Minimum rental yield for real estate

Question

There are some German books:

(Praxishandbuch Baufinanzierung

Praxisleitfaden Immobilienanschaffung und Immobilienfinanzierung)

about home financing, which mention that you shouldn't buy a property with a rental yield lower than 4% or even 6% for older houses. In addition, you shouldn't pay more than 25 times your expected annual payment in case of 4% rental yield.

I'm located in rural area in Austria near the German border. The average apartment price is about 2000€/m² (still rising), the rentals are about 7€/m² per month. When using these rules about financing, there's no chance to get any property, at least in my area.

How can one get real estate without breaking one of these rules? Has this rule of thumb stopped working due to the low average lending rates? Or is this just a phenomenon of my region in Austria?

Answer 1

When I got into rental property in the US I kept seeing a 2% rule: don't buy a property unless it will rent for at least 2% of purchase price per month. I've yet to see a property in my area that would hit that number. A more popular rule became the 1% rule. That one seems more reasonable in my area, but it doesn't really paint the whole picture.

The rule you're referring to could be out-dated or perhaps it fits Germany and not Austria due to different laws/taxes/interest rates. In any case, these rules are of limited use.

Better than an over-simplified rule is a more comprehensive analysis of expected cash flow. If you expect prices to keep rising then it can be worth buying with a lower initial return, but that's just one part of the overall analysis. Consider tax implications, all expenses associated with property ownership, and compare the expected rate of return for a rental property to other investment types. There are definitely some markets that are unattractive to new real estate investors.