What is the return on equity for property?
Property as an investment is rarely paid for with the purchase price — instead it is usually financed to a considerable extent through a loan. It is precisely this leverage that makes the return on equity so revealing: while a property throws off only 4 percent gross rental yield on the purchase price, the return on the equity put in can be a multiple of that. With the calculator below, you can see how much the tenant takes off your hands each month — and how your wealth grows over 20 years.
Return on Equity Calculator
Assumed property value appreciation: 1 % p.a. (conservative)
Tax note: Non-binding guidance, without warranty – not a substitute for tax advice.
The leverage effect with property
Someone who buys a property costing 300,000 € and puts in 60,000 € of equity finances the loan of 255,000 € (purchase price plus incidental costs) through the bank. The decisive mechanism: the loan is not repaid out of your own pocket — but out of the rental income.
As long as rental yield > loan interest rate holds, the borrowed capital works for you. The property earns more than it costs — the difference strengthens your equity. This leverage is known as the leverage effect.
In concrete terms that means:
- You put in 60,000 € (approx. 20 percent of the total price)
- The property rises in value and the loan is paid down
- After 20 years your equity (property value minus remaining debt) can be a multiple of the original sum
- At the same time you have often carried only a fraction of the monthly instalment yourself
"The tenant pays the instalment" — what that really means
This sentence is not a marketing promise but an arithmetical truth — when the rental income is high enough. For a rented flat in Dresden at 900 € net cold rent and a loan instalment of 1,100 €:
- Tenant carries: 900 € (approx. 82 percent of the instalment)
- Owner carries: 200 € + running costs (service charge, maintenance)
- The owner builds equity — through both repayment AND appreciation
The calculator shows exactly this split: the blue bar (the tenant's share) and the orange bar (your share) make visible who actually carries how much of the monthly costs.
Positive cash flow (rent exceeds the instalment plus running costs) is possible, but rare in strained markets such as central Dresden locations. More often the personal contribution is 100–400 € a month — given the long-term wealth-building, an acceptable contribution from the point of view of many investors.
Return on equity vs. direct investment
What if you invested the same 60,000 € directly instead — for example in a broadly diversified ETF with an assumed return of 5–7 percent p.a.? The return on equity of a debt-financed property can exceed this benchmark return, but does not have to:
| Factor | Property (debt-financed) | Direct investment (ETF) |
|---|---|---|
| Leverage effect | Yes (leverage through a loan) | No |
| Inflation protection | High (tangible asset) | Moderate |
| Liquidity | Low (tied-up capital) | High |
| Tax treatment | Depreciation, income-related expenses | 25 % flat-rate withholding tax |
| Risks | Vacancy, interest-rate change, maintenance | Price fluctuations |
For the typical Dresden investor with an investment horizon of 20+ years and a specific property in a good location, the return on equity is in many cases competitive — provided the financing and rent are carefully calculated.
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