Rental yield is one of the most frequently quoted figures in property investment, but it’s also one of the most commonly miscalculated or misunderstood. Here’s how to work it out properly, and why the version you use matters.
Gross Yield: The Quick Comparison Tool
Gross yield is the simplest version to calculate, and the one most commonly quoted in headline market comparisons. The formula is:
Gross Yield = (Annual Rental Income ÷ Property Purchase Price) × 100
For example, a property bought for £200,000 and let for £1,000 a month generates £12,000 a year in rent. Dividing £12,000 by £200,000 and multiplying by 100 gives a gross yield of 6%.
Gross yield is useful as a fast way to compare different properties or areas at a glance, but it deliberately ignores every cost involved in actually owning and running the property, which is exactly why it can be misleading if treated as the full picture.
Net Yield: What Actually Matters
Net yield strips out the running costs of owning the property, giving a far more accurate picture of the actual return being generated. The formula is:
Net Yield = ((Annual Rental Income − Annual Costs) ÷ Property Purchase Price) × 100
Annual costs typically include mortgage interest, letting or management agent fees, landlord insurance, service charges and ground rent (for leasehold properties), maintenance and repair costs, and an allowance for void periods when the property isn’t let. Using the same example ,a £200,000 property generating £12,000 in rent, if annual costs total £4,000, the net income is £8,000. Dividing £8,000 by £200,000 gives a net yield of 4%, a full 2 percentage points lower than the gross figure. This gap is exactly why relying on gross yield alone can create a misleadingly positive impression of a property’s real performance.
Don’t Forget to Include Purchase Costs
A more complete version of net yield includes the upfront costs of buying the property, not just the purchase price, since these represent real money invested in acquiring the asset. This means adding Stamp Duty (including any surcharge for an additional property), legal fees, survey costs, and any initial refurbishment or furnishing costs to the purchase price before calculating yield. Including these costs generally produces a somewhat lower yield figure than using the purchase price alone, but it reflects the true amount of capital committed to the investment.
Accounting for Void Periods
Even in strong rental markets, a property rarely stays occupied 100% of the time. Building a realistic void period allowance into the annual rental income figure, rather than assuming full occupancy every month of the year, produces a more conservative and realistic yield calculation. A common approach is to reduce the assumed annual rent by the equivalent of one month, reflecting an average void period between tenancies, though this can vary considerably depending on the local rental market and property type.
What Counts as a Good Yield
Across England and Wales, average rental yields currently sit somewhere around 5.5% to 6%. Anything above 6% is generally considered a good yield, with yields of 7% or higher regarded as excellent. These benchmarks are useful for sense-checking a specific property or area, though it’s worth remembering that very high yields sometimes come with correspondingly higher risk, areas with weaker long-term capital growth prospects, higher tenant turnover, or more demanding property types such as HMOs frequently post the strongest headline yields.
Yield Isn’t the Whole Investment Picture
A property’s yield says nothing about its likely capital growth, the quality of the local tenant demand, or how easy it would be to sell in future. A property with an average yield in an area with strong growth prospects can outperform a higher-yielding property in a stagnant or declining area over a longer holding period. Yield is one important measure among several, not a standalone verdict on whether a property is a good investment.
The Bottom Line
Gross yield is a fast, useful comparison tool, but net yield, including purchase costs and a realistic void allowance, is what actually reflects a property’s real financial performance. Any yield figure quoted without clarifying which version is being used, and what costs (if any) have been factored in, should be treated with caution rather than taken at face value.