Gross yield is a marketing number. Net yield is the one that pays you
The yield on a listing is almost always gross, which means it ignores every cost that will actually come out of your pocket.
Gross yield is annual rent divided by purchase price. It takes one line of arithmetic, which is precisely why it is the number on the brochure. It tells you almost nothing about whether a property will make money, because it treats a property with a £4,000 service charge and a property with none as identical.
Net yield is annual rent minus the costs of owning and running the property, divided by the total money you actually put in — which is the purchase price plus acquisition costs plus any refurbishment. It is a smaller number and a truer one.
What belongs in the costs
The list is longer than most first-time investors expect, and each omission flatters the yield. The recurring costs are the ones that erode a return year after year; the one-off costs are the ones that make the initial calculation look better than it was.
- Letting agent fees, typically 8–12% of rent plus tenant-find and renewal fees
- Void periods — budget at least two to four weeks a year even in strong markets
- Service charge and ground rent on leasehold property, which can exceed the rent on a poorly chosen flat
- Buildings insurance, and contents if furnished
- Maintenance and repairs, realistically 1% of the property value a year, not the zero most spreadsheets assume
- Safety compliance: gas safety, electrical installation condition report, smoke and carbon monoxide alarms, legionella
- Licensing fees where a selective or additional scheme applies
- Accountancy and tax compliance
- The acquisition costs you paid on day one: stamp duty surcharge, legal fees, survey, and any refurbishment
The refurbishment trap
A property bought at £150,000 with £25,000 of refurbishment has cost £175,000 plus acquisition costs, and the yield must be calculated on that figure. Calculating it on the purchase price alone overstates the return by a sixth or more, and it is the single most common way a deal is made to look better than it is.
The same applies to any discount. If you buy at 15% below market and then spend the discount on the roof, you have not bought below market — you have bought at market and done the work. That can still be a good outcome, but it is a different one, and the yield calculation should say which happened.
Working the numbers backwards
A more useful exercise than calculating the yield of a property you have found is to decide the net yield you need, then calculate the maximum price that produces it. Working backwards turns a vague sense that a deal is not quite good enough into a specific offer.
Take the realistic annual rent, subtract every recurring cost, and divide by your target net yield. The result is your ceiling. If the asking price is above it, you now know the exact gap you need to negotiate, or the exact reason to walk away.
Common questions
- What is a good net yield in the UK?
- It varies enormously by region, which is why a single figure is not much use. In expensive southern markets a net yield of 3–4% may be the realistic ceiling; in parts of the north and the Midlands, 6–8% is achievable. What matters more is the yield relative to the risk: a 7% yield on a property that needs a new roof every decade is not better than 5% on one that does not.
- Should I include mortgage interest in the net yield?
- Keep them separate. Net yield measures the property's performance; the mortgage is how you chose to finance it. Calculate net yield first, unleveraged, then compare it to your cost of borrowing. If the net yield is below the mortgage rate, leverage is reducing your return, not increasing it.