IRR, yield and equity return: how to read a property investment projection

A property investment IRR (internal rate of return) in Germany is the single annual rate at which everything you pay into an investment, from purchase costs to monthly top-ups, balances everything you get back, including the sale. It is the most complete return measure and the easiest to flatter, because the sale price, the loan and the tax rate move it far more than any yield. On the fictional Leipzig apartment below, a 4.5 per cent gross yield becomes a pre-tax IRR of 0.8 per cent over ten years if the price rises by 1 per cent a year, and −3.1 per cent if it stays where it is.

The monthly budget is covered in our rental property cash-flow guide. This guide is about the multi-year figures on the last page of a projection.

Definitions vary between sources, so a projection should state its own. These are the ones used here.

• Gross yield: annual cold rent divided by the purchase price. A price tag, not a return.
• Net yield: rent after vacancy and owner-paid costs, divided by the price plus purchase costs: the property's return before financing.
• Cash-on-cash return: one year's cash flow before tax divided by the cash you put in.
• Equity multiple: total cash received divided by total cash paid in over the holding period, regardless of timing.
• IRR: the discount rate at which the present value of all dated cash flows, in and out, is zero. Unlike the multiple, it rewards money that comes back sooner.

The first three describe one year. Only the last two include the sale, where most of a financed apartment's return arrives.

Illustrative example. Fictional figures, not a forecast, offer or valuation. Apartment A from our cash-flow guide: a two-room flat in Leipzig in a building completed in 1996. Price €240,000; purchase costs €26,568 (11.07 per cent, including €1,200 of notary and land-registry costs for the bank's land charge); loan €216,000 at an assumed 3.7 per cent nominal, fixed for ten years, 2 per cent initial repayment, €1,026 a month; cold rent €900 a month. Owner costs a month as in that guide: non-recoverable service charge (Hausgeld) €120, unit management €35, allowances of €40 for repairs and €20 for vacancy. Purchase contract notarised 15 January 2026; benefits and burdens pass on 1 April 2026, so each year runs from April to March. Rent rises 1.5 per cent a year and owner costs 2 per cent a year, as smoothed averages. Annual flows are counted at the end of each year. Sale at the end of year 10 for €265,109 (1 per cent a year): sale contract notarised Tuesday 12 February 2036, benefits and burdens passing 1 April 2036, when the fixed rate also ends. The seller pays an agent 3.57 per cent including VAT. Tax: assumed 42 per cent marginal rate, income tax only; solidarity surcharge and church tax excluded.

Year 0 is the €24,000 down payment plus €26,568 of purchase costs. Figures rounded to the euro.

Before tax, the owner pays in €50,568 at the start and €32,687 in top-ups over years 1 to 9; year 10's shortfall is netted against the sale. In total, €83,255 goes in and €88,790 comes back.

Of the €123,120 in loan payments, €52,180 repays principal. That is real equity building, and the series already captures it: each year's principal is part of the outflow, and it comes back as a loan of €163,820 rather than €216,000 to clear at the sale. Some projections also add each year's principal to the annual return as "equity growth". That counts it a second time. In this example, it lifts the pre-tax IRR from 0.8 to 8.4 per cent.

Gross yield, net yield and cash-on-cash use the definitions and first-year figures of our cash-flow guide.

The yields describe the property in its first year. The cash-on-cash return shows the owner subsidising it. The multiple says that, over ten years, you get back 7 per cent more than you put in before tax. The IRR turns that into an annual rate: 0.8 per cent, below the 3.7 per cent the bank charges.

With 90 per cent financing, the sale is the only large positive number in the series, so the exit assumption decides the result. The table varies it, and the loan.

Cash needed at the start: €50,568 with a 90 per cent loan; €122,568 with a 60 per cent loan (€144,000 at the same 3.7 per cent and 2 per cent repayment, €684 a month); €265,368 with no loan (no land-charge costs). Rent, costs and selling costs as above.

After a 10 per cent fall, the net sale proceeds are €44,469, less than the cash paid in at the start. Check what the exit price implies: at €265,109, the next buyer pays about 21.2 times the then annual rent, against 22.2 times today. An exit at a higher multiple than today's assumes the market gets dearer as well as rents rising. For the reverse question, what price you need simply to recover your cash, see how much appreciation your investment needs.

Borrowing raises the IRR only when the property itself earns more than the loan costs. The no-loan column is the property's own, unlevered return. At 1 per cent growth it is 3.0 per cent, below the 3.7 per cent interest rate, so each borrowed euro dilutes it: 2.2 per cent with a 60 per cent loan, 0.8 per cent with 90 per cent. At 2 per cent growth the property earns about 3.8 per cent, close to the loan rate, and leverage barely matters. Only above that does it amplify: at 3 per cent a year, 6.8 per cent with a 90 per cent loan against 4.7 per cent with none. On the way down it works just as hard.

Leverage also changes the cash you need: the 60 per cent case roughly breaks even each month but needs €72,000 more on day one. The rate is held at 3.7 per cent throughout; lenders often price a lower loan-to-value ratio more favourably.

The after-tax line applies an assumed 42 per cent marginal rate (for 2026, a single filer's rate from €69,879 of taxable income, § 32a EStG) to each year's taxable rental result: rent after vacancy, less interest (§ 9(1) sentence 3 no. 1 EStG), deductible owner costs and building depreciation (Absetzung für Abnutzung, AfA) of €3,980.52 a year, 2 per cent of a €199,026 building base (§ 7(4) EStG). Principal is not deductible. Year 1 also deducts the €1,200 land-charge costs as financing costs (Finanzverwaltung NRW); maintenance-reserve contributions are left out until the owners' association spends them (BFH, IX R 19/24). Depreciation is not a payment, and a deduction is worth your marginal rate, not the euro.

The tax effect is €1,696 in year 1 and shrinks as interest falls and rent rises; by year 10 the flat shows a small taxable profit. Over ten years it adds €6,447 and lifts the IRR from 0.8 to 1.8 per cent. Three caveats:

• It needs other German-taxed income at that rate. At a 30 per cent marginal rate, the after-tax IRR is 1.5 per cent. Non-residents are treated differently; see rental property tax benefits.
• It arrives with the assessment, not monthly. Moving each year's effect back by a year lowers the after-tax IRR to 1.7 per cent.
• Less debt can reverse the sign. With a 60 per cent loan, the flat makes taxable profits, so the after-tax IRR (1.9 per cent) is below the pre-tax one (2.2 per cent).

The sale is untaxed here because the sale contract is notarised after 15 January 2036, outside the ten-year period for private sales under § 23 EStG, assuming private ownership and no commercial property dealing. Inside the period, the gain would be taxed, with the AfA claimed added back; see selling after ten years. The fixed rate ends with the sale, so no early repayment compensation (Vorfälligkeitsentschädigung, § 490(2) BGB) arises.

• Gross yield against IRR. A 4.5 per cent gross yield and a 0.8 per cent IRR describe the same flat. Never set one project's yield against another's IRR.
• Levered against unlevered. A 4.0 per cent IRR on 90 per cent finance and 3.8 per cent on a cash purchase carry different risks and need very different amounts of cash. Compare like with like.
• Pre-tax against after-tax. An after-tax IRR at 42 per cent does not describe a reader at 30 per cent, a non-resident or a sale inside ten years.
• Purchase costs left out. If year 0 shows only the €24,000 down payment, the base-case IRR rises from 0.8 to 6.2 per cent. Purchase costs are cash out on day one.
• A multiple on initial equity only. Net sale proceeds of €91,825 divided by €50,568 look like 1.82 times your money. Including nine years of top-ups, it is 1.07.

• Does year 0 include every euro you pay: down payment, transfer tax, notary, land registry and any agent?
• Is the IRR levered or unlevered? At what loan amount, interest rate, repayment rate and fixed-rate period?
• Before or after tax? At what marginal rate, and does it assume refunds arrive in the same year?
• What exit price, what multiple of rent does it imply, and are selling costs and the remaining loan deducted?
• What rent growth, and is it possible under the lease and the limits on rent increases in a tenancy (§ 558 BGB)?
• Are all owner costs in: non-recoverable Hausgeld, management, repairs, vacancy, and do they grow?
• Is principal counted once?
• What is the IRR if the price does not rise at all?

Alpha Minoris's Buyer's Agent service can go through these questions with you at its readiness stage, before any search or offer, setting a projection's assumptions against your budget, borrowing capacity and reserves; waiting can be the outcome. It covers Berlin, Dresden and Leipzig, and you need not live there. It does not value property or predict prices, and the tax lines belong with your tax adviser (Steuerberater).

If you have a projection for a specific apartment, bring it with the lease, the owners' association's latest annual accounts and the loan offer, and test its assumptions line by line. Discuss your first rental property with Alpha Minoris.