Rental yield is the most fundamental metric for buy-to-let investment. This guide explains gross yield, net yield and cash-on-cash return — and how to use them.
Understanding rental yields is fundamental to evaluating any buy-to-let investment. Without yield analysis, you cannot meaningfully compare properties, assess whether an investment makes financial sense, or track your portfolio's performance over time.
Gross rental yield
Gross yield is the simplest and most commonly quoted metric. It is calculated as:
Annual rent / Property value × 100 = Gross yield %
Example: a property worth £200,000 achieving £1,000 per month rent has a gross yield of 6% (£12,000 / £200,000 × 100).
Gross yield is useful for quick comparisons between properties but doesn't reflect the actual income you'll receive after costs.
Net rental yield
Net yield is a more accurate picture of your investment's performance, accounting for all costs:
(Annual rent - Annual costs) / Property value × 100 = Net yield %
Annual costs to include: mortgage interest, letting agent fees, insurance, maintenance budget (allow 1-2% of property value per year), void periods (allow 2-4 weeks per year), professional fees.
Example: the same £200,000 property, with £3,600 in annual costs, has a net yield of 4.2% (£8,400 / £200,000 × 100).
Cash-on-cash return
For mortgaged properties, cash-on-cash return is often more meaningful than yield on total property value:
Annual cash flow / Cash invested × 100 = Cash-on-cash return %
Example: you buy the £200,000 property with a £50,000 deposit and £5,000 in costs. Annual net cash flow is £5,000 after all costs including mortgage interest. Cash-on-cash return is 9.1% (£5,000 / £55,000 × 100).
What is a good yield?
What constitutes a "good" yield depends on your location, strategy and what you're optimising for. In central London, gross yields of 2-3% are common but capital growth potential is higher. In Essex towns like Basildon or Grays, gross yields of 6-8% are achievable. Properties in the Surrey commuter belt typically achieve 4-5% gross with stronger capital growth.
As a general guide, a net yield of 4%+ on the full property value makes many buy-to-let investments financially viable when mortgaged at typical buy-to-let rates.
Yield vs capital growth
The choice between high-yield and high-capital-growth properties is one of the fundamental strategic decisions in property investment. High-yield properties generate more income now; high-capital-growth properties build wealth over time. Many investors seek a balance of both.
Contact us for a free rental valuation and yield assessment for your property.