A North East worked example
A two-bed terrace costs £95,000 and lets for £650 a month. Running costs are £1,800 a year. You put down 25% and borrow £71,250 interest-only at 5%. Buying costs, including stamp duty, legal fees and a few small jobs, come to £6,500.
- Gross yield: £7,800 ÷ £95,000 = 8.21%.
- Net yield: (£7,800 − £1,800) ÷ £95,000 = 6.32%.
- Cash flow: £6,000 − £3,562.50 interest = £2,437.50 a year, or £203 a month before tax.
- Return on cash: £2,437.50 ÷ £30,250 put in = 8.06% a year, before any growth in value.
Gross or net: which matters?
Gross yield is useful for comparing areas quickly. Net yield is closer to what you keep. The gap between them is usually biggest on cheap properties, where repairs, voids and fees are a bigger share of a small rent.
Costs to include
- Letting and management fees, often 10% to 15% of the rent.
- Landlord insurance, gas safety, electrical checks and licensing fees.
- Repairs and maintenance. Many landlords allow 5% to 10% of the rent.
- Empty months between tenants.
- Ground rent and service charges on flats.
What is a good rental yield?
There is no single answer. In parts of the North East, gross yields of 7% to 10% are common because prices are low, but low-value homes can be harder to mortgage. See low-value North East property. In the South, 4% to 5% is more typical, with landlords relying more on growth.
Lenders care about rental cover, not yield. A property with a great yield can still fail the stress test if the loan is large. Check both in the deal analyser.
Tax
These figures are before tax. If you own the property personally, mortgage interest is not deducted in full. You get a basic-rate tax credit instead. See our Section 24 guide.
Common questions
How do you calculate rental yield?
Gross yield is the annual rent divided by the property price, times 100. Net yield takes your annual running costs off the rent first.
Should I use the purchase price or the current value?
Use the purchase price, plus buying costs if you want to be strict, when judging a new deal. For a property you already own, use today's value to see the return on the money tied up in it.
Does yield include mortgage costs?
No. Yield ignores how you finance the property. Cash flow and return on cash, shown in the calculator, include the mortgage.