Rental property can be a stable, cash-flow-generating investment — but before making a purchase decision, you need to understand how profitable it actually is.
This guide shows how to calculate rental property returns step by step — both without financing and with financing (ROI).
1. Determine the Rental Income
Example:
Monthly rent: 700 €
Annual rent: 700 × 12 = 8,400 €
👉 This is your gross income — total income before expenses and taxes.
2. Calculate Annual Expenses
Example expenses:
• Maintenance fund & building management: 600 €
• Repairs & maintenance: 400 €
• 1 month vacancy: 700 €
Total expenses: 1,700 €
👉 Net rental income = 8,400 € – 1,700 € = 6,700 € per year
3. Calculate Total Investment
• Purchase price: 120,000 €
• Additional costs (notary, renovation, furniture): 5,000 €
Total investment: 125,000 €
4. Calculate Return Without Financing
Gross yield:
8,400 / 125,000 × 100 = 6.72%
Net yield:
6,700 / 125,000 × 100 = 5.36%
5. Add the Effect of Financing – ROI (Return on Investment)
Assume you use 30% down payment and 70% bank financing.
Down payment: 37,500 €
Loan: 87,500 €
Interest rate: 5% annually
Annual interest cost:
87,500 € × 0.05 = 4,375 €
👉 For simplicity, we ignore loan principal repayments in this ROI model.
Annual Net Income After Interest
Net rental income: 6,700 €
– Interest cost: 4,375 €
= 2,325 €
ROI on Your Own Capital
2,325 / 37,500 × 100 = 6.2%
👉 Real ROI = 6.2% per year
This means that with 30% of your own capital and a 5% interest rate on the loan, your actual return on invested capital is around 6.2% per year.
6. Add Potential Property Value Growth
If property prices increase by 3% per year, this adds to your total return.
Total return (cash flow + appreciation):
6.2% + 3% = 9.2% annually
Summary
| Indicator | Value |
|---|---|
| Monthly rent | 700 € |
| Annual rental income | 8,400 € |
| Expenses | 1,700 € |
| Net income | 6,700 € |
| Total investment | 125,000 € |
| Down payment (30%) | 37,500 € |
| Loan interest (5%) | 4,375 € |
| ROI (real) | 6.2% |
| Total return incl. appreciation | ~9.2% |
Conclusion & Recommendation
If you finance the property entirely with your own money, you can realistically achieve 5–6% net yield.
Using a loan increases ROI on your own capital, but also increases risk — interest rate hikes or vacancy periods can reduce your returns.
In the long term, additional property value growth can push total returns into the 8–10% range, making rental property an attractive alternative to more conservative investments.
If you plan to use a property management service, make sure to include this cost in your calculations.
In Estonia, property management typically costs about 8.3% of annual rental income.
