Why gross yield doesn't tell the whole story
Gross yield is the annual rent divided by the purchase price. For a 150\,000 € property rented at 650 € a month, that gives \frac{7\,800}{150\,000} \times 100 = 5.2 %. Simple, but incomplete.
This figure ignores almost everything: your deposit, your loan, your charges, your taxes and the resale price. Two properties showing 5% gross yield can earn twice as much as each other once these are factored in.
Above all, gross yield ignores time. Yet 1,000 € received in 10 years is worth less than 1,000 € today. That is exactly what the IRR corrects.
Comparing two investments on gross yield alone is like choosing a car on its top speed. You miss the essentials: fuel use, price, reliability. A property at 5% gross with strong leverage can crush one at 7% gross bought in cash.
What exactly is the IRR?
The IRR, or internal rate of return, is the average annual rate your invested money truly earns over the whole operation. It is shown as a percentage, like a yield, but it factors in every flow over time.
Mathematically, it is the rate that brings the sum of your discounted flows to zero. In plain terms: the rate at which what you put in (deposit, instalments) is exactly offset by what you take out (rent, resale).
An IRR of 11% means your money in this property works at 11% a year. You can then compare directly with a life-insurance fund, shares or another property, on an honest basis.
Internal rate of return
CF_t = cash flow in year t (negative at purchase, positive afterwards), r = the IRR you are solving for, n = holding period in years.
The flows to include in the calculation
The first flow is your starting outlay: deposit plus notary and guarantee fees. It is money going out, so a negative flow in year 0.
Then come the annual cash flows: rent collected minus loan instalments, charges, property tax and income tax. Positive or negative depending on your setup, they spread across the whole holding period.
The last flow is the most overlooked: the net resale proceeds. That is the sale price minus the remaining loan balance, the fees and the capital-gains tax. Without it, your IRR is wrong.
A concrete IRR example
You buy a 150\,000 € flat with a 30\,000 € deposit, the rest on credit. Each year, the property yields a net cash flow of 600 € once the loan, charges and tax are paid.
After 10 years, you sell. After repaying the remaining loan balance, agency fees and capital-gains tax, you are left with 75\,000 € net. That amount adds to the final year's flow.
Factoring in these flows, the IRR comes out at about 11% a year. For a property advertised at 5.2% gross yield, the gap is huge: the loan leverage and the resale do all the work.
| Year | Cash flow |
|---|---|
| Year 0 (purchase) | -30,000 € |
| Years 1 to 9 | +600 € / year |
| Year 10 (resale) | +75,600 € |
| Resulting IRR | ≈ 11% |
Reading and comparing an IRR correctly
A good IRR depends on your horizon and your risk appetite. In leveraged buy-to-let, an IRR between 6% and 10% is solid, above 12% it is excellent. Below 4%, a hands-off investment makes more sense.
Beware the assumptions. The IRR rests on an estimated resale price and vacancy. Inflate the future gain and your IRR becomes a pretty but worthless number. Stay cautious on the resale.
The IRR says nothing about your monthly cash effort. A property can show a 12% IRR while costing you 200 € a month for 15 years. Always read the IRR and the cash flow together.
Always compute your IRR on two resale scenarios: a cautious one (flat price) and an optimistic one (capital gain). If the IRR stays decent even with a flat resale price, your investment stands on its own, with no bet on the market.
From gross yield to IRR, the right reflex
Gross yield is for quickly filtering listings. The IRR settles the choice between two seriously considered properties. One sorts, the other decides.
Doing the maths by hand is heavy: you solve an equation by trial and error or use the IRR function in a spreadsheet. Doable, but quickly tiresome when you compare several properties.
Buy&Rent computes the IRR of each project from your deposit, your loan, your cash flows and a resale assumption. You compare your properties on a clear basis, with no spreadsheet, and you see which one truly makes your money work.
Key takeaway
Gross yield compares badly, the IRR compares well. By factoring in the deposit, the cash flows, the loan and the resale, it gives the real annual return on your money. Compute it on a cautious resale scenario, cross it with your monthly cash flow, and you will know which property to choose. Buy&Rent does it for you on every simulation.