How to Calculate Rental Yield Properly

Gross yield, net yield, ROI on cash-in and true cash flow — the four numbers every UK investor should run before every deal.

Yield is the most misused number in UK property. A headline 8% gross on a Nottingham HMO can hide a 2% net. Here is how to run the four calculations that actually matter.

1. Gross yield

Annual rent divided by purchase price. Fast, comparable across regions, useful for a first sift — and nothing else.

£11,400 annual rent on a £150,000 house = 7.6% gross.

2. Net yield

Annual rent minus running costs, divided by total capital in (purchase price + stamp duty + legal + refurb). Running costs to include:

Insurance
Letting or management fees (10–12% of rent + set-up)
Maintenance sinking fund (aim for 10% of rent)
Ground rent and service charge for leasehold
Void allowance (one month per year is realistic in most cities)
HMO utilities and council tax where the landlord pays them

For the same £150k house with £8k of costs to buy and £5,000 of annual running costs, net yield is £6,400 ÷ £163,000 = 3.9%.

3. ROI on cash-in

The number that decides whether the deal beats an index fund. Annual pre-tax cash flow after mortgage payments, divided by cash left in the deal.

75% mortgage at 5.5% interest-only on £150k = £515/month = £6,190/year.
Cash left in: £37,500 deposit + £8k costs + £5k refurb = £50,500.
Cash flow: £11,400 − £5,000 running − £6,190 mortgage = £210.
ROI on cash-in: £210 ÷ £50,500 = 0.4%.

That deal does not work. The cash-flow buffer is too thin for any rate movement.

4. True cash flow after tax

Individual landlords no longer deduct mortgage interest — they get a 20% tax credit under Section 24. On the same numbers, a higher-rate taxpayer pays income tax on the pre-interest profit, then subtracts a 20% credit. That can push a paper-positive deal into a real-cash negative.

A limited-company structure treats interest as a normal business expense, so all four numbers can be recomputed with corporation tax on true profit.

Rules of thumb that survive scrutiny

If gross is under 6% in a normal-rate environment, you are relying on capital growth. Own the risk.
If ROI on cash-in is under 5%, the deal must have a value-add angle.
Always stress-test at +2% on the mortgage rate. If the deal breaks, the deal is broken now.

How EstateVera helps

The Investor Toolkit computes all four numbers side by side. Change one input — rent, rate, refurb — and every downstream figure updates. Save the deal to a property record and the AI assistant will monitor rent comparables monthly.