Two rental properties can offer the same headline yield yet leave you with very different amounts after costs. Gross rental yield compares rent with the property’s price. Net rental income shows what remains after operating costs, while mortgage payments then affect the cash available.
To compare those figures fairly, it helps to follow the money in stages: start with rent, allow for empty periods and operating costs, then deduct mortgage payments. This guide uses one example throughout, with tax considered separately.
How to calculate gross rental yield
Gross rental yield expresses annual rent as a percentage of the property’s price or value. Here, we use the purchase price and assume twelve occupied months to calculate the headline figure.
Headline gross rental yield = annual rent at full occupancy ÷ purchase price × 100
A property costing £250,000 with rent of £1,250 a month would produce £15,000 over twelve occupied months. Divide £15,000 by £250,000 and multiply by 100 to get a 6% headline gross yield.
That percentage takes no account of repairs, management fees or borrowing. It also assumes you receive all twelve months of rent. If the home stands empty, the rent received over the year will be lower, even if the advertised monthly rent stays the same.
Understanding net rental income and yield
When comparing gross rental yield vs net rental yield, check what each figure includes. Definitions of “net” vary, so a percentage from one calculation may not be directly comparable with another. This article keeps mortgage payments and tax separate from operating costs.
Net rental income is measured in pounds
We define net rental income before mortgage payments and tax as rent after an allowance for empty periods, less operating costs. These can include letting fees, insurance, routine repairs and service charges you pay. The result is an amount in pounds, rather than a percentage.
Use a realistic annual budget for buy-to-let running costs. Include costs that arrive once a year as well as monthly bills, and allow for work between tenancies. Major improvements and purchase costs need their own budget; they are outside this simplified operating-income calculation.
Net rental yield is a percentage
Net rental yield before finance and tax = net rental income ÷ purchase price × 100
Using the same purchase price keeps the gross and net percentages on a consistent basis. We then deduct mortgage payments from net rental income to show cash remaining before tax. Neither the net yield nor that cash figure measures the total return on your investment, which also depends on other costs and changes in property value.
Same gross yield, different cash remaining
Both hypothetical properties below cost £250,000 and could receive £1,250 per occupied month. Each has a £150,000 interest-only mortgage at an illustrative 5% rate throughout the year: £625 a month, or £7,500 annually. These figures illustrate the calculation; they are not market estimates or mortgage quotes.
Property A receives twelve months of rent. Property B has one empty month, often called a void period, and higher operating costs.
Annual measure
Property A
Property B
Rent at full occupancy
£15,000
£15,000
Headline gross yield
6%
6%
Rent lost during void
£0
£1,250
Rent after void allowance
£15,000
£13,750
Operating costs
£3,000
£4,500
Net rental income, before mortgage and tax
£12,000
£9,250
Net yield, before finance and tax
4.8%
3.7%
Mortgage payments
£7,500
£7,500
Cash remaining, before tax
£4,500
£1,750
The two properties start at 6%, but Property B leaves £2,750 less cash over the year. Its £13,750 rent after the void, less £4,500 operating costs, gives £9,250 net rental income. Dividing that by £250,000 gives the 3.7% net yield; deducting the mortgage payments leaves £1,750 before tax.
Worth knowing
Property B’s gross yield would be 5.5% using rent after the empty month. Its 6% headline figure assumes full occupancy. Count the £1,250 lost rent only once: reduce rental income for that month without adding the same loss to operating costs.
This comparison excludes acquisition costs, capital improvements, tax and money set aside to repay the interest-only loan. The annual cash figures also hide timing: a repair bill may fall due before the next rent payment arrives.
Check the property numbers
Explore mortgage payments and gross rental yield using your own figures, then allow separately for running costs, voids and tax.
How mortgage payments change the picture
Your mortgage balance, interest rate and repayment method all affect the cash left each month. In the example, matching mortgages isolate the effect of costs and empty periods. In practice, two owners of similar properties could have different borrowing and therefore different cash flow.
With a repayment mortgage, the full payment reduces cash available, but part pays back the debt. Treating that whole payment as an expense would overlook the capital you have repaid. Interest-only payments leave the capital outstanding unless you make separate repayments.
Before a fixed-rate deal ends, review what a changed payment would mean for the property’s budget. The headline gross yield could stay unchanged while higher mortgage costs reduce the cash you retain. A lender’s rental assessment is another separate check; it does not establish your net income.
Cash flow and taxable profit differ
The cash left in your account is not automatically the profit on which you pay tax. Mortgage capital repayments reduce debt, while the tax treatment of interest and other finance costs depends on ownership and your circumstances.
For individuals letting residential property, Section 24 finance-cost rules generally restrict relief to a basic-rate tax reduction, subject to limits. Companies follow different rules. Avoid applying a flat tax percentage to the final cash figures above: ask a tax adviser to calculate your position and confirm which costs qualify for relief.
Choose the measure for your question
Comparing areas or properties
Use the same basis for price, rent and occupancy. Gross yield offers a starting comparison, while net yield adds the operating costs you have included.
Budgeting after costs and mortgage payments
Look at cash remaining before tax, then allow for your tax position and a reserve. An annual surplus does not remove the need to cover bills as they arrive.
Testing changes to the assumptions
Rework the figures with a longer void, an extra repair or a higher mortgage payment. This shows how much room the budget has when plans change.
Reviewing an existing rental property
Compare rent actually received with recorded costs over the same period. Use that evidence to identify where improving rental income or reviewing spending could help.
How Muttuo can help
Muttuo compares options from more than 100 lenders across the market. We can help you review mortgage payments, repayment methods and borrowing costs alongside your rental budget, whether you are buying or reviewing an existing mortgage.
Review your mortgage payments
Compare suitable mortgage options
Understand borrowing costs
Explore your borrowing options
Discuss your property plans and borrowing needs with an adviser.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The FCA does not regulate some buy-to-let mortgages.
Common questions about rental property figures
What is a good rental yield?
There is no single percentage that makes a property suitable. Assess the rent, costs, demand and risks together. A higher headline yield may come with larger bills or longer empty periods.
Should I use purchase price or current value?
Purchase price shows yield against what you paid. Current value helps assess the income relative to what the property is worth now. Label the basis and use it consistently; neither figure uses your deposit as the denominator.
Does net rental yield include mortgage payments?
Definitions vary. Here, we calculate net rental yield after allowing for empty periods and operating costs, but before mortgage payments and tax. Other methods deduct finance costs from income or add purchase costs to the property price, so check the formula before comparing results.
Can positive gross yield mean negative cash flow?
Yes. Rent can produce a positive gross yield while operating costs and mortgage payments exceed the income received. You would need other funds to cover the shortfall.
