Rental Yield Explained: How to Calculate Gross vs Net Returns

A duplex in Indianapolis purchased for $120,000 and rented at $750 per month generates a gross yield of 7.5%. The same $120,000 invested in a San Francisco studio renting at $1,100 per month sounds better at 11%, until you realize the San Francisco purchase price is actually $380,000, giving a gross yield of 3.5%. Rental yield is the fundamental metric for comparing property investments, but the number only tells the truth when calculated correctly. This guide covers both gross and net yield formulas, regional benchmarks, and the most common mistakes that lead investors to overpay.

Gross Yield vs Net Yield: The Formula Difference

Gross rental yield is the simplest calculation: annual rent divided by property value, multiplied by 100. It is the headline number used on property listings and comparison sites because it is easy to calculate and makes properties look attractive. For a property costing $200,000 and renting at $900 per month ($10,800 per year), the gross yield is 5.4%.

Net rental yield subtracts all landlord expenses before dividing. These costs include mortgage interest payments, building insurance ($200-$500/year), maintenance reserves (10-15% of rent), property management fees (8-12% of rent), void periods (typically 4-8 weeks per year), and HOA fees for condos. For the same $200,000 property, annual costs of $3,600 reduce the yield from 5.4% to 3.6%, a difference that can turn a viable investment into a loss-making one at current mortgage rates.

What Counts as a Good Rental Yield?

In the current US market, a gross yield of 5% to 8% is generally considered good. Below 4% is low risk territory, the margins are too thin to absorb unexpected costs like boiler replacements or extended void periods. Above 8% is achievable in some locations but often comes with trade-offs: higher tenant turnover, lower property condition, or weaker capital appreciation.

Zillow Rental Market Report for 2025 found that average US rents rose 7.2% year-over-year, with yields strongest in Midwest and Southern cities: Indianapolis at 8.2%, Cleveland at 7.8%, and Memphis at 7.5%. San Francisco averaged 3.9%, reflecting the persistent disconnect between property prices and rental income in coastal metros.

The right target depends on your investment strategy. Income-focused investors target 6-8%+ gross yield and accept slower price growth. Capital growth investors accept 4-5% yield in areas where property values are appreciating faster, banking on total return over time. Balanced investors look for 5-6% yield in cities with both rental demand and growth potential.

Regional Yield Comparison across the US

Always verify yields with local rental data and recent comparable lettings rather than relying solely on regional averages. A street-level analysis often reveals yields 1-2% above or below the area average.

Compare your portfolio against other landlords with the Rental Portfolio Benchmark to see where your returns sit versus peers. If you are still deciding between owner-occupation and a rental purchase on the same property, the Buy vs Rent Calculator weighs the opportunity cost on a 10-year horizon.

Factors That Make or Break Your Yield

Property type. Houses in multiple occupation (HMOs) can generate yields of 8-12% because you rent by the room. A 4-bed HMO at $500 per room generates $24,000 per year versus $14,400 if let as a single let at $1,200 per month. However, HMOs require an HMO license, more intensive management, higher maintenance costs, and compliance with additional fire safety regulations.

Void periods. Every empty month costs a full month's rent. Budget for 4-8 weeks of void per year. Properties near universities, hospitals, or major employers tend to have shorter voids due to consistent demand. Urban one and two-bed apartments void for the shortest periods; large family homes and rural properties for the longest.

Maintenance reserves. Older properties offer attractive purchase prices but demand more maintenance. Budget 10-15% of annual rent for ongoing maintenance on pre-1960 properties and 5-10% for newer builds. On top of this, set aside a sinking fund of 1-2% of property value per year for major capital expenditure, boilers, roofs, kitchens, and bathrooms all need replacing eventually.

Closing costs on investment properties. Real estate transfer tax, title insurance, and lender fees add meaningful upfront cost. On a $200,000 rental purchase, total closing costs typically run $4,000-$8,000 before you even receive your first month's rent. Factor this into your total cost base and use our Closing Costs Calculator to check the exact amount.

Common Yield Calculation Mistakes

Using gross yield for investment decisions. Gross yield is useful for initial screening but should never be used to make purchase decisions. Always calculate net yield before committing capital.

Assuming 100% occupancy. A realistic occupancy rate is 90-95% for well-located properties. Factoring in 4-6 weeks of void per year gives a more accurate picture.

Ignoring management costs. Even self-managing landlords have costs: advertising for tenants, credit and background checks, HVAC and electrical inspections, and their own time. If you value your time, factor in an equivalent management fee.

Forgetting purchase costs. Real estate transfer tax, title insurance, attorney fees, inspection, and mortgage origination fees add 3-6% to the purchase price. Some investors calculate yield against the total invested rather than just the property price, which gives a more conservative (and realistic) number.

Tax Implications That Affect Your Real Yield

Rental income is taxable, and the tax treatment significantly affects your net return. In the US, mortgage interest on rental properties remains fully deductible as an operating expense against rental income, along with depreciation, property tax, insurance, repairs, and management fees. Depreciation alone (27.5 years straight-line for residential) often shelters a meaningful share of rental income from current taxation.

Capital gains tax also affects your total return when you eventually sell. Long-term capital gains rates in the US are 0%, 15%, or 20% depending on income bracket, plus a potential 3.8% Net Investment Income Tax. Depreciation recapture is taxed at up to 25%. Factor this into your exit strategy, and consider a 1031 exchange to defer taxes when rolling equity into another investment property. A property with 3% rental yield but 8% annual capital growth has a different tax profile than one with 7% yield and 2% growth.

Some landlords hold rental property inside an LLC for liability protection and to separate rental finances from personal assets. Most single-member LLCs are disregarded for tax purposes and income still flows through to your personal return. Multi-member LLCs file as partnerships. LLCs add formation and annual filing costs ($100-$800 per state), and lenders may require personal guarantees on the mortgage. Consult a CPA or real estate attorney before restructuring.

Yield Optimization Strategies

Add value through refurbishment. A $15,000 kitchen and bathroom upgrade on a $150,000 property might increase rent from $700 to $850 per month. That is an extra $1,800 per year, a 12% return on the refurbishment cost, plus increased property value. Track your renovation ROI with our Marketing ROI Calculator.

Consider HMO conversion. Converting a 3-bed house from a single let at $900 per month to a 4-room HMO at $450 per room generates $1,800 per month, double the income from the same property. The conversion cost ($5,000-$15,000 for fire safety, en-suites, and licensing) typically pays for itself within 12-18 months.

Negotiate purchase price aggressively. Every $5,000 reduction in purchase price on a $150,000 property with $9,000 annual rent increases your gross yield from 6.0% to 6.2%. On a portfolio of five properties, aggressive negotiation can add a full percentage point to your average yield.

Minimize void periods. Start marketing the property 6-8 weeks before the current tenant leaves. Price the first week's rent competitively to attract quick applications. Properties priced at the market rate let within 2 weeks; properties priced 10% above market sit empty for 4-6 weeks. Use our Break-Even Calculator to model the cost of void periods against your fixed expenses.

Building a Complete Property Analysis

Rental yield is one piece of the puzzle. For a complete investment analysis, combine your yield calculation with a mortgage affordability assessment, a closing costs calculation, and a review of the mortgage affordability guide for current lending criteria. If you are deciding between property and other investments, our Compound Interest Calculator can model alternative scenarios. For a deeper dive into property economics, explore the real estate transfer tax guide to understand the full tax implications.

Yield Analysis by Property Type

Different property types offer fundamentally different yield profiles. Understanding these patterns helps you target the right investments for your strategy:

Holiday lets can achieve exceptionally high yields in tourist hotspots but carry significant seasonality risk. A coastal property might achieve 15% yield in summer months and 2% in winter. Annualised, the yield often settles at 7-10%, comparable to a well-located HMO with far less volatility. Use our Home Affordability Calculator to model purchase scenarios for each property type, and check our Profit Margin Calculator to see how management costs affect your bottom line.

The Leverage Effect: How Mortgages Amplify Yield

Rental yield is calculated on property value, but most investors do not buy with 100% cash. A $200,000 property with 6% gross yield generates $12,000 per year. If you invested $50,000 cash (25% deposit) and borrowed $150,000, that $12,000 income represents a 24% return on your actual cash invested, before mortgage costs.

After mortgage interest (approximately $6,750 per year on a 4.5% rate), your net income from the $50,000 invested is $5,250, a 10.5% cash-on-cash return. This leverage effect is why property investors often achieve higher returns on invested capital than the headline yield suggests. However, leverage amplifies losses too: if rental income falls while mortgage payments remain fixed, your cash-on-cash return can turn negative quickly.

For Property Platforms and Property Managers

Property investment platforms and property managers embed rental yield calculators on their websites. Investors who model returns on specific properties reveal their budget, target yield, and investment criteria, data that transforms a website visitor into a qualified lead for property management services or investment advisory.