For landlords and property investors, one of the most important factors to consider when buying a property is its rate of return, better known as rental yield or return on investment (ROI).
Yet after years in property investment and management, I’ve found that a great number of clients don’t give a property’s ROI its due consideration, instead focusing on more superficial aspects such as house size, location, or overall quality. Those things matter, but they don’t tell you whether the numbers actually work. Whether you’re buying your first rental property or adding to an established portfolio, the first step should always be calculating its potential ROI properly, starting with rental yield.
Gross yield: the quick screening tool
Gross yield is the fastest way to compare two properties side by side. To calculate it, divide the property’s annual rental income by its purchase price, expressed as a percentage.
Formula: Gross yield = (monthly rental income x 12 / total purchase price) x 100
Example: Steve is ready to invest. He’s found two properties he likes.
Property 1
- Purchase price: £200,000
- Monthly rental income: £800
- Annual rental income: £9,600
- Gross yield: 4.8%
Property 2
- Purchase price: £250,000
- Monthly rental income: £950
- Annual rental income: £11,400
- Gross yield: 4.56%
At first glance, Property 2 looks like the stronger option since it brings in more rent each month. But Property 1 actually has the higher gross yield, because its lower purchase price means that rent works harder relative to what you’ve put in. Pound for pound, Property 1 is the better investment on this measure alone.
Gross yield is a useful first filter, but it’s not the number that tells you whether a property will actually make money. For that, you need net yield.
Net yield: the number that actually matters
Net yield takes gross yield and strips out the real costs of owning and running the property, giving you a far more honest picture of what you’ll actually take home.
To calculate it, take your annual rental income, subtract your running costs (mortgage payments, insurance, maintenance, letting agent fees, and so on), then divide the result by your total investment, which should include every cost of acquisition, not just the purchase price.
Costs to include in your total investment figure:
- Purchase price
- Stamp duty, including the additional-property surcharge (currently 5% on top of standard rates for a second property or buy-to-let purchase)
- Legal and conveyancing fees
- Survey fees
- Mortgage arrangement fees
- Refurbishment and repair costs
- Furniture, if letting furnished
- Tenant acquisition costs (referencing, advertising)
- Running costs during void periods, such as council tax and insurance
Two figures many investors underestimate: stamp duty, which is often the single largest one-off cost on an additional property, and void periods, covered below.
Void periods
It’s rare for a rental property to be occupied for all 12 months of every year. Ignoring this is one of the most common mistakes investors make when calculating yield, and it’s an easy one to fix: stress-test your numbers using 11 months’ worth of rental income rather than 12, so a normal gap between tenants doesn’t quietly wipe out your margin.
Make your own calculations, independently
When agents or developers quote a yield figure, treat it as a starting point rather than a fact. Yields quoted to sell a property are often based only on the purchase price and headline rent, without factoring in the real costs listed above. Strip those out and the number is usually lower than advertised. Running your own net yield calculation, using your actual costs, is the only way to know what you’ll really be taking home.
What counts as a good yield in 2026?
For years, many investors treated a gross yield of around 4-5% as a reasonable threshold for a buy-to-let. That rule of thumb is worth treating with more caution today. Mortgage rates are materially higher than they were when that benchmark became common, which means the same gross yield now covers a smaller margin above your actual borrowing costs.
Rather than lean on a fixed percentage, the more reliable approach is stress-testing net yield against your real mortgage rate and running costs for that specific property. Our buy-to-let mortgage team can help you model this properly before you commit to a purchase, including for portfolio and limited company structures, where the tax treatment of costs can differ significantly.
If you’re weighing up your first investment property or looking to expand an existing portfolio, it’s also worth a look at our buy-to-let investment and portfolio investment pages, or book a free mortgage consultation to talk through the numbers on a specific property.
