Gross yield, net yield, and why the denominator decides everything
Rental yield is the buy-to-let world's screening number, used the way American investors use the cap rate. Gross yield is annual rent divided by cost. Net yield is annual rent after voids and running costs, divided by the same cost. Both are unleveraged: the mortgage never appears, so the figure describes the property and not your loan.
What makes the number slippery is not the numerator but the denominator. Almost every property portal and agent quotes yield on the asking price, because that is the only figure they have. Your actual outlay includes stamp duty or transfer tax, conveyancing, survey, lender fees and whatever the property needs before a tenant will pay for it. On the worked example below, that gap is $15,300 on a $250,000 purchase — 6.1% of the price — and it drags the gross yield from 6.00% to 5.65% without a single assumption changing.
Neither basis is wrong. What is wrong is mixing them: computing your own yield on total acquisition cost and then comparing it against a listing's yield on price makes every property on the market look better than the one you own. The selector on this calculator exists so you can force both sides onto the same basis.
What belongs in each line
Annual rent is the monthly figure times twelve. If you let on a weekly basis, multiply the weekly rent by 52 and divide by 12 first — using "rent times 4" for a month understates annual income by 4 ÷ 4.333 = 7.7%, because there are 4.33 weeks in an average month.
The void allowance covers empty periods and unpaid rent. Two weeks a year between tenancies is 3.85% of the rent; a month is 8.3%. Include arrears here rather than in running costs, because arrears scale with rent while a service charge does not.
Running costs are everything the property consumes annually except the mortgage: letting or management fees, landlord insurance, service charge and ground rent on a leasehold flat, maintenance and repairs, gas safety and electrical certificates, and any accountancy. The mortgage is deliberately excluded — including it would make the yield depend on your loan and destroy its comparability, which is the whole point of the metric.
The basis is where you make the explicit choice. Total acquisition cost is the honest measure of capital committed, and it is the correct denominator if you want a figure comparable with what that money could earn elsewhere. Purchase price alone is the market convention, and it is the correct denominator if you are benchmarking against quoted yields.
Note what is missing: this is a yield, not a return. It ignores capital growth entirely, and it ignores the effect of your mortgage on both the capital committed and the income received. For the leveraged figure, use the cash-on-cash return calculator; for total return including growth, the rental property ROI calculator.
Worked example: a $250,000 flat at $1,250 a month
You buy a two-bedroom flat for $250,000. Stamp duty or transfer tax is $7,500, legal work and survey come to $1,800, and $6,000 of redecoration and safety work is needed before letting. It rents at $1,250 a month. Running costs — management at 10%, insurance, service charge, maintenance and certificates — total $4,200 a year, and you allow 4% for voids.
- Annual rent. 1,250 × 12 = $15,000.
- Total acquisition cost. 250,000 + 7,500 + 1,800 + 6,000 = $265,300.
- Gross yield on price. 15,000 ÷ 250,000 = 6.00%.
- Gross yield on acquisition cost. 15,000 ÷ 265,300 = 5.65%.
- Rent after voids. 15,000 × 0.96 = $14,400.
- Net annual income. 14,400 − 4,200 = $10,200.
- Net yield on acquisition cost. 10,200 ÷ 265,300 = 3.84%.
- Net yield on price. 10,200 ÷ 250,000 = 4.08%.
- Payback. 265,300 ÷ 10,200 = 26.0 years of net income to recover the capital, ignoring any growth.
Four legitimate yields for one property, spanning 5.65% to 6.00% gross and 3.84% to 4.08% net. The spread between the highest and lowest of the four is 2.16 percentage points — larger than the gap between a good and a poor property in many markets. Always say which one you are quoting.
How to read a yield
Yield is a price, set by the local market for that type of property, so there is no threshold that separates good from bad everywhere. What the number does reliably tell you is the shape of the investment.
Low yield means you are buying growth. Prime central locations routinely trade at low yields because buyers expect capital appreciation and value the liquidity. That is a legitimate strategy, but it means the income will not cover much and the return depends on the price rising.
High yield means you are being paid for risk or for work. Yields well above the local norm generally come with something attached: a short lease, a difficult tenant profile, a market with weak population growth, or a property let by the room rather than as a whole. None of those is disqualifying; all of them need to be priced.
The gross-to-net gap is the diagnostic. On the example above, gross 5.65% becomes net 3.84% — the running costs and voids absorb 32% of the rent. A leasehold flat with a heavy service charge, or a fully-managed let, will show a wider gap; a modern freehold house that you manage yourself will show a narrower one. Two properties with identical gross yields and different gaps are not comparable investments, and the gross figure alone will never tell you which is which.
Compare net yield against your mortgage rate. If the net yield on the purchase price is below your interest rate, the loan costs more per borrowed dollar than the property earns per dollar of price, so borrowing more reduces your return rather than increasing it. That single comparison explains most of what happens to leveraged landlords when rates move.
Monthly rent needed for a target gross yield
| Purchase price | 4% yield | 5% yield | 6% yield | 7% yield | 8% yield |
|---|---|---|---|---|---|
| $150,000 | $500 | $625 | $750 | $875 | $1,000 |
| $200,000 | $667 | $833 | $1,000 | $1,167 | $1,333 |
| $250,000 | $833 | $1,042 | $1,250 | $1,458 | $1,667 |
| $300,000 | $1,000 | $1,250 | $1,500 | $1,750 | $2,000 |
| $400,000 | $1,333 | $1,667 | $2,000 | $2,333 | $2,667 |
| $500,000 | $1,667 | $2,083 | $2,500 | $2,917 | $3,333 |
These are gross yields on the purchase price only. Add your acquisition costs to the price and the required rent rises in proportion — on the worked example, 6% on $265,300 needs $1,326.50 a month rather than $1,250.
Where yield calculations go wrong
- Comparing your net yield to a listing's gross yield. The two differ by everything the property costs to run. On the worked example that is 1.81 percentage points, which is larger than the difference between most markets.
- Multiplying weekly rent by four. A month averages 4.33 weeks, so this understates annual rent by about 7.7%. Multiply weekly rent by 52 instead.
- Leaving the mortgage in running costs. Yield is unleveraged by definition. Including interest turns it into a badly-defined hybrid that cannot be compared with any quoted figure.
- Forgetting the service charge and ground rent on a leasehold flat. These are frequently the single largest running cost and they are invisible on the sale particulars until you ask.
- Using asking rent rather than achieved rent. Advertised rents are aspirational; letting agents can tell you what comparable units actually let for and how long they took.
- Ignoring refurbishment. Work needed before the first tenancy is capital you have committed. Leaving it out of the basis is the most common way a marginal deal is made to look acceptable.
- Quoting a yield on a room-let property against whole-house comparables. Houses in multiple occupation produce higher gross yields and much higher running costs, so their net yields are not comparable to a single-family let.
Yield, cap rate and the rest of the family
Rental yield and the American capitalisation rate are close relatives that are not interchangeable.
Cap rate is net yield with a stricter numerator. A US cap rate divides net operating income by value, where NOI has already had a management fee and often a replacement reserve deducted. A gross rental yield deducts nothing at all. On the same property, a quoted gross yield will read one to three percentage points above the cap rate, purely because of what has been subtracted. The cap rate calculator follows the appraisal convention.
Gross rent multiplier is yield upside down. Price divided by annual rent, so a 6% gross yield is a multiplier of 16.7. Some markets quote one and some the other; they carry identical information. See the gross rent multiplier calculator.
The 1% rule is a yield in disguise. Monthly rent at 1% of price is an annual gross yield of 12% on price — a level very few markets now support, which is why the rule functions mainly as a fast filter rather than a standard. Test it with the one percent rule calculator.
Two things yield structurally cannot see. It cannot see capital growth, so it will always favour high-income, low-growth markets over the reverse — and over a long hold, growth compounds while yield does not. And it cannot see leverage, so two investors buying the same flat with 25% and 40% deposits will compute the same yield and experience very different returns. Use yield to screen and to compare properties; use the leveraged metrics to decide.
Key terms
- Gross yield
- Annual rent divided by the basis, with nothing deducted. Fast to compute from a listing and blind to running costs.
- Net yield
- Annual rent after voids and running costs, divided by the same basis. Sometimes called net initial yield in commercial markets.
- Void
- A period with no paying tenant, whether between tenancies or during arrears. Expressed here as a percentage of annual rent.
- Total acquisition cost
- Purchase price plus transfer tax, legal and lender fees, and any refurbishment required before letting — the full capital committed.