Cost-benefit analysis

Profitability Analysis - A profitability analysis is a financial analysis that compares all the income and expenses of a real estate investment to assess its profitability. It is the key decision-making tool for investors, builders, and project developers. Banks regularly require a profitability analysis as the basis for lending for investment properties. A carefully prepared analysis protects against bad investments and identifies realistic return expectations.

Components and Methodology

A complete feasibility study consists of two parts:

Revenue side:

• Annual net base rent (actual rent or target market rent)
• Rent increase potential (typically modeled at 1-3% p.a.)
• Special income: parking spaces, advertising space, communal antennas

Cost side:

• Purchase price and ancillary acquisition costs: Real estate transfer tax (Bavaria: 3.5%), notary and land registry fees (approx. 1.5-2%), brokerage commission (up to 3.57% per party) - together approx. 8-10% of the purchase price
• Non-pass-through management costs: Maintenance reserve of approx. 7-12 euros/m²/year for older buildings, administrative costs, risk of rent loss of approx. 2-3% of the annual net rent (excluding utilities)
• Interest and principal payments on the financing (debt service)
• Tax implications: Depreciation, income-related expenses, income tax on rental surpluses

The standard profitability metrics are:

• Gross rental yield: Annual net rent (excluding utilities) / purchase price × 100 - quick comparison figure for offers
• Net rental yield: Annual net rent minus non-pass-through costs / total investment (purchase price + ancillary costs) - more meaningful than gross
• Return on equity: Cash flow after debt service and taxes / equity invested - shows the leverage effect of debt financing

A solid real estate investment in Nuremberg typically achieves a gross rental yield of 4-6% and a net rental yield of 3-4%.

Tax Considerations and Cash Flow

The profitability calculation takes into account the tax leverage: Straight-line depreciation significantly reduces the tax burden on rental income:

• 3% annually: New construction from 2023 onward (Section 7(4) EStG)
• 2% annually: Built between 1925 and 2022
• 2.5% annually: Built before 1925

With a building value of 200,000 euros and a 2% depreciation rate, the annual depreciation amount is 4,000 euros, which reduces income tax as an income-related expense. At a marginal tax rate of 42%, this results in a tax savings of 1,680 euros per year.

The after-tax cash flow shows whether the property pays for itself on a monthly basis or if the owner must make additional payments. For leveraged investments, we distinguish between:

• Positive cash flow: Rental income exceeds debt service + costs - property generates a monthly surplus
• Negative cash flow (shortfall): Owner makes monthly contributions - only advisable if significant appreciation is expected and there are tax benefits

We always calculate three scenarios: conservative (1% annual rent increase, higher risk of rent loss), realistic (2% annual rent increase), and optimistic (3% annual rent increase, low vacancy risk).

Expected Returns and Purchase Price Multipliers

The purchase price of an investment property is often stated as a multiple of the annual net cold rent-the so-called multiplier or factor. A factor of 20 means that the purchase price is 20 times the annual net rent, which corresponds to a gross rental yield of 5%. Typical factors in Nuremberg (as of 2025):

• Basic peripheral locations (Langwasser, Kornburg): Factor 15-18 (yield 5.5-6.7%)
• Mid-range locations (Röthenbach, Maxfeld): Factor 18-22 (yield 4.5-5.5%)
• In-demand locations (Johannis, Gostenhof): Factor 22-28 (yield 3.5-4.5%)
• Premium locations (Erlenstegen, Buchenbühl): Factor 28-35 (yield 2.8-3.5%)

Practical Tip for Property Owners in Nuremberg

We recommend that investors in the Nuremberg metropolitan region base their profitability calculations on the current market data from the Nuremberg Appraisal Committee. The local comparative rents from the Nuremberg Rent Index (last updated in 2023) provide a solid foundation for income planning. Especially in neighborhoods with potential for appreciation such as Eberhardshof, Galgenhof, or Muggenhof, the profitability analysis often shows attractive returns because purchase prices still have moderate multiples while rental demand is rising.

We prepare a comprehensive profitability analysis for our investor clients-including tax considerations, financing structure, and sensitivity analysis for three scenarios-and explain the results in a personal consultation.

Frequently Asked Questions

What return makes a property a worthwhile investment?

As a rule of thumb: The net rental yield should be at least 1-2 percentage points above the current loan interest rate to generate positive cash flow. With an interest rate of 3.5% (as of 2025), we recommend a net rental yield of at least 4.5-5%. In Nuremberg, this is realistically achievable for existing apartments in mid-range locations-in premium locations, yields are lower, but the potential for appreciation and protection against vacancies is higher.

Do I need to submit a profitability analysis to the bank?

Yes, when financing investment properties, banks generally require a transparent profitability analysis. They examine, in particular, the ability to service the debt-that is, whether the rental income is sufficient to cover interest and principal payments. As a rule of thumb: Rental income should amount to at least 110-120% of the debt service to provide a buffer for vacancies and repairs. For owner-occupied properties, a household budget (income vs. household expenses) is typically used instead.

What mistakes are commonly made in profitability calculations?

The three most common mistakes are: Maintenance costs set too low - many calculations assume only 5 euros/m²/year; for older buildings, 10-15 euros/m²/year is more realistic. No provision for rental loss risk - when tenants move out, apartments stand vacant for an average of 2-3 months; 2-3% of the annual base rent should be set aside as a reserve. Overly optimistic rent assumptions - the base rent should be based on the current rent index, not on isolated peak rents. We critically review your calculation for precisely these points.

How do I calculate the break-even point for a real estate investment?

The break-even point indicates how many years it takes for the investment (purchase price + ancillary costs) to be covered by rental income + tax benefits + appreciation. With a gross rental yield of 5% and a purchase price ancillary cost ratio of 9%, the theoretical break-even point is approximately 18 years - without taking debt financing into account. With debt financing (leverage) and tax benefits, the break-even point can drop to 10-12 years. We calculate your individual break-even point as part of our investment consulting services.

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