How to Assess the Profitability of a Seaside Rental Property

Buying a seaside property is one of the most attractive and profitable long-term investments in Croatia. Besides being used for personal purposes, apartments, houses, and villas can generate stable income through tourist rental.

Actual profitability does not depend solely on location or rental rates. Investors want to know the true return on investment after all costs such as maintenance and rental management. That is why ROI (Return on Investment) is one of the key factors when deciding to purchase a property.

Below, we will explain which factors influence income from tourist rental and deliver the highest return on investment.

What Is ROI in Real Estate?

ROI stands for Return on Investment, is expressed as a percentage, and indicates the return on invested capital. In short, ROI is used to assess the profitability of a property. The higher it is, the more potentially profitable is the investment.

ROI is calculated by dividing net profit by total investment and multiplying by one hundred. It is necessary to take into account rental income and all costs associated with the property – from taxes and furnishing to maintenance and tourist rental management.

ROI =Net Profit / Total Investment x 100

What Costs Are Included in a Property Purchase?

When checking ROI, many investors focus on the purchase price. However, total investment includes additional costs that can affect rental profitability. The basis of the investment is the purchase price. In addition, property transfer tax, agency commission, legal costs, and costs related to the transfer of ownership should be factored in.

Sometimes it is necessary to invest in renovation and furnishing. A new kitchen, bathroom, terrace arrangement, or interior upgrades can significantly increase the property’s competitiveness on the rental market.

Investments also include property categorisation, professional photography, and advertising on rental platforms. The total investment can be shown through a simple formula:

Total Investment = Purchase Price + Additional Costs

Calculate Annual Rental Income

After estimating the investment, the next step is to calculate potential annual rental income, as it plays a key role in determining the profitability of investing in an apartment. With rental properties, income depends on several factors such as property location, length of season, average nightly rate, and similar.

The estimation model can be calculated using the following formula:

Monthly Rent x 12 = Annual Rental Income

However, for seaside property, an estimate based on average annual occupancy should be used, as an apartment can have high occupancy during July and August but significantly lower occupancy the rest of the year.

You can read more about the differences between rental models in the article on short-term or long-term rental and what brings higher profit.

Factors That Influence Income

Factors that influence income include location, season and occupancy, maintenance costs, property quality, rental type, and amenities.

Location is one of the most important factors affecting ROI. Properties close to the sea, the centre, marinas, or popular tourist attractions achieve higher occupancy and higher nightly rates. Locations such as Dubrovnik, Split, or Hvar often provide more stable income.

Income also depends on the length of the season. Properties located in areas with a longer season usually achieve a higher ROI. Properties such as holiday homes or villas with pools often have a longer season and higher occupancy.

Properties with a longer season often have higher operating costs as well. Maintenance costs should be included in the profitability calculation. These include, for example, pool or garden maintenance.

A modern interior, quality furnishings, or a terrace with a view can enable a higher rental price.

Short-term rental usually offers greater income potential but involves more effort. Long-term rental provides more stable income but achieves a lower ROI.

Amenities such as a pool, jacuzzi, private parking, fast internet, or smart home systems can increase the property’s competitiveness and enable better nightly rates.

Annual Property Maintenance Costs

Rental income is not actual earnings, as every property generates annual costs that need to be included in the ROI calculation. For example, if the apartment is in a building, owners pay building maintenance fees, plus servicing, repair, renovation, and minor refurbishment costs.

For tourist rentals, owners cover electricity, water, internet, utility costs, etc. Cleaning costs, pool maintenance, or garden upkeep are also significant when it comes to houses and villas.

Additional costs include property insurance, tax obligations, advertising platform commissions, property management services, etc. Net annual income can be calculated using the formula below:

Net Annual Income = Annual Rental Income – Operating Costs

Difference Between Gross and Net ROI

It is important to distinguish between gross and net ROI. Gross ROI is based solely on rental income and the purchase price of the property, without factoring in additional costs. Net ROI, on the other hand, includes all annual costs such as maintenance, property management, and other operating expenses. Therefore, net ROI provides a more realistic and accurate picture of the actual return on investment.

How to Calculate Return on Investment in Real Estate?

The first step is to determine the total investment including the price, taxes, renovation, and furnishing. Then rental income from tourist rental is estimated. The third step is to subtract all annual costs such as utilities, maintenance, cleaning, and platform commissions. The final ROI is calculated using the following formula:

ROI (%)=Net Annual Income / Total Investment x 100

The higher the percentage, the more profitable the investment.

If you want to find out which locations in Croatia have the greatest rental potential and typically deliver a higher ROI, you can view an overview of the most promising areas in the article where to buy property for rent in Croatia.

Examples of Return on Investment in Real Estate

Let us assume we bought an apartment in Zadar worth 250,000 EUR, including renovation and furnishing. The apartment generates gross annual income of 24,000 EUR while maintenance and management costs are 8,000 EUR, meaning the net income is 16,000 EUR. In this scenario, the ROI is 6.4%.

A luxury villa with a pool requires high initial investment but achieves a higher ROI compared to an apartment. Based on a villa purchase price of 1,000,000 EUR and annual income of 120,000 EUR, with operating costs of 50,000 EUR, it generates a net profit of 70,000 EUR. In this case, the ROI is 7%.

Realistic ROI Expectations

The level of ROI for seaside properties can vary significantly depending on the type of property, location, or rental strategy. On the Croatian market, the return on investment ranges between 3% and 8%, with seaside properties having a higher ROI than inland properties.

Conclusion

In conclusion, the profitability of a seaside rental property does not depend solely on an attractive location but on a careful assessment of all income and costs associated with the investment. A quality property in a good location can generate stable income and increase the value of the investment long-term, but the key to success lies in a realistic calculation of net ROI. Investors who analyse maintenance costs, occupancy, season, and rental strategy in advance can make a more confident decision and achieve the maximum return on their investment.

If you are considering investing in a seaside property, explore the current selection of apartments and houses and villas on the Croatian coast, or contact us for a personalised profitability assessment – we will help you find a property that matches your investment goals.