Rental yield and return on investment, explained properly

Every listing quotes a yield and almost none of them quote the one that matters. This guide explains the four numbers worth calculating on any deal and how to judge them.

Gross yield

Annual rent divided by purchase price. A £250,000 flat renting for £1,250 a month has a gross yield of 6%. It is quick, comparable across areas and almost useless on its own, because it ignores every cost of ownership.

Typical gross yields in 2026: 4% to 6% for standard lets in London and the South, 6% to 9% in the Midlands and North, 8% to 14% for HMOs let by the room, and higher still for serviced accommodation measured on gross booking revenue. The higher the gross yield, the higher the costs behind it usually are.

Net yield

Annual rent, less a void allowance, less all running costs, divided by price. Running costs for a standard let typically include insurance, maintenance, letting and management fees, safety certificates, service charge and ground rent on flats, and licensing where it applies. For an HMO with bills included add gas, electricity, water, broadband, council tax, cleaning of common parts and a much larger maintenance allowance.

A 12% gross HMO with 40% costs is a 7.2% net yield. A 6% gross single let with 15% costs is 5.1%. The gap is real but narrower than the headline, and it has to pay for the extra work and risk.

Cash-on-cash return

Annual cash flow after the mortgage divided by the cash you put in: deposit, stamp duty, legal fees, refurbishment and furnishing. This is the return on your money rather than on the property, and it is the number to compare against paying down a mortgage, a pension, or another deal.

Leverage cuts both ways. Borrowing 75% at 5.5% turns a 5.1% net yield into a thin or negative cash return, while the same borrowing on a 7.2% net yield still leaves a positive one. The calculator on this site does the arithmetic; the judgement is in the inputs.

Interest cover

Lenders assess buy-to-let mortgages by dividing the rent by the interest at a stressed rate, typically wanting 125% for basic-rate taxpayers and companies and 145% for higher-rate taxpayers, at a rate of at least 5.5% or the pay rate plus a margin. If the rent does not cover it, the loan is reduced whatever the price. Run this before you offer, because it sets your maximum borrowing and therefore your deposit.

What is a good number?

There is no universal answer, but a deal that does not clear these hurdles deserves a hard look:

• Net yield above the mortgage rate you will actually pay, with a margin for rate rises.
• Positive monthly cash flow after finance, after a realistic void allowance (8% for standard lets, 10% to 15% for HMOs and short lets), after a maintenance reserve, and after paying for management even if you plan to self-manage.
• Cash-on-cash return that justifies the illiquidity and the work compared with a risk-free alternative.
• Interest cover that leaves headroom on the lender's stress test.

The mistakes that flatter a deal

• Using asking rents rather than achieved rents, or a full house of rooms rather than average occupancy.
• Leaving out stamp duty, refurbishment and furnishing from the cash invested.
• Forgetting that bills-included rents move with energy prices while the rent is fixed for a year.
• Ignoring tax. Two identical deals can produce different after-tax returns depending on whether they are held personally or in a company.
• Treating capital growth as income. It may come, but it does not pay the mortgage this month.

AIRPROP appraises deals for clients using the same model we use for our own purchases, including finance, tax and a downside case. Book a free call if you want a deal sense-checked before you commit.