Gross versus net: why the two figures diverge
Rental yield comes in two flavours, and the distance between them is the whole story. Gross rental yield is simply the annual rent divided by the property value — a clean, optimistic headline that ignores the cost of actually owning the place. Net rental yield takes the same rent and first strips out the annual expenses of ownership before dividing by value. Those expenses — letting and management fees, repairs and maintenance, insurance, property taxes and an allowance for the weeks the property sits empty — can swallow a substantial share of the rent. When they do, gross and net yields diverge sharply, and a property that looks like a generous gross earner can turn out to be a thin net one. A tempting gross yield is always worth re-checking on a net basis before you buy.
The rental yield formulas
Gross yield = Annual rent ÷ Property value × 100
Net yield = (Annual rent − Annual expenses) ÷ Property value × 100
where annual rent is the full rent collected over a year andannual expenses are the recurring costs of running the property. Both are expressed as a percentage of value, so the gross figure flatters and the net figure tells you what is closer to reality. Some investors swap the denominator for purchase price plus buying costs — stamp duty, legal fees and the like — for a stricter measure of the yield on the capital they have actually committed.
Worked example
Take a $500,000 property that rents for $60,000 a year and costs $20,000 a year to run. Here is how the gross and net yields come out:
| Step | Amount |
|---|---|
| Property value | $500,000 |
| Gross annual rent | $60,000 |
| − Annual expensesmanagement, maintenance, insurance, property taxes, and vacancy | $20,000 |
| Gross yieldannual rent ÷ property value — the headline figure, before any running costs | 12.00% |
| = Net yield(rent − expenses) ÷ value — after $20,000 of running costs, far closer to what you keep | 8.00% |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then swap in the figures for a property you're weighing up.
How rental yield relates to the cap rate
Net rental yield and the capitalisation rate are conceptually the same idea wearing different clothes. The cap rate divides net operating income by the property value, and net yield on value does much the same thing, so the two converge once expenses are treated consistently. Gross yield, by contrast, is the quick screen — a fast way to rank properties before doing the harder work, much as the gross rent multiplier is a back-of-envelope gauge of price relative to rent. Use gross yield to shortlist, then net yield or the cap rate to decide. To extend the analysis, see ourcap rate calculatorand ourgross rent multiplier calculator.
Gross and net rental yield, shown honestly
- It shows gross and net side by side. Rather than reporting a single optimistic number, the calculator presents both yields together so the gap between headline and reality is impossible to miss.
- Expenses are built in. By taking annual running costs as an input, it computes the net yield that actually matters instead of leaving you to guess how much the gross figure overstates the return.
- It keeps the comparison honest. Because both results are percentages of value, you can line up properties of very different prices and judge their income on equal terms.
Frequently asked questions
What is rental yield?
Rental yield is the annual rental income a property generates expressed as a percentage of its value. It tells you how hard your capital is working as an income asset, independent of price gains. A property worth 300,000 that rents for 18,000 a year has a gross rental yield of 6 percent. Because it is a percentage, yield lets you compare the income return of properties of very different prices on the same footing.
What is the difference between gross and net rental yield?
Gross yield uses the full annual rent over the property value and ignores running costs, so it is the headline figure agents tend to quote. Net yield subtracts the annual expenses of owning the property — management fees, maintenance, insurance, property taxes and an allowance for vacancy — before dividing by value. Net yield is always lower, and the gap between the two reflects how expensive the property is to run. The net figure is the one that resembles what actually lands in your pocket.
How do you calculate rental yield?
For gross yield, divide the annual rent by the property value and multiply by 100. For net yield, first subtract the total annual operating expenses from the annual rent to get net income, then divide that by the property value and multiply by 100. For example, 18,000 of rent on a 300,000 property is a 6 percent gross yield; if running costs are 5,000 a year, net income is 13,000 and the net yield is about 4.3 percent. Some investors use purchase price plus buying costs as the denominator for a stricter figure.
What is a good rental yield?
There is no single right number because yields trade off against expected price growth, location and risk. Prime city-centre properties often carry low yields of 3 to 4 percent because buyers expect capital appreciation, while higher-yield areas of 7 percent or more usually compensate for slower growth or greater management effort. What matters most is whether the net yield comfortably covers financing costs and leaves a margin, and how it compares with other properties and asset classes you could buy instead.
How is rental yield different from cap rate?
They are close cousins. Net rental yield divides net rental income by the property value, while the capitalisation rate divides net operating income by the value, so the two line up when expenses are measured the same way. The cap rate is the standard term in commercial real estate and is built on net operating income, whereas rental yield — especially the gross version — is the quicker residential screening figure. Gross yield in particular is a fast first pass rather than a precise return measure.
Disclaimer: This calculator is foreducation and illustration only. Rental yield rests on the rent, value and expense figures you enter, all of which can change, and it ignores financing, taxes on income and capital growth. The figures it produces are not appraisals of any specific property. Nothing here is investment, tax, or trading advice.