Calculating rental yield should be straightforward, but most landlords mix at least two different concepts and end up with a number that doesn’t mean anything. The typical result: flats that “yield 7 %” on paper and leave £80 net per month in the bank.
This guide walks through the four metrics that actually matter —gross yield, net yield, cash-on-cash return and total return on investment— with a numerical example of a UK property. By the end you’ll have a step-by-step calculation order.
If you’d rather have it tracked automatically each month, that’s exactly what Livra does. The rest of the article teaches you how to do it yourself.
1. Gross yield: the first snapshot
Annual gross yield answers a single, narrow question: what percentage of the property price do you collect in rent each year?
Gross yield = (Monthly rent × 12) / Purchase price × 100It’s the figure you see on every property portal. Useful as an initial filter to discard obviously bad deals, but it ignores everything else: expenses, voids, tax, mortgage. It always overstates reality.
Example. You buy a flat for £250,000 (price excluding fees) and rent it out at £1,250/month.
- Annual income = 1,250 × 12 = £15,000
- Gross yield = 15,000 / 250,000 = 6.0 %
That number tells you that “on paper” you recover 6 % of the price each year through rent. It doesn’t tell you what stays in your pocket.
2. Net yield: what you actually keep
Net yield subtracts the costs of owning a tenanted property. This is what you actually need to look at before deciding to buy.
Net yield = Annual net income / (Purchase price + Acquisition costs) × 100Net income is gross income minus:
- Service charge and ground rent (for leasehold flats)
- Building insurance (landlord policy)
- Maintenance and repairs (a rough estimate is 1.0 %–1.5 % of property value per year)
- Void allowance (~1 month/year between tenancies)
- Letting agent fees, if applicable
Acquisition costs are SDLT, conveyancing, surveys, mortgage arrangement fees and any broker fee. In the UK these typically total 4 %–8 % of the purchase price for a non-first-home (the 5 % SDLT surcharge for additional properties pushes the number up).
Example (same flat). Same £1,250/month rent, plus the real costs:
| Item | Annual |
|---|---|
| Gross rent | £15,000 |
| Voids (one month/year) | −£1,250 |
| Service charge + ground rent | −£1,350 |
| Building insurance | −£250 |
| Maintenance (1.5 %) | −£3,750 |
| Net income | £8,400 |
And acquisition costs on the £250,000 flat (SDLT 5 % on additional property = £14,925, plus £3,000 in legal/survey/broker fees): roughly £18,000.
- Total invested = 250,000 + 18,000 = £268,000
Net yield = 8,400 / 268,000 = 3.13 %
You went from an apparently attractive “6 % gross” to ~3.1 % net — before mortgage interest or tax. That drop is normal, which is why gross and net aren’t interchangeable.
3. Cash-on-cash return: the metric if you have a mortgage
If you finance the property, net yield doesn’t capture what matters: how much money stays in your account each year vs how much money you put in from your own pocket.
Cash-on-cash return = (Net income − Annual mortgage cost) / Own capital invested × 100“Own capital invested” is the deposit plus acquisition costs (not the mortgage — that’s not your money).
Example. Same flat, 80 % LTV mortgage:
- Deposit = £50,000 (20 % of 250,000)
- Acquisition costs = £18,000
- Own capital invested = £68,000
- Annual mortgage cost at 5 % interest, 25-year term ≈ £14,000 (£1,170/month)
Cash-on-cash return = (8,400 − 14,000) / 68,000 = −8.2 %
The flat loses £5,600/year in cash. Net yield was positive, but the mortgage eats the cash flow. This is the metric that tells you whether you’ll be putting money in or taking money out every month — and it’s the one almost nobody calculates.
In practice: cash-on-cash is the thermometer of your liquidity. The higher it is, the more positive monthly cash flow and the lower the risk if rents drop or your variable rate moves up.
4. Total return on investment: including appreciation and capital paydown
Cash-on-cash only looks at cash. But buying a property also generates two invisible returns:
- Capital paydown: every mortgage payment includes principal repayment. It leaves your account, but it comes back to you as equity.
- Appreciation: the property may rise (or fall) in value.
Total ROI sums them:
Total ROI ≈ Cash-on-cash + (Principal paydown / Capital invested) + (Expected appreciation / Capital invested)Continuing the example: if in year one you pay down £4,500 of principal (part of the mortgage payment) and the flat rises 2 % (£5,000), your real total ROI would be:
Total ROI ≈ −8.2 % + (4,500 / 68,000) + (5,000 / 68,000) = −8.2 % + 6.6 % + 7.4 % = ~5.8 %
The number changes dramatically: it looks awful in cash terms but, looking at equity, it isn’t. The problem is liquidity, not total return. Knowing how to distinguish these two sides is critical to not lying to yourself.
Common mistakes
- Comparing gross to net across deals. If a letting agent tells you “6 %” and your neighbour says “4.5 %”, you’re probably not talking about the same thing.
- Not allowing for voids. The moment a tenant leaves, losing a month is normal. If your yield only works at 100 % occupancy, it doesn’t work.
- Forgetting tax — especially Section 24. UK rental income is taxed as income. Worse, since Section 24 was phased in (2017–2020), mortgage interest is not deductible against rental income for higher-rate taxpayers; you only get a 20 % tax credit on it. For a higher-rate landlord this can swing real net return by several percentage points.
- Confusing accounting and cash expenses. Wear-and-tear allowance reduces tax but doesn’t leave your account. Mortgage payment does leave your account, but part of it comes back as paid-down principal.
- Not considering opportunity cost. If the same capital invested elsewhere would yield 4 % with no effort, the rental has to clearly beat that to justify the risk and time.
How to calculate it in order
Always do it in this order, and never skip steps:
- Gross: initial filter. If it’s below 5 % on a leveraged purchase, the deal needs serious tuning.
- Net: subtract recurring costs and voids. If it drops below 2 %, the property depends on resale price to be worthwhile.
- Cash-on-cash: if you’re using a mortgage, this tells you whether you’re putting in or taking out money each year.
- Total ROI: add capital paydown and expected appreciation for the full picture. Tells you whether the deal builds equity even while burning cash.
Calculate yours in a minute
Don’t fancy opening Excel? Drop your property details into our public rental yield calculator and you’ll see all four ratios at once, including the 10-year projection with mortgage and tax. The link that gets generated contains your numbers, so you can send it to your partner, your accountant or save it for later.
In summary
- Gross is marketing; only useful to discard deals.
- Net is the real yield of the deal without a mortgage.
- Cash-on-cash is your liquidity with a mortgage.
- Total ROI is the equity creation.
A deal can have a brutally negative cash-on-cash and a very high total ROI: you’re building equity but financing the property out of your pocket every month. Another can have great cash-on-cash but poor total ROI: comfortable monthly cash, but the property isn’t appreciating.
Knowing which you prioritise —cash, equity or both— is what turns “investing in property” into an informed decision instead of an act of faith.