How to calculate rental yield

01

Start with the gross yield formula

Gross yield (%) = monthly rent × 12 ÷ purchase price × 100. It gives a quick comparison between annual rent and the price paid for a property. It does not tell you how much money will remain in your bank account.

Take an illustrative purchase price of £240,000 and monthly rent of £1,200. Annual rent is £14,400 and gross yield is 6%. These are arithmetic examples, not a market rent estimate or a return promised for any UK area.

Calculate rental yield using your own figures

02

Allow for rent you may not collect

A plan based on every month being fully paid can be fragile. Voids between tenancies and other interruptions reduce collected rent. State the allowance explicitly so that two property comparisons use the same basis.

In the example, a 5% void allowance removes £720 from £14,400, leaving £13,680. The percentage is an illustrative assumption, not evidence of likely occupancy. Use your own evidence about the property, tenancy and letting arrangements.

03

Calculate net operating income and yield

Deduct the operating costs included in your model from the rent remaining after voids. Think about management, routine maintenance, insurance and service charges where applicable. Keep major one-off works visible in a separate cash plan if they are not captured by the allowance.

The Greathome calculator applies its operating-cost percentage to rent after voids. With an illustrative 15% allowance, costs are £2,052, leaving £11,628 net operating income. Divide by £240,000 and multiply by 100 to get 4.845%, displayed as 4.85%.

04

Keep finance and tax separate

Net operating income describes the property before financing. Mortgage interest, capital repayments and loan fees affect the investor’s cash position separately. Do not subtract only interest and describe the remainder as cash available if capital repayments must also be made.

Taxable rental profit is another calculation. HMRC rules determine allowable expenses and the treatment of residential finance costs; an operating-cost percentage is not a tax deduction calculation. Ownership structure and individual circumstances matter.

Estimate the mortgage payment separately

05

Understand the denominator and cash-on-cash return

A yield based on purchase price excludes stamp duty, legal fees and initial works from its denominator. A return based on total acquisition cost will be lower for the same income if those costs are added. Name the denominator whenever you quote a percentage.

Cash-on-cash return compares annual cash flow after the costs you specify with the actual cash invested. Borrowing changes both cash invested and debt service, so it can amplify gains or losses. The current simple yield tool reports operating yield; it does not calculate a tax-adjusted cash-on-cash return.

Estimate the purchase-tax cost · List acquisition costs separately

06

Compare scenarios before comparing properties

Run the same property under a base case and a less favourable case. Lower the rent, increase the void allowance or raise costs one at a time. Record which assumption has the largest effect so you know where further evidence is most useful.

Then compare properties on matching definitions. A higher gross yield can coexist with higher repairs, lease liabilities or management demands. Do not insert capital growth to rescue an operating budget that does not work; future prices remain uncertain.

• Keep evidence for the rent assumption and its date.
• State costs omitted from the result.
• Distinguish income yield from resale profit and total return.