This is general information, not financial, legal or tax advice. All figures in this post are invented examples and estimates, there to show the method. They are not market prices, rents or interest rates.
What is direktavkastning?
Direktavkastning, the direct or net yield, is what a property earns in a year from renting it out, after its running costs and before the loan, as a percentage of what the property costs. It answers one question: if you paid cash, how much would the property give back each year?
In English-speaking markets the same idea is often called the cap rate or net initial yield. It is the most common way to compare one property with another, and with what your money could earn elsewhere.
Gross yield, bruttoavkastning, is the yearly rent divided by the price, with no costs taken off. It is the number listings like to show, and it is always higher.
The formula
Direktavkastning = driftnetto ÷ price × 100
Driftnetto (net operating income) = the rent you will actually receive − the costs of running the property
The price is what you pay, including the costs of buying such as the title registration, mortgage deeds and a survey. When valuers compare properties they use the market value instead; for a buyer, the price you pay is the honest base.
Interest, amortisation and income tax are left out on purpose. They depend on your loan and your tax position, not on the property, so leaving them out lets you compare properties fairly. They come back in the cash flow, below.
Which costs belong in it
Every cost of keeping the property let and in working order belongs in driftnetto. Financing and tax do not.
| In driftnetto | Not in driftnetto |
|---|---|
| Vacancy and unpaid rent (an allowance) | Loan interest |
| Heating, water, electricity for shared areas, waste, if you pay them | Amortisation |
| Running maintenance and a yearly amount set aside for planned work (roof, windows, pipes) | Income tax |
| Property fee or tax, ground rent if the land is leased | Depreciation |
| Insurance | Improvements that add value, such as an extension |
| Management, accounting and your own admin time, if you would otherwise pay for it | |
| For a bostadsrätt: the monthly fee to the association |
Planned maintenance is the cost most often missing. A roof that lasts thirty years is a cost every year, not only in the year it is replaced. A maintenance plan from the seller, or a survey, tells you what is coming.
Image courtesy of R Architecture via Unsplash
Worked example: a building with four flats
The example: a small building with four flats, priced at 6,000,000 SEK. Each flat can be let for 9,500 SEK a month. You pay heating, water and the shared electricity. Every figure is an invented estimate.
Step 1: the rent you will actually receive
| Rent: 4 flats × 9,500 × 12 months | 456,000 |
| Vacancy and unpaid rent, 3% | −13,680 |
| Rent received | 442,320 |
Step 2: the running costs
| Heating, water, shared electricity, waste | 70,000 |
| Maintenance: running repairs plus a yearly amount for planned work | 60,000 |
| Property fee | 8,000 |
| Insurance | 15,000 |
| Management and admin | 20,000 |
| Running costs | 173,000 |
Step 3: driftnetto and the yield
Driftnetto is 442,320 − 173,000 = 269,320 SEK. With 100,000 SEK of buying costs, the property costs 6,100,000 SEK in total.
Direktavkastning = 269,320 ÷ 6,100,000 × 100 = 4.4%. The gross yield on the same building is 456,000 ÷ 6,000,000 × 100 = 7.6%. The difference is the cost of owning it.
Cash flow is not yield
Cash flow is what is left in your account each year after the loan: driftnetto minus interest and amortisation. The yield stays the same whatever you borrow; the cash flow moves with every change in the interest rate.
Continue the example with a loan of 4,200,000 SEK, 70% of the price, amortised by 1% a year (42,000 SEK). Your own money is 1,900,000 SEK. Before income tax:
| Interest rate (example) | Interest a year | Cash flow a year |
|---|---|---|
| 3% | 126,000 | 101,320 |
| 4% | 168,000 | 59,320 |
| 5% | 210,000 | 17,320 |
| 6% | 252,000 | −24,680 |
At about 5.4% interest the building stops paying for itself: (269,320 − 42,000) ÷ 4,200,000. Above that, you add money every year, even though the yield is still 4.4%. Before you buy, work out the rate at which your cash flow turns negative and decide whether you could carry it.
The yield tells you whether the property is a good one. The cash flow tells you whether you can afford to own it. You need both answers.
The mistakes that make a yield look better than it is
The same building can be shown at 4.4% or at 6.1%, depending on what is left out. Here is what each common shortcut does to the example:
| What is left out | Yield shown |
|---|---|
| Nothing: the honest number | 4.4% |
| Buying costs (yield on the price only) | 4.5% |
| Vacancy and unpaid rent | 4.6% |
| Asking rent of 10,000 instead of the 9,500 you can get | 4.8% |
| Maintenance | 5.4% |
| All four together | 6.1% |
| Every cost (gross yield) | 7.6% |
- Forgetting vacancy. Flats stand empty between tenants, and some rent is paid late or not at all. A yield that assumes twelve full months every year is a best case.
- Forgetting maintenance. The largest single gap in the table. Count a yearly amount for planned work, not only this year's repair bills.
- Using the asking rent. Use the rent you can get and keep, checked against similar homes and against the rules below.
- Forgetting the loan. The yield ignores the loan by design. A good yield with a large loan can still mean a negative cash flow when rates rise.
- Trusting the seller's figures. Ask for the last years' actual rents and costs, not a forecast.
Image courtesy of Carlos Muza via Unsplash
Check the rent you are allowed to charge
In Sweden the rent in your calculation must be one the law allows, or the yield is built on a number a tribunal can lower. For a building with ordinary rental flats, the rent is not reasonable if it is markedly higher than the rent for flats of equal utility value (Jordabalken, chapter 12, section 55). In practice that means rents set like those of comparable flats in the area, not the highest rent someone would pay.
A private person renting out at most two homes follows the private rental law instead; see How much rent can I charge when I rent out my home in Sweden? The tax on the surplus is covered in Tax on rental income when you rent out privately in Sweden.
How Hyrea helps once you own it
A yield worked out before you buy is a forecast. The real one shows up in the rent that arrives and the bills that are paid. Hyrea keeps each property's rent and costs together and shows what came in, what went out and the net cash flow, so you can check the real figures against the ones you bought on, and see early when vacancy or repairs run above your estimate.
Frequently Asked Questions
What is a good direktavkastning?
There is no single good number. It depends on the location, the condition of the property and what your money could earn elsewhere. Compare it with your loan rate: a yield below the interest rate means the loan costs more than the property earns.
What is the difference between gross and net yield?
Gross yield is the yearly rent divided by the price. Net yield, direktavkastning, takes off vacancy and every running cost first. Only the net yield tells you what the property earns.
Should the loan be part of the yield?
No. The yield is worked out before the loan so that properties can be compared fairly. Work out the cash flow separately, after interest and amortisation, at several interest rates.
Do I use the price or the market value?
As a buyer, use the price plus your buying costs: that is the money you put in. Valuers use the market value, which is why their yield on the same building can differ from yours.
Is tax part of the calculation?
Not in the yield. Income tax depends on your own situation and how you own the property, so it comes after the cash flow. Ask an adviser before you buy if you are unsure.
How often should I work it out again?
Every year, with the year's real rent and costs. Comparing the actual yield with the one you bought on is the quickest way to see whether the property is doing what you planned.
See it with your own homes
The Free plan covers up to 3 units, with no card. Add a property and a tenant and watch Hyrea put the rest in order. Missing something you need? Tell us. Every rental business is run a little differently, and we want to hear how you run yours. What you tell us shapes the features other landlords and property managers rely on next.
