How to calculate rental yield: gross and net

To calculate rental yield, divide the annual rent by the property price and multiply by 100. That gives the gross yield. For the more useful net yield, first subtract the annual operating costs from the rent, then divide by the price plus purchase costs. A property bought for €180,000 that rents for €900 a month has a gross yield of 6%; after realistic costs its net yield might be closer to 3.7%.

The two rental yield formulas

Gross rental yield

Gross yield (%) = annual rent / purchase price × 100

Net rental yield

Net yield (%) = (annual rent − annual operating costs) / (purchase price + purchase costs) × 100

Gross yield is quick and needs only two numbers you can find in a listing. Net yield takes more effort but tells you what the property actually earns. Investors use gross yield to screen dozens of listings and net yield to decide on the shortlist.

You will see slightly different definitions elsewhere. Some people divide net income by the purchase price only, leaving out purchase costs; when that figure is measured against the price it is often called the cap rate. Neither version is wrong. What matters is that you use the same definition every time you compare properties.

How to calculate rental yield step by step

1. Find the annual rent. Take the realistic monthly rent, based on what comparable properties actually let for, and multiply by 12.
2. Calculate gross yield. Divide the annual rent by the purchase price and multiply by 100.
3. List the purchase costs. Transfer taxes, notary or legal fees, survey, valuation and lender fees. Add any work needed before the first tenant moves in.
4. Estimate annual operating costs. Include every cost you pay as the owner and cannot pass on to the tenant (see the list below).
5. Subtract costs from rent to get your net operating income.
6. Calculate net yield. Divide net operating income by the price plus purchase costs and multiply by 100.
7. Sense-check the result. Compare it with alternatives, your borrowing cost and other properties you are considering.

A worked example

The example uses euros; the maths is identical in any currency.

• Purchase price: €180,000
• Purchase costs: €14,400 (8% of the price, an example figure)
• Monthly rent: €900

Step 1 and 2: gross yield

Annual rent = €900 × 12 = €10,800

Gross yield = €10,800 / €180,000 × 100 = 6.0%

Step 3 to 5: net operating income

Annual operating cost	Amount
Vacancy allowance (5% of rent)	€540
Maintenance and repairs	€900
Landlord insurance	€300
Non-recoverable service charge	€720
Property tax	€420
Letting and management	€820
Total	€3,700

Net operating income = €10,800 − €3,700 = €7,100

Step 6: net yield

Net yield = €7,100 / (€180,000 + €14,400) × 100 = €7,100 / €194,400 × 100 = 3.65%

If you measure against the price only, the figure is €7,100 / €180,000 = 3.94%. Both are valid, but they are not comparable with each other. You can check these figures, and try your own, with the rental yield calculator.

Which costs to include in net yield

Include costs that you, as the owner, bear in a typical year:

• Vacancy allowance: a percentage of rent or a number of empty weeks per year, based on how often tenants change and how long re-letting takes.
• Maintenance and repairs: routine fixes plus a provision for larger items. Our guide to a rental property maintenance budget explains common estimation methods.
• Insurance: landlord building and liability cover, and contents if you furnish.
• Service charges and building costs: only the part you cannot recover from the tenant. Which costs are recoverable depends on your lease and local law; service charges explained covers the principles.
• Property taxes and local fees that fall on the owner.
• Management and letting fees if you use an agent, or a realistic allowance if you might in future.
• Ground rent, licensing, certificates and accounting where they apply.

Leave these out of net yield:

• Mortgage interest and principal. Financing is handled separately in cash flow and cash-on-cash return.
• Income tax. Tax depends on your personal situation, not on the property.
• One-off purchase costs. They go into the denominator, not the annual costs.
• Costs the tenant pays directly, such as their own utilities.

Gross vs net yield at a glance

	Gross yield	Net yield
Inputs	Rent and price	Rent, price, purchase costs, operating costs
Effort	Seconds	An hour of research
Best for	Screening many listings	Deciding on a specific property
Main weakness	Ignores all costs	Only as good as your cost estimates
Effect of financing	None	None

The gap between the two depends on the property. A newer apartment with low maintenance and modest building costs might lose only a couple of percentage points between gross and net. An older house with high turnover and large repair needs can lose much more. That is why two listings with the same gross yield can be very different investments.

Working backwards from a target yield

The formula also works in reverse, which is useful when you make an offer.

Maximum price for a target gross yield

Price = annual rent / target yield

If the rent is €10,800 a year and you want at least a 6.5% gross yield: €10,800 / 0.065 = about €166,150. Anything above that misses your target.

Required rent for a target gross yield

Annual rent = price × target yield

For a €180,000 property and a 6.5% target: €180,000 × 0.065 = €11,700 a year, or €975 a month. If comparable properties do not let for that, the price is too high for your criteria.

The same logic works with net yield, as long as you add purchase costs to the price and add operating costs to the required rent.

Yield on purchase price vs current value

Once you own a property, its yield depends on what you compare it with.

• Yield on cost uses what you paid. It tells you how your original investment is performing. If you bought years ago and rents have risen, this figure can look very healthy.
• Yield on current value uses today's market value. It answers a different question: if you sold now and reinvested the money, would you earn more elsewhere?

A property with a strong yield on cost but a weak yield on current value may be worth reviewing. You are effectively holding today's equity in an asset that earns relatively little on it.

Where yield stops and other metrics begin

Rental yield ignores financing, so it cannot tell you whether a property will pay its own mortgage. For that, calculate cash flow and cash-on-cash return. Our guide to cap rate vs cash on cash return explains how leverage changes the picture, and rental property cash flow shows how to forecast the money that actually reaches your account. To test the mortgage itself, use the mortgage calculator.

Yield also ignores capital growth. A low-yield property in an area with strong long-term demand and a high-yield property in a declining area are different kinds of bets. Whether your result is good enough is covered in what is a good rental yield.

Common mistakes when calculating rental yield

• Using the asking rent. Base the rent on achieved rents for comparable properties, not on the most optimistic advert.
• Forgetting vacancy. Twelve months of rent every year is rarely realistic over the long run.
• Comparing gross with net. One listing's "yield" may be gross, another's net. Always ask which.
• Ignoring purchase costs. They can add several percent to what you pay and reduce your true return.
• Putting mortgage payments into net yield. This mixes up the property's performance with your financing choice.
• Counting recoverable costs as income. Service charges the tenant reimburses are not extra profit; they pass through.
• Using a one-off year. A year with no repairs flatters net yield. Use an average over several years.
• Monthly vs annual confusion. Yield is annual. Dividing monthly rent by the price gives a figure twelve times too small.

Key takeaways

• Gross yield = annual rent / price × 100. Use it for fast screening.
• Net yield = (annual rent − operating costs) / (price + purchase costs) × 100. Use it to decide.
• Keep financing and income tax out of yield; handle them in cash flow.
• Use the same definition every time you compare properties.
• Work backwards from your target yield to set your maximum offer.

For the wider context of choosing, financing and running a rental property, see our buy to let investing guide.