The “multiple” is the most prominent way to calculate the return on your investment property. How do you calculate the multiple and what multiple should you be looking for when buying a property?
- The multiple is the easiest way to calculate the profitability of your real estate investment with just 2 numbers
- After calculating the multiple, you will know the investment return of your property when calculating “1/multiple”
- In 2023, the multiples in Germany ranged from around 20 up to 80 in the regions with high demand
- Historically speaking, the multiple has been rising continuously for property prices in Germany
What Is The Real Estate "Multiple"?
A great way to calculate the return on your investment property is by using the multiple, called “Vervielfältiger” in German. In this article of the GermanReal.Estate Wiki, we will look at what the multiple is, how you calculate it, and the best multiple you should look at before buying an investment property in Germany.
The multiple (Vervielfältiger) is an extremely popular number to easily calculate the return of your rental property the fastest way possible. All you need is two numbers of your property you probably know already:
- The purchasing price of your investment property
- The net rental income per year
Attention: NET rental income, not GROSS rental income. Figuring out the net rental income generated by your rental property per year can be a little tricky. You need to subtract all the costs of owning a property from the rental income your tenant pays each month, including:
- Reserves for any renovations and repairs
- Property management costs
- A reserve for covering expenses during any vacancies
- All other costs of the property (“Betriebskosten”)
You can also calculate the multiple using the GROSS rental income instead of the NET rental income, but then you are just making the investment property seem more profitable than it actually is. Calculating back and forth until the numbers look nice enough is a sure way to failure when investing in real estate. As a real estate investor, you will get the NET rental income only, not the GROSS rental income paid by the tenant.
How To Calculate Your Real Estate Return With The Multiple
Now that we have the two numbers we need to calculate the multiple, we just divide the property price by the annual net rent to get the multiple of your investment property. But what does the multiple help us to know? 🤔
The multiple might make more sense when you divide 1 by the multiple to give you the percentage return of your rental property:
- A property worth 100.000€ that returns 10.000€ in net rental income per year would have a multiple of 10. When dividing 1 by your multiple of 10, you will get your net return of 10% per year.
- A 100.000€ property returning only 5.000€ in net rental income per year would have a higher multiple of 20, and therefore only a net return of only 5% per year.
The higher the multiple of your property, the lower your return, and vice versa. If you find a property with a multiple of 1, it would cost 100.000€ and return 100.000€ in net rental income. In other words, the rental property will pay completely for itself in the first year.
That would be absolutely incredible, and that’s also why properties like this do not exist (at least here in Germany). Properties with single-digit multiples, or higher than 10% return, don’t really exist in Germany anymore. Only perhaps crappy shacks in the back end of nowhere that need extensive renovation.
Invest in properties in Germany with LOW multiples (and therefore a HIGH return on investment) here:
Multiples Of German Real Estate In 2023
The dark green areas have the smallest multiple with less than 22.5. A multiple of 22.5 is a return of about 4%. That is why it is currently quite tough to make passive income when investing in real estate in Germany.
In the top German locations, mostly the “A” locations and really good “B” locations, the multiple is at least 30. That’s the red areas on the map.
In the dark red areas, the multiple goes above 32.5. Based on our formula, the return on investment of a rental property with a multiple of 32.5 would be roughly 3%.
The highest multiple on this map is in an area you would probably never expect – in North Friesland. The multiple here is 82.3 which is a return on net rent of 1.2%. Extremely low!
It’s probably on the Island of the Rich and Famous in Germany: Sylt.
The question when seeing this map is: What type of real estate investor are you? What are you looking for as a real estate investor? 🤔
Is it all right to invest a large amount of money and get a small return on rent in exchange for a relatively safe investment? Then invest in the red and dark red areas with high multiples. Or do you want a cheap property with a relatively high return on your investment IF you find a tenant (= significantly higher risk)? Then invest in Sachsen-Anhalt which is almost completely green.
Historic Multiples Of Real Estate In Germany
One thing is sure, over the long term the Germany map above will get darker and darker in the red if Postbank doesn’t adjust the multiple numbers in the future. We compared the 2021 map with the 2022 map, and rent increased by about 5% year-over-year while property prices increased by more than 17% over the same period.
- Average multiple in Germany 2022: 28,5
- Average multiple in Germany 2021: 25,8
- Average multiple in Germany 2020: 24,1
With the rising property prices in Germany over the last decades and the high demand for living space, it seems likely that this trend will continue over the long term. So if you are interested to invest in real estate in Germany then you might want to go ahead now before properties become less and less affordable in front of your eyes.
The first 2 investment properties we tokenized are in the areas surrounding Düsseldorf (Mönchengladbach & Willich). Düsseldorf is one of the top 7 cities in Germany (A-locations) and properties are still affordable there. If you find the right property, of course. If you don’t want to go property hunting yourself, but want an easier way to invest in German real estate, check out our real estate security tokens on our marketplace.