What is a good rental yield? How to judge a deal

A good rental yield is one that covers all your running costs and mortgage payments with a margin, and pays you enough extra, compared with safer alternatives, to justify the risk and work of being a landlord. There is no universal figure: what is good depends on whether you mean gross or net yield, on your financing, and on how much risk and capital growth the property carries. The practical answer is to set your own minimum net yield using the method below and test every deal against it.

Why there is no single answer to what is a good rental yield

You will often hear a round number quoted as "good". Treat such claims with caution, for three reasons.

• Gross and net are very different. Running costs can absorb a large share of the rent. A headline figure means little until you know which yield is meant. See how to calculate rental yield for both formulas.
• Financing changes everything. The same yield can produce a healthy surplus with cheap borrowing and a monthly loss with expensive borrowing.
• Yield and growth trade off. As a general tendency, properties in places where many people want to own tend to have lower yields, because prices are high relative to rents. Areas with weaker demand to buy often offer higher yields to compensate for slower growth or more risk.

So instead of looking for a magic number, ask four questions about every deal.

Test 1: does the net yield beat your costs?

Start with net yield, not gross. Two properties with very different headline yields can end up much closer once costs are counted. The example uses euros; the maths works in any currency.

	Property A	Property B
Price	€300,000	€150,000
Annual rent	€15,000	€12,000
Gross yield	5.0%	8.0%
Operating costs (example)	25% of rent: €3,750	40% of rent: €4,800
Net operating income	€11,250	€7,200
Net yield on price (cap rate)	3.75%	4.8%

Property B still comes out ahead, but the gap has shrunk from three percentage points to about one. Property B is an older building with more tenant turnover and higher maintenance, so it may also carry more risk. Whether one point of extra yield compensates for that is a judgement call, but at least you are now comparing like with like. Run your own numbers in the rental yield calculator.

Test 2: does the yield cover your mortgage?

If you borrow, the property must earn enough to service the loan. A simple break-even check helps you see this before you go further.

Interest-only loan

Break-even cap rate = loan-to-value ratio × interest rate

With a 75% loan at an example rate of 4%: 0.75 × 4% = 3.0%. Below a 3% cap rate, the property cannot cover its interest from rent.

Repayment loan

Replace the interest rate with the annual payment as a percentage of the loan (sometimes called the debt constant). A 25-year repayment loan at 4% costs about 6.33% of the loan amount each year.

Break-even cap rate = 0.75 × 6.33% = about 4.75%

That is a big difference. Part of the repayment loan's cost is principal, which builds your equity, but it still has to come out of the rent. Our article on interest only vs repayment mortgage explains the trade-off, and the loan to value ratio explained shows how borrowing less lowers your break-even point.

Positive and negative leverage

When the cap rate is higher than your interest rate, borrowing increases your return on your own cash. This is positive leverage. When the interest rate is higher than the cap rate, each extra euro of debt reduces your return. This is negative leverage, and it means the deal only works if prices rise. Our guide to cap rate vs cash on cash return works through this with numbers.

Test 3: does it beat your alternatives?

A rental property ties up a large sum, is slow to sell and needs ongoing work. It should therefore pay more than investments that are safer, easier and more liquid.

A simple way to set your personal hurdle:

1. Note the return you could earn on a lower-risk alternative you would genuinely consider.
2. Add a premium for illiquidity, effort and concentration risk. How big depends on your risk tolerance and how hands-on you are.
3. The result is your minimum acceptable net yield, before considering growth.

For example, if a lower-risk alternative pays 3% in your situation and you want at least two extra percentage points for the work and risk, your hurdle is a 5% net yield. These are example figures; your own will differ.

Test 4: what about capital growth?

Yield is only the income part of the return. A rough way to think about total return, before financing, tax and selling costs:

Expected total return ≈ net yield + expected annual price growth

If you assume 2% annual growth on a property with a 4% net yield, your rough expected return is 6%. The weakness is obvious: growth is an assumption, not a fact. Prices can stagnate or fall for long periods. A cautious approach is to require that the deal works on income alone, and to treat any growth as a bonus.

What justifies a lower or higher yield?

Factors that can justify accepting a lower yield	Factors that should make you demand a higher yield
Newer building with low maintenance needs	Older building with major repairs on the horizon
Steady, broad-based rental demand	Demand tied to one employer or one university
Long average tenancies, low turnover	Frequent tenant changes, re-letting costs
Low, predictable building costs	High or rising service charges, weak reserve fund
Good long-term growth prospects	Flat or falling prices over many years
Simple rules for landlords	Strict or changing rent and letting regulation
Easy to sell if needed	Hard-to-mortgage or niche property

None of these factors is right or wrong; they shift the risk. The point is to be paid appropriately for the risk you take.

Rules of thumb, and why to be careful

• The 1% rule says monthly rent should be at least 1% of the price, roughly a 12% gross yield. It is a quick screen used in some markets, but in many places almost nothing qualifies, and it ignores costs completely.
• The 50% rule assumes operating costs take about half the rent, excluding the mortgage. It is useful as a warning against optimistic estimates, but your property may be well above or below it.

Use them to spot listings worth a closer look, never to approve a purchase.

A quick checklist for judging any yield

• Is the quoted figure gross or net?
• Is the rent based on achieved rents for comparable properties?
• Have you included vacancy, maintenance, insurance, non-recoverable building costs, taxes and management?
• Does the net yield clear your break-even point for the loan you plan to take?
• Does it beat your personal hurdle based on safer alternatives?
• Does the deal still work if the interest rate rises or the property is empty for a few months?
• Would it still be acceptable if prices did not rise at all for years?

If you can answer yes to the last three, the yield is probably good enough for you. Then move on to rental property cash flow to see how the money moves month by month.

Common mistakes

• Chasing the highest headline yield without checking why it is high.
• Comparing a gross yield in one listing with a net yield in another.
• Assuming today's interest rate will last for the whole time you own the property.
• Ignoring the cost of your own time if you self-manage; you may not always be able to.
• Treating price growth as certain and accepting a yield that only works with growth.
• Copying someone else's target without considering your own costs, borrowing and risk tolerance.

Key takeaways

• A good rental yield is personal: it must beat your costs, your mortgage and your safer alternatives, with a margin.
• Judge net yield, not gross, and compare properties on the same definition.
• Check your break-even yield for the loan you plan to use.
• Higher yields usually mean higher risk or lower growth; make sure you are paid for it.
• The safest deals work on income alone, with growth as a bonus.

For the full picture of financing, buying and running a rental, read our buy to let investing guide.