Rental Yield Calculator
Gross yield is the number in the listing. It ignores the months the flat sits empty, the agent, the insurance, the maintenance and the tax. This works through all three of the figures that matter, ending with the one an investor is really buying: the return on the cash actually committed.
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Three yields, and only one of them is honest
Gross yield divides a full year of rent by the purchase price. It assumes the property is never empty and costs nothing to hold, which is why it is the figure in the advertisement.
Net yield takes off the weeks with no tenant and the cost of owning the place, and divides by what the purchase actually cost including fees. It is usually two to three percentage points below the gross figure.
Return on the cash invested goes further and subtracts the mortgage interest, then divides by the cash you committed rather than the price. With borrowing, this is the number that describes what you are earning.
Empty weeks are not pessimism
Between tenants there is a gap, and the gap has a cost. Three weeks a year is a normal assumption for an ordinary letting; a student flat with a fixed academic cycle may be higher. Setting it to zero produces a figure no landlord ever achieves.
The costs people forget
Service charge and ground rent where the property is leasehold. Buildings insurance. Maintenance, which averages far more over a decade than it does in the good years. A letting agent, typically a tenth of the rent. Periodic safety checks. Void-period utilities and standing charges.
Leverage cuts in both directions
Borrowing raises the return on your own cash while the rent exceeds the interest, and turns negative faster than most people expect when rates rise. A property yielding 4% net, financed at 5%, loses money every month regardless of what the price does.
This is the income, not the whole return
Capital growth is the other half and is not modelled here, because nobody knows it in advance. Nor is income tax on the rent, which varies widely: some countries tax rental profit at the normal income rate, others apply a flat rate or allow the mortgage interest as a deduction. Check the treatment where the property is before comparing the figures here with a deposit account.
Frequently asked questions
What is a good rental yield?
It depends entirely on the market and on interest rates. The meaningful test is whether the net yield comfortably exceeds the mortgage rate, because below that the property costs money to hold.
Should purchase costs be in the price?
For net yield, yes. Transfer tax and fees are money spent to acquire the asset, and leaving them out overstates the return.
Why is the cash return higher than the net yield?
Because borrowing means a smaller amount of your own money is earning the income. That works while rent exceeds interest and reverses sharply when it does not.
Does this include tax on the rent?
No. Rental income is taxed very differently between countries, and in several the mortgage interest is deductible. Apply your own rate to the income after costs.