Gross and net yield
Gross yield = (monthly rent × 12) ÷ price × 100 Net yield = (annual rent × (1 − vacancy) − operating expenses) ÷ price × 100
Gross yield is a quick way to compare listings, but it ignores costs. Net yield subtracts the rent lost to empty periods and the yearly cost of owning the property, so it's closer to the real return.
How to calculate rental yield by hand
Take a $300,000 property that rents for $2,000 a month, with $6,000 a year in operating expenses and a 5% vacancy allowance.
- Annual rent if fully let: $2,000 × 12 = $24,000.
- Gross yield: $24,000 ÷ $300,000 × 100 = 8.00%.
- Vacancy loss: $24,000 × 5% = $1,200, leaving $22,800 of rent actually collected.
- Net operating income: $22,800 − $6,000 = $16,800 a year, or $1,400 a month.
- Net yield: $16,800 ÷ $300,000 × 100 = 5.60%.
The 2.4-point gap between the two figures is the cost of vacancy and upkeep. On older properties or in areas with high property tax the gap is often wider.
Comparing properties
| Price | Monthly rent | Expenses/yr | Vacancy | Gross yield | Net yield |
|---|---|---|---|---|---|
| $200,000 | $1,600 | $5,500 | 5% | 9.60% | 6.37% |
| $300,000 | $2,000 | $6,000 | 5% | 8.00% | 5.60% |
| $300,000 | $2,000 | $6,000 | 10% | 8.00% | 5.20% |
| $450,000 | $2,600 | $9,000 | 5% | 6.93% | 4.59% |
The cheaper property wins on both measures in this example, but yield is only part of the picture. Price growth, tenant demand and repair risk differ between properties and aren't captured here.
What to include in operating expenses
- Property tax and landlord insurance
- Repairs and maintenance
- Property management or letting agent fees
- HOA or service charges, and any utilities you pay as landlord
Don't include mortgage payments. Net yield measures the property itself, so two buyers with different financing get the same figure. The default expenses are a rough placeholder; replace them with your own numbers.
Common mistakes
- Comparing gross yield on one listing with net yield on another. Always compare like with like.
- Using the asking rent of the best unit on the street. Check what similar homes have actually rented for.
- Leaving out big one-off costs. A roof or boiler replacement every so many years is a real cost; set aside a yearly amount for it.
- Ignoring purchase costs. Enter the price plus closing costs if you want the yield on the total amount you'll pay to buy.