How to calculate the return on a property investment in Mallorca

When someone tells us "I want to buy something that yields well in Mallorca", the first question we ask back is: profitable according to which calculation? There are at least four different ways to measure a property's return, and each one tells a different part of the story. A flat can look like a bargain on gross yield and be a mediocre deal once you calculate the net figure.

In this article we go through the four metrics we use in every report we prepare for our clients, and apply them to an example with real market numbers.

1. Gross yield: the first filter, not the conclusion

This is the quickest calculation, and also the most incomplete. It relates the annual rent to the money put on the table, without deducting any running costs:

One important nuance worth flagging: some "gross yield" calculations you'll see only use the purchase price in the denominator. At Mallorca PSI we always use the total investment — price plus transfer tax, notary, land registry, legal fees and renovation if there is any — for both gross and net yield. It's a more conservative and realistic approach: it reflects the money you actually put into the deal, not just what you pay the seller. So if you compare our figure with a property portal's, ours will normally come out somewhat lower — not because the property performs worse, but because we're counting all the capital employed.

Even with total investment in the denominator, gross yield still doesn't tell you what you're actually going to earn: two flats with the same gross yield can have very different net results depending on their community fees, council tax or state of repair.

2. Net yield: this is where the real conversation starts

Net yield deducts the running costs of holding the property from the rent: council tax (IBI), community fees, home insurance, non-payment insurance, maintenance and letting management if you outsource it. The denominator is the same as for gross yield: the total investment.

It's common to see reports that mix different denominators between gross and net yield, which makes the two figures impossible to compare with each other. Always using the same base — total investment — is what lets the gap between them tell you something useful: how much the upkeep of the property is really costing you in yield terms.

3. Cash flow and return on equity

If you buy with a mortgage, there's a third metric that often matters more day to day than the previous two: cash flow — what's left in your pocket each month after paying the loan instalment.

From there you calculate the return on equity (cash-on-cash): how much the money you've actually put in — your deposit plus initial costs — is generating, rather than the property's full price.

This is the metric that changes most depending on how you structure the financing. The smaller the deposit, the higher the cash-on-cash tends to be — but so does the risk if the rental income stops. It also tends to be noticeably lower than net yield, precisely because a good part of the NOI goes towards the mortgage payment.

4. IRR: the metric that sums it all up, time included

The three previous metrics are a snapshot of one year. The Internal Rate of Return (IRR) is the only one that accounts for the passage of time: each year's cash flows and the future sale of the property, already appreciated, over whatever horizon you choose (we usually calculate it over 10 years).

It's the most complete metric, and also the most sensitive to the assumptions used (expected appreciation, rent growth, sale horizon). That's why, whenever we calculate it for a client, we always explain the assumptions behind it — it's never a magic number, it's a reasoned scenario.

Practical example

Let's take a flat in Palma with these conditions — figures from a real deal we've recently analysed (identifying details omitted):

Item	Amount
Purchase price	€300,000
Transfer tax (8% of purchase price)	€24,000
Notary, land registry and legal fees	€2,000
Renovation / initial furnishing	€40,000
Total investment	€366,000
Equity outlay (10% deposit + costs)	€96,000
Estimated monthly rent	€1,500
Gross annual income	€18,000
Annual running costs (IBI, community, insurance, maintenance)	€2,400
Annual cash flow before tax	€3,380

Metric	Result
Gross yield	4.9%
Net yield	4.3%
Cash-on-cash return	3.5%
Estimated 10-year IRR (3%/year appreciation)	13.7%

Notice the journey across the four metrics: gross yield of 4.9% becomes net yield of 4.3%, and then just 3.5% cash-on-cash once the mortgage is deducted — the picture of "what actually lands in your pocket" is quite a bit more modest than the headline figure the property is often advertised with. And yet the IRR jumps to 13.7% over 10 years, because it factors in an estimated 5% annual appreciation and the future sale of the property, not just the rent. None of the four figures is "the lie" and none is "the truth" — they're different questions, and all four need asking.

What almost never gets calculated (and should)

• Rental taxation: the 50-60% reduction on personal income tax if the rental is for a primary residence, and depreciation of the property as a deductible expense, substantially change the after-tax net result.
• Void periods between tenants: assuming 100% occupancy all year is unrealistic; a single empty month already cuts gross yield by almost a point.
• Opportunity cost of the deposit: the equity tied up also has a cost if you're not investing it elsewhere.

How we do it at Mallorca PSI

Before we propose a viewing, we carry out the full financial analysis of every shortlisted property: gross and net yield on the total investment, cash flow, cash-on-cash, indicative taxation and estimated IRR over several years. That way you decide with data, not with the "advertised" yield shown on the portal.