What is a good ROI on a buy to let?

Gross yield is the annual rent divided by the purchase price. It is a quick screening ratio for comparing properties, and that is all it is: it ignores every cost, so it says nothing about what you will actually earn.

Net yield subtracts the running costs, such as management, maintenance, insurance, voids and compliance, before dividing by the price. It is a better measure of the property as an income-producing asset, but it still ignores how the purchase was financed.

Return on investment, as investors usually mean it, is annual profit divided by the total cash you personally invested: the deposit, purchase fees, stamp duty and any refurbishment. Cash on cash is the sharpest version of the same idea: the annual net cash flow after the mortgage is paid, divided by the cash you still have left in the deal. ROI and cash on cash are the numbers that describe your return as an investor rather than the property's performance as an asset, which is why leverage changes them and does not change yield.

Here is a clearly hypothetical illustration, with numbers chosen for easy arithmetic rather than taken from any market. Suppose a property costs 100,000 pounds and produces 5,000 pounds a year after running costs but before any mortgage. Bought with cash, that is a 5 percent return on the 100,000 pounds invested. Now suppose instead you put in 25,000 pounds and borrow 75,000 pounds, and the interest costs 3,750 pounds a year. The net cash flow falls to 1,250 pounds, but it is earned on only 25,000 pounds of your money, which is again 5 percent. Make the borrowing slightly cheaper and the same property produces a higher percentage return on your cash than the unleveraged version; make it slightly dearer and the return collapses or goes negative.

That is the whole story of leverage: it multiplies whatever gap exists between what the property earns and what the debt costs, in both directions. A leveraged ROI therefore carries risk that the same number unleveraged does not: a rate rise, a void or a repair bill hits the leveraged investor several times harder as a proportion of their cash flow.

The practical consequence is that ROI figures are only comparable at similar leverage. A leveraged return should be judged against leveraged alternatives and should be materially higher than the unleveraged return on the same property, because you are being paid for the extra fragility. If gearing up barely moves your ROI, the debt is costing almost as much as the property earns, and you have added risk for nothing.

A single let, professionally managed, is at the passive end of property: the right ROI target is closer to what other passive investments offer, plus a premium for illiquidity and the occasional bad tenant or boiler. An HMO typically produces a higher gross income from the same building, but it buys that income with higher running costs, more regulation, licensing, more management and more of your time, so it needs a visibly higher return to be worth it. Comparing the two on raw ROI without pricing your own hours flatters the HMO.

Project-led strategies distort the ratio differently. A flip's return is earned over months, not years, so it has to be annualised before comparison, and it carries delivery risk that a tenanted single let does not. In a buy-refurbish-refinance deal, the refinance returns some of your cash, shrinking the denominator: as the cash left in approaches zero, cash on cash grows without bound and stops meaning anything. A money-out deal is better judged on the absolute annual cash flow, the profit created, and the risk carried, not on a percentage of almost nothing.

Strategy also sets what the return is made of. High-yield areas often deliver income with modest capital growth prospects; growth areas often deliver the reverse. An ROI target that ignores which of these you are actually buying will push you towards deals that look good on the ratio you measured and poor on the one you wanted.

Start from opportunity cost. Your cash has alternatives: savings, gilts, index funds, paying down other debt. The prevailing Bank Rate and what it feeds through to is the visible floor for what money earns with little risk or effort. Any rental return has to clear that floor before it has justified anything, because a rental is less liquid, less diversified and more work than the alternatives.

Then add a premium for what the rental actually involves: money you cannot access quickly, concentration in one asset in one street, tenant and regulatory risk, and your own hours. How large that premium should be is a personal judgement, but it must be positive, and it should be larger the more leveraged, the more management-heavy and the less liquid the deal is.

Then compute the deal's honest figure: realistic rent from comparable evidence rather than the listing's claim, all running costs including voids and maintenance, every pound of cash in the denominator including fees, stamp duty and refurbishment, and your own time priced at something rather than nothing. Finally, stress test it: a higher mortgage rate at refinance, rent at the bottom of the comparable range, a void, a repair. A good ROI is one that still clears your target after the stress test, not one that only clears it when everything goes right.

Most inflated ROI claims are built from the same handful of moves. Each one shrinks the denominator or pads the numerator, and each is easy to catch once you know to look for it.

The honest answer remains: the one that beats your alternatives by enough to pay for the risk and work, at your leverage, for your strategy, after honest costs and a stress test. Two investors can look at the same deal and correctly reach different verdicts, because their alternatives, tax positions, appetite for management and cost of borrowing differ.

What you can always do is rank your own opportunities on a consistent basis: same definitions, same honesty about costs, same stress test. A deal that clears your floor comfortably, survives the stress test and beats the other deals you could do with the same cash is a good ROI for you, whatever the percentage happens to be. That discipline, applied consistently, matters more than any benchmark number, and it is exactly the kind of like-for-like comparison a consistent analysis process is for.