How rental yield really works, and what counts as a good one

Rental yield is the number every landlord quotes and almost nobody defines the same way. Ask three investors what yield their flat does and you can easily get three answers for the same property, because they are quietly measuring different things.

It is worth getting straight, because yield is the figure you will lean on when you compare two properties, work out whether a price makes sense, or decide if a deal is worth chasing at all. The maths is simple. The trap is in what you leave out.

Gross yield: the headline number

Gross yield is the rent for a year set against what the property costs, written as a percentage. The formula is short:

Gross yield = (annual rent ÷ property price) × 100

Say you buy a flat for £200,000 and let it for £900 a month. That is £10,800 a year in rent. Divide that by £200,000 and you get 5.4 percent. Quick to work out, easy to compare, and useful as a first filter when you are scrolling through listings.

The catch is that gross yield pretends the property runs itself for free. It does not. So while it is a fine way to shortlist, it is a poor way to decide.

Net yield: the honest number

Net yield does the same sum but takes the running costs off the rent first. This is the figure that tells you what the property actually does once it is up and running:

Net yield = ((annual rent − annual costs) ÷ property price) × 100

Stick with the same flat. Here is a realistic year of costs for a leasehold property let through an agent:

Take that £3,930 off the £10,800 rent and you are left with £6,870. Against the £200,000 price, the net yield is about 3.4 percent. The same flat that looked like 5.4 percent a moment ago is doing closer to half that once the real world is included. Neither figure is wrong. They are just answering different questions.

Price paid, or money in?

There is a second fork in the road, and it trips people up more than the gross versus net split. Do you divide by the property price, or by the total cash you actually had to find?

Buying that £200,000 flat is rarely a flat £200,000. Add stamp duty, legal fees, and a survey, plus anything you spent doing the place up, and you might be £210,000 in before a tenant moves a single box. Measure the rent against £210,000 instead of £200,000 and every yield figure nudges down. That is not pedantry. It is the difference between the return the listing implies and the return your bank balance feels.

The point is not that one method is correct. It is that you should pick one and use it for every property you weigh up, so you are comparing like with like.

So what is a good yield?

Here is the honest answer: it depends, and anyone who gives you a single magic number is selling something. That said, some rough UK markers help:

• Around 5 to 6 percent gross is fairly ordinary across much of the country.
• 7 to 8 percent is a strong yield, more common in the north and in higher-demand rental areas.
• 9 percent and up usually means a cheaper area, a house in multiple occupation, or both, which tends to bring more management and more risk.

The reason there is no clean threshold is that yield is only half the story. A flat in an expensive city might yield a modest 4 percent but climb steadily in value, while a high-yielding terrace somewhere cheaper might barely move in price for years. Income and growth pull in different directions, and which one matters more depends entirely on what you are trying to do. Someone after monthly cash flow weighs yield heavily. Someone playing a longer game might happily accept a lower yield for a property they expect to appreciate.

A few things people forget

Three quiet ones catch first-time landlords out. Voids, because an empty month is not just lost rent but a mortgage you still have to pay. Tax, because yield is almost always quoted before tax, and the way mortgage interest is treated for individual landlords changed a few years back, so your post-tax position can look quite different from the headline. And the cost of getting in and out, since buying and selling property is expensive enough that a quick flip rarely makes the numbers everyone hopes for.

None of this means yield is a bad measure. It is a genuinely useful one. It just works best when you treat it as the start of the sums rather than the end of them.

This guide is general information, not financial advice. Figures are illustrative and tax rules change, so check your own numbers before making a decision.