Rental yield tells you how much annual income a property generates relative to its cost. It is the primary metric landlords and property investors use to compare investments and assess profitability.
Two Types of Rental Yield
1. Gross Rental Yield
Gross yield = (Annual rent ÷ Property value) × 100
Example: Property worth £250,000, monthly rent £1,100:
Annual rent = £1,100 × 12 = £13,200
Gross yield = (13,200 ÷ 250,000) × 100 = 5.28%
2. Net Rental Yield
Takes annual costs into account — more accurate for comparing investments:
Net yield = ((Annual rent − Annual costs) ÷ Property value) × 100
Annual costs typically include:
- Letting agent fees (8–15% of rent)
- Maintenance and repairs (1% of property value as a rule of thumb)
- Insurance
- Ground rent and service charge (leasehold)
- Mortgage interest (if leveraged)
- Void periods (assume 1–2 months/year empty)
Example continued:
Annual rent: £13,200
Agent fees (10%): −£1,320
Maintenance (1%): −£2,500
Insurance: −£300
Voids (1 month): −£1,100
Total costs: £5,220
Net income: £13,200 − £5,220 = £7,980
Net yield = (7,980 ÷ 250,000) × 100 = 3.19%
What Is a Good Rental Yield?
| Yield | Assessment |
|---|---|
| Below 3% | Weak — likely relying on capital appreciation |
| 3–5% | Average for most UK cities |
| 5–7% | Strong return |
| 7%+ | Excellent — often in northern cities or HMOs |
Yield vs Capital Growth
High-yield areas (e.g. Liverpool, Bradford) often see slower price appreciation. Low-yield areas (e.g. London) offer stronger long-term capital growth. Most investors seek a balance.
Leveraged Yield (Return on Investment)
If you use a mortgage, calculate yield on your actual cash invested:
Cash-on-cash return = (Annual net income ÷ Cash invested) × 100
Example: £250,000 property, 25% deposit (£62,500):
Net income after mortgage interest: £3,500
Cash-on-cash return = (3,500 ÷ 62,500) × 100 = 5.6%
Common Mistakes
- Using asking price instead of purchase price (include stamp duty and solicitor fees)
- Forgetting void periods — even good tenants leave eventually
- Ignoring capital expenditure (boiler replacement, roof repairs)
- Comparing gross yields across different properties instead of net yields