Walk into any conversation about UK property investment and someone will quote you a gross yield. It’s the number on every listing brochure, every online portal, every developer’s pitch deck. And it’s almost always the least useful number in the room.
What gross yield tells you
Gross yield is simply annual rent divided by purchase price, expressed as a percentage. A property that costs £200,000 and rents for £1,200 per month has a gross yield of 7.2%. It’s easy to calculate, easy to compare, and tells you almost nothing about whether the deal actually works.
The problem is that gross yield ignores every cost involved in running the property. Mortgage payments, letting agent fees, maintenance, insurance, void periods, service charges, ground rent, and management costs can collectively reduce a 7.2% gross yield to a 3–4% net yield, or worse, to a deal that loses money every month.
Net yield: the honest number
Net yield deducts running costs from rental income before dividing by purchase price. There’s no industry-standard definition of what ‘costs’ to include, which is why you should always build your own model rather than relying on anyone else’s ‘net yield estimate’.
A reasonable net yield calculation for a BTL property should include: letting agent fees (typically 8–12% of rent), maintenance reserve (1–2% of property value per year is a sensible allowance), void periods (assume at least 4–6 weeks per year), insurance, service charges and ground rent where applicable, and mortgage interest if you’re borrowing.
Cash-on-cash return: what you’re actually earning
Cash-on-cash return measures your annual cash income as a percentage of the cash you actually deployed, your deposit, legal fees, stamp duty, and any refurbishment costs. This is the number that matters most for investors using leverage.
A property purchased for £200,000 with a 25% deposit (£50,000) plus £10,000 in buying costs (£60,000 total cash in) that generates £6,000 net income per year has a cash-on-cash return of 10%, considerably more attractive than the gross yield suggested.
Understanding which number you’re looking at, and which one to actually base your decision on, is the foundation of every good investment decision. Use our free yield calculator to model all three for any deal.
The takeaway
Gross yield is fine for initial screening, it quickly eliminates deals that can’t work. Net yield tells you whether the deal is profitable. Cash-on-cash return tells you whether it’s the best use of your capital. Use all three, in that order.