Property loan for investors: optimise returns with precise calculations
07.06.2025
10
Minutes
Katrin Straub
Managing Director at nextsure
An investment property is more than just rental income. The wrong property loan can significantly reduce your returns and jeopardise wealth building. We’ll show you how, through a detailed comparison and a proper yield calculation, to find the optimal financing for your investment.
The topic in brief and concise terms
Return on equity is the key metric for investors, as it takes leverage into account.
A low repayment rate (e.g. two per cent) increases the monthly cash flow, while a long fixed-rate period protects against interest rate risks.
Tax advantages such as depreciation allowances (AfA) and the deduction of loan interest significantly increase the net return.
Laying the foundations: gross and net rental yield as initial indicators
The gross rental yield is a quick but superficial metric. It simply relates the annual net cold rent to the purchase price. An apartment for 300,000 euros with 12,000 euros annual rent achieves a gross yield of four per cent.
The net rental yield is more meaningful, as it takes account of the ancillary purchase costs and non-recoverable operating costs. With 10.2 per cent ancillary costs (30,600 euros) and 2,500 euros in annual costs, the yield already falls to 2.87 per cent.
Both metrics, however, ignore the largest cost block: financing. Only by considering interest and repayment payments does the true profitability become clear. This initial analysis helps quickly filter out unprofitable offers with a simple household calculator. But the actual basis for decision-making only comes from calculating the return on equity.
Maximise returns: return on equity as a key performance indicator
The equity return shows how your invested capital is actually earning interest. It relates the annual net income (rent minus all costs, interest and taxes) to the equity you have invested. The lower the amount of equity used, the greater the leverage effect can be.
An example calculation makes this clear:
Purchase price incl. incidental costs: EUR 330,000
Equity: EUR 66,000 (20 per cent)
Loan: EUR 264,000 at 3.5 per cent interest p.a.
Annual net income before interest: EUR 9,500
The interest costs in the first year amount to EUR 9,240, so the profit is only EUR 260. The equity return therefore initially amounts to only 0.4 per cent. An annuity loan changes this relationship over time. Without taking tax advantages and repayment into account, it becomes clear how crucial low interest rates are.
Uncover hidden costs: realistically plan ancillary costs and ongoing expenses
Ancillary purchase costs are a significant factor that is often underestimated. They generally have to be paid from equity and, depending on the federal state, amount to between eight and 15 per cent of the purchase price. On a purchase price of €350,000, this can quickly add up to more than €35,000.
The most important ancillary costs include:
Property transfer tax (3.5 to 6.5 per cent)
Notary and land registry fees (approx. two per cent)
Estate agent’s commission (often between 3.57 and 7.14 per cent)
Ongoing, non-recoverable costs such as the maintenance reserve fund (often one to two euros per square metre per month) and property management costs further reduce the return. A precise calculation, for example for a garage as an investment, is essential. These expenses determine the long-term success of your investment.
Using leverage: Choosing the right property loan for investors
Choosing the right loan is the most powerful lever for increasing returns. For buy-to-let investors, different terms matter than for owner-occupiers. A lower initial repayment rate of, for example, just one or two per cent increases the monthly cash flow.
A long fixed-rate period of 15 or 20 years secures the current terms for you and protects against interest rate increases. Current mortgage rates in July 2025 are around 3.4 per cent for ten-year fixed terms. A comparison of different providers is crucial to finding the best mortgage finance.
Our expert tip: Pay attention to the option of special repayments. Even if you choose a low ongoing repayment rate, a special repayment option of five per cent per year gives you the flexibility to become debt-free more quickly if needed.
Tax benefits as a returns booster: understanding depreciation and interest deductions
As a capital investor, you can deduct significant expenses from tax and so increase your return. The two most important items are the interest on your property loan and depreciation (AfA). The loan interest is fully tax deductible as income-related expenses.
AfA allows you to write off the acquisition or construction costs of the building (excluding the land portion) linearly over 50 years at two per cent per year. For a building portion of 250,000 euros, you can claim 5,000 euros a year for tax purposes.
These tax deductions reduce your taxable income and lead to noticeable tax savings. Costs for necessary insurance for landlords can also be claimed as income-related expenses. In this way, the state is indirectly involved in the costs of your investment property.
Securing your future: strategies for refinancing and interest rate protection
The first fixed-rate period eventually comes to an end, often after ten or 15 years. After ten years, a remaining debt of over 75 per cent is not uncommon with a repayment rate of two per cent. If interest rates rise during this time, the new monthly instalment can blow your calculations out of the water.
To minimise this risk, you can use a forward loan. This allows you to lock in the current interest rates for your future refinancing up to five years in advance. This incurs a small interest premium, which is worthwhile if interest rates are expected to rise.
Proactive market monitoring is essential so you don't miss the right moment to secure the terms. With a forward loan, you create planning certainty for decades. This means your investment remains a profitable investment in the future as well.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific suggestions for improvement.
More useful links
The German Bundesbank offers a comprehensive indicator system for the German residential property market.
The Federal Statistical Office (Destatis) provides detailed tables and data on house and land prices.
Current interest rates and yields for housing loans to private households can be found at the German Bundesbank.
The KfW provides information on its home ownership programme (124) to support the acquisition of home ownership.
A detailed study on property taxation is offered by the ifo Institute.
Information on the long-term success of property investments can be found at Wüest Partner.
FAQ
How do I calculate the return on my investment property?
The simplest method is the gross rental yield (annual net rent / purchase price * 100). More meaningful is the net rental yield, which takes ancillary costs and non-recoverable costs into account. For a final assessment, you should calculate the return on equity, which also considers financing costs and tax advantages.
What role do acquisition costs play in the return calculation?
The ancillary purchase costs (property transfer tax, notary, estate agent) often amount to more than ten per cent of the purchase price and usually have to be paid from equity. They increase the total investment and thus reduce the initial return.
Why is a low repayment rate often better for investors?
A low repayment rate (e.g. 1–2%) results in a lower monthly instalment. This leaves more of the rental income as surplus (cash flow), which increases liquidity and can be used for further investments or reserves.
What is depreciation for wear and tear (AfA)?
AfA is a tax depreciation deduction on the value of the building (not the land). For buildings erected after 1924, you can claim two per cent of the acquisition and production costs against tax each year for 50 years.
How can I protect myself against rising interest rates when refinancing?
With a forward loan, you can secure today’s interest rate level for refinancing due in the future, often up to 66 months in advance. This creates planning certainty, but does involve a small interest-rate surcharge.
Are nextsure’s consulting services free of charge?
Yes, our mission is to offer you tailored and easy-to-understand insurance solutions. An initial risk analysis and specific suggestions for improvement are free of charge for you.
