk investment would have returned over the same period. Property is also less liquid than shares, and selling takes time and cost. Adding a premium for these features, and for the effort of owning and managing a property, shows whether the expected return is enough reward for the trouble.