How to work out rental yield on a UK property

Gross yield is annual rent over purchase price, nothing else. Its virtue is speed: you can work it out from a listing in your head, and it is the figure most listings and sourcing packages quote. Its vice is that it ignores every cost of actually owning the property, so two deals with identical gross yields can produce completely different bank balances.

Use gross yield the way it deserves to be used: as a filter, not a verdict. Scanning a patch, anything clearing your gross threshold goes on the shortlist; everything below it saves you the deeper work. Just never let the filter number become the decision number.

Net yield starts from the same annual rent and subtracts the running costs before dividing by the price. The costs that belong in there: letting agent management (typically 10 to 15% of rent if you use one), landlord insurance, routine maintenance, safety certificates, ground rent and service charge on leaseholds, and an allowance for voids, the weeks between tenants when the property earns nothing. A void allowance of two to four weeks a year is a sensible baseline for a normal single let.

On the worked example: £10,200 of rent, minus £1,200 management, £300 insurance, £600 maintenance, £150 certificates and a two-week void allowance of roughly £390, leaves about £7,560. On the £150,000 purchase that is a 5.0% net yield, down from 6.8% gross. That 1.8-point gap is typical, and it is precisely the gap optimistic appraisals pretend does not exist.

Mortgage payments stay out of both figures deliberately, so that deals can be compared independently of how any particular buyer funds them. Finance belongs in the cashflow calculation: rent minus costs minus mortgage equals what lands in your account. A deal can carry a respectable net yield and still lose money monthly at today's rates with high leverage; run both numbers.

Honest answer: it depends where you are buying, and the spread is wide. Northern cities, much of Scotland and Northern Ireland routinely produce 7 to 9% gross on ordinary stock, and double digits on the right HMO. London and most of the commuter belt sit at 4 to 5% gross, and buyers there are usually paying for capital growth prospects rather than income.

As working bands for an income-led purchase: under 5% gross rarely survives a mortgage at current rates; 5 to 7% is workable with sensible leverage; 7% and above is genuinely strong. On net yield, knock roughly 1.5 to 2 points off each band. Judge any specific deal against its own local market rather than the national average; a 6% yield can be the best on the street in Surrey and the worst in Middlesbrough.

If you are buying a property that needs work, calculate yield on the total money in, not the purchase price alone. £10,000 of rent on a £120,000 purchase looks like 8.3%; add the £25,000 refurb that makes it lettable and the honest figure is 6.9% on the £145,000 all-in cost. Sourcing packages love the first version; your bank account experiences the second.

The same discipline applies in reverse when a refurb raises the rent. If £25,000 of work takes the rent from £850 to £1,100, the marginal yield on the refurb spend is 12%, which may make the project worthwhile even though the blended figure moves less. Working the numbers on cost, both directions, is how refurb-to-let decisions should be made.

Most yield mistakes inflate the number the same four ways: using the asking price when you will pay more (or the optimistic discount you have not negotiated yet), using an advertised rent no tenant has ever paid, ignoring voids entirely, and quoting gross where net is the honest figure. Any listing quoting a yield deserves the question: whose rent, whose price, and gross or net?

The subtler trap is judging yield without demand. A 9% yield in a street where tenants do not want to live is a spreadsheet fiction; the voids and arrears that produced the low price will produce them for you too. Yield tells you the price of the income; local letting demand tells you whether the income is real. Check time-to-let and comparable achieved rents, not just the arithmetic.