Rental yield is the first number most investors look at, and the most misused. A property advertised at a 7% yield can be a mediocre investment once voids, management fees, maintenance and mortgage interest are deducted — and a property advertised at 5% can be a strong one if its costs are low and its rent is secure. The difference is not the headline; it is which costs you deduct, which denominator you use, and whether you stop at yield or go on to cash flow.
This guide gives you the formulas, works them through with UK examples you can check line by line, and shows where yield stops being useful and cash-on-cash return takes over. All examples are illustrations with round numbers, not predictions for any particular property. Yield on its own is always a pre-tax figure; tax is dealt with separately at the end.
The two formulas you actually need
Gross yield
Gross yield = (annual rent ÷ property value) × 100
Annual rent is monthly rent × 12. Property value is usually the purchase price when assessing a purchase, or current market value when assessing a property you already own. Gross yield is quick, which is why agents quote it. It is also incomplete, because it assumes every penny of rent is kept and nothing ever goes wrong.
Net yield
Net yield = ((annual rent − annual running costs) ÷ property value) × 100
In this guide, "running costs" means the operating costs of letting: letting-agent management fees, voids (rent lost while the property is empty between tenants), insurance, maintenance and repairs, safety certificates, service charges and ground rent on leasehold property, and accountancy fees. It does not include mortgage interest or income tax. That convention matters, because some sources deduct mortgage payments as well and call the result "net yield" — which makes their figures impossible to compare with anyone else's. Where mortgage interest matters, this guide shows it separately as cash flow, rather than smuggling it into the yield.
Use the rent you will actually collect
Use the rent you realistically expect to collect, not the highest asking rent you have seen. If comparable lets achieve £1,050 a month and one agent suggests £1,200, underwrite at £1,050 until you have evidence otherwise. An inflated rent inflates every figure downstream — gross yield, net yield, interest coverage and cash flow. The same applies to voids: a property empty for four weeks between tenants each year has lost roughly 8% of its annual rent before any other cost is counted.
Worked example 1: the simple case
A property worth £200,000 let at £1,100 a month, with £3,200 a year in running costs.
- Annual rent: £1,100 × 12 = £13,200
- Gross yield: (£13,200 ÷ £200,000) × 100 = 6.6%
- Net rental income: £13,200 − £3,200 = £10,000
- Net yield: (£10,000 ÷ £200,000) × 100 = 5.0%
The gap between 6.6% and 5.0% — 1.6 percentage points — is the cost of actually running the let. It is the difference between how the property looks on a listing and how it performs in your bank account. When comparing two properties, compare net yields, not gross yields: two homes with the same rent and price can have very different service charges, repair bills and management fees.
Worked example 2: a realistic cost breakdown
Take a two-bedroom flat valued at £185,000, let at £1,050 a month, and break the costs down instead of using a single lump sum.
- Annual rent: £1,050 × 12 = £12,600
- Gross yield: (£12,600 ÷ £185,000) × 100 = 6.81%
Annual running costs:
| Cost | Amount |
| Letting-agent management (10% of rent) | £1,260 |
| Void allowance (5% of rent, roughly two to three weeks empty) | £630 |
| Buildings and landlord insurance | £500 |
| Maintenance and repairs | £925 |
| Gas safety, electrical and EPC certificates | £280 |
| Accountancy fees | £400 |
| Total running costs | £3,995 |
- Net rental income: £12,600 − £3,995 = £8,605
- Net yield: (£8,605 ÷ £185,000) × 100 = 4.65%
The "cost drag" here is 2.16 percentage points. Much of it is predictable: management fees and insurance are contractual, certificates are statutory, and a void allowance is a planning assumption, not bad luck. The only genuinely variable line is maintenance, and even that averages out over a few years. A landlord who budgets no void allowance and no maintenance reserve is not being optimistic; they are miscalculating.
Worked example 3: yield on total cost
Take a £250,000 house let at £1,250 a month, with £3,000 a year in running costs.
- Annual rent: £1,250 × 12 = £15,000
- Gross yield on price: (£15,000 ÷ £250,000) × 100 = 6.0%
- Net yield on price: ((£15,000 − £3,000) ÷ £250,000) × 100 = 4.8%
Now include the cost of buying. In England, a £250,000 additional property pays stamp duty of £6,250 on the first £125,000 at 5% plus £8,750 on the remaining £125,000 at 7%: £15,000 in total. Add £2,500 for legal, survey and setup costs, and the total cash cost is £267,500.
- Net yield on total cost: (£12,000 ÷ £267,500) × 100 = 4.49%
That 4.49% is the figure to compare against other investments, because £267,500 — not £250,000 — is what you actually spent. Stamp duty is the single biggest reason net yield on total cost sits below net yield on price for a buy-to-let purchase, and why a high gross yield can still be a weak deal once the full purchase cost is counted.
Beyond yield: cash flow and cash-on-cash return
Yield ignores how you paid for the property. Cash-on-cash return does not: it compares the cash left after mortgage interest (and, in a full version, tax) with the cash you actually invested. That tells you whether a mortgaged property pays you each month or costs you each month.
Continue with the flat from worked example 2:
- Cash invested: 25% deposit on £185,000 = £46,250, plus stamp duty of £10,450 (£6,250 on the first £125,000 at 5% plus £4,200 on the remaining £60,000 at 7%), plus £2,500 legal and setup costs = £59,200
- Mortgage: £138,750 at 5.5% interest-only = £7,631 interest a year
- Net rental income: £8,605
- Cash flow before tax: £8,605 − £7,631 = £974 a year
- Cash-on-cash return before tax: (£974 ÷ £59,200) × 100 = 1.65%
A property with a 6.81% gross yield and a 4.65% net yield therefore returns just 1.65% on the cash invested, before tax. That is leverage working in reverse: when mortgage interest consumes most of the net rent, the return on your cash collapses even though the yield looks healthy. For a higher-rate taxpayer, Section 24 tax can push this cash flow negative on the same property — which is why yield alone should never decide a mortgaged purchase. The limited-company guide in this series explains that tax interaction, and the mortgage guide explains the interest-coverage test lenders apply to the same rent.
What counts as a good yield?
You will often see 5% to 8% quoted as a good gross yield range in the UK, with above 7% described as very good. Treat that as a rule of thumb, not a benchmark. A good yield depends on location, running costs, mortgage rate and what return you could get elsewhere for the same risk.
The pattern to understand is the trade-off, not a single number. Higher yields tend to appear where prices are lower relative to rents — often in northern and midlands markets and smaller towns — while lower yields tend to appear where prices are high relative to rents, notably central London.
Seven mistakes that distort yield calculations
1. Using asking rent instead of achieved rent. Portal asking rents are aspirations. Use rents actually achieved on comparable lets, evidenced by letting agents or completed tenancies.
2. Forgetting voids entirely. Even a good property is empty between tenants. Budget a void allowance every year. Five per cent of rent — roughly two to three weeks — is a common planning assumption; four weeks is roughly 8%.
4. Treating maintenance as zero in a good year. A year with no repairs does not mean the property has no maintenance cost; it means the cost has been deferred. Budget an annual reserve and judge the property over three to five years, not twelve months.
5. Ignoring leasehold costs. Service charges and ground rent on a flat can be thousands of pounds a year and can rise sharply. Always obtain the service-charge history and any planned major works before calculating yield on a leasehold property.
7. Stopping at yield and ignoring tax and interest. Yield is pre-tax and, in the convention used here, pre-mortgage. A property's after-tax cash flow is what you actually keep. Always run yield, then cash flow, then after-tax cash flow, in that order.
Checklist for assessing any property
1. Establish the realistic monthly rent from comparable achieved lets. 2. Calculate gross yield: (monthly rent × 12 ÷ price) × 100. 3. List every running cost, including a void allowance and maintenance reserve, and calculate net yield. 4. Add stamp duty and buying costs, and calculate net yield on total cost. 5. Deduct mortgage interest at the actual product rate and calculate cash flow in pounds. 6. Divide cash flow by total cash invested for cash-on-cash return. 7. Apply your tax position — personal or company, basic or higher rate — to estimate after-tax cash flow. 8. Stress-test: one month void, a 1% rate rise, and a £1,000 repair in the same year. If the property still works, it is a resilient deal; if it only works when everything goes right, it is not.
Frequently asked questions
What is the difference between gross and net rental yield?
Gross yield is annual rent divided by property value, times 100. Net yield deducts annual running costs — management, voids, insurance, maintenance, certificates and similar costs — from the rent before dividing. Gross yield suits a quick comparison of listings; net yield is closer to what the property actually earns.
Should mortgage interest be deducted to get net yield?
Conventions vary. This guide defines net yield before mortgage interest and tax, and shows mortgage interest separately as cash flow. Some sources deduct mortgage payments in their "net yield", producing a lower figure that cannot be compared with a pre-mortgage net yield. Whichever convention you use, state it and apply it consistently.
What is a good rental yield in the UK?
A gross yield of around 5% to 6% is often described as good, and above 7% as very good, but the right figure depends on location, costs, mortgage rate and capital-growth prospects. Judge net yield on total cost and after-tax cash flow, not gross yield alone.
Is rental yield the same as return on investment (ROI)?
No. Yield measures annual rental income against property value. ROI, or total return, measures everything — rent, capital growth, all costs, financing and tax — against the cash you invested. A property can have a modest yield but a strong ROI if it appreciates quickly, or a high yield and a weak ROI if it falls in value or costs more to run than expected.
How do I calculate yield on a property I already own?
Use current market value as the denominator, not the price you originally paid. That tells you what the property earns on the capital tied up in it today, which is the right comparison for a hold-or-sell decision.