Rental yield calculator

What is rental yield, and how is it calculated?

Rental yield is a property's yearly rent as a percentage of what it cost. The simplest version, gross yield, is 12 x monthly rent / price x 100. On the default inputs above, $1,500 a month is $18,000 a year, and $18,000 / $300,000 = 6.00%.

Yield measures income only. It leaves out any rise or fall in the property's value, which is a separate part of the return, and it says nothing about how the purchase was paid for. That is why this calculator shows three figures: gross yield, net yield, and cash-on-cash return, the last of which does depend on borrowing.

Gross vs net rental yield: why net is the figure that matters

Gross yield divides the full rent by the price as if every month were let and nothing were spent. Net yield divides net operating income, the rent actually collected less the costs of running the property, by the price. Only money that reaches you can be spent, saved or used to pay a loan, so net yield is the figure the arithmetic of the investment rests on.

The gap can be large. On the default property, 6.00% gross becomes 4.10% net: $5,710 of the $18,000, or 31.7%, goes on an empty month or so, the letting agent, repairs, insurance and service charges. Two properties with the same gross yield can have very different net yields once a building's service charges or an older home's repairs are counted, which is why comparing on gross alone can mislead.

How do you calculate net rental yield step by step?

Here is the default example as a list of lines, the way you would set it out on paper:

The management fee is charged on rent collected, so it falls when the property is empty. Net yield on total cost adds the purchase costs to the price, which gives a lower and more complete figure for a property you have just bought. The Show the working line under the result prints this sum with your own inputs.

What is cash-on-cash return, and how does a mortgage change it?

Cash-on-cash return is the yearly cash left after all costs, including mortgage payments, divided by the cash you put in: (net operating income - mortgage payments) / (price - loan + purchase costs). Bought with cash, it equals the net yield on total cost, 3.98% on the default inputs.

Borrowing shrinks the cash you put in but adds a payment. With an interest-only loan, the rule is exact: cash-on-cash rises above the net yield on total cost only when the mortgage rate is below it. On the default property with a 75% loan:

• at 3%, cash-on-cash is 6.60%;
• at 4%, it is 3.92%, just under the 3.98% cash figure;
• at 6%, the $13,500 of interest is more than the $12,290 of income, so the property costs $1,210 a year to hold and cash-on-cash is -1.44%.

At 6%, borrowing 50% instead of 75% gives 2.07%. A repayment loan adds principal to the payments: over 25 years at 6% that is $17,396 in year 1, including $4,005 of principal, so cash-on-cash falls to -6.08% even though the principal adds to your equity.

Worked examples in pounds and dirhams

The yields are percentages, so they read the same in any currency; only the amounts change. These inputs are for illustration, not market figures.

The dirham apartment has the higher gross yield and the lower net yield, mainly because of its service charges. Add a 75% interest-only mortgage at 5% to the pounds example and the £9,375 of interest leaves £1,397 a year on £72,500 of cash, a cash-on-cash return of 1.93%.

How do vacancy, fees and rent change the yield?

Every input moves net yield in a direction you can check on the default property:

• Vacancy: 0% gives 4.37% net and 10% gives 3.83%, about 0.27 points for every 5 points of vacancy.
• Management: self-managing at 0% gives 4.67%; a 15% fee gives 3.81%.
• Price: the same rent on a $250,000 purchase is 7.20% gross and 4.92% net; on $350,000 it is 5.14% gross and 3.51% net.
• Rent: to reach a 5% net yield on these costs, rent would need to be $1,764.13 a month.

Fixed costs such as insurance and service charges weigh more heavily on cheaper properties, so a high gross yield on a low price can shrink sharply once they are counted.

How do you calculate rental yield in Excel or Google Sheets?

Put the price in B1, monthly rent in B2, vacancy % in B3, management % in B4 and the total of the fixed yearly costs in B5. Then:

• gross yield: =B2*12/B1;
• rent collected: =B2*12*(1-B3) in B6;
• net operating income: =B6*(1-B4)-B5 in B7;
• net yield: =B7/B1, formatted as a percentage.

For cash-on-cash, subtract the yearly mortgage payments from B7 and divide by the deposit plus purchase costs. For a repayment loan, the yearly payment is the monthly loan payment times 12. Set the formulas against the default inputs here and they should return 6.00% and 4.10%.

Common rental yield mistakes

• Quoting gross yield as the return. On the default property almost a third of the rent never reaches the owner.
• Assuming twelve months of rent. Even a few weeks empty between tenants shows up in the yield.
• Misreading the management fee. A fee can be charged on rent collected or on the full rent. This calculator charges it on rent collected, so check the agreement before comparing.
• Treating repayment principal as a cost. It lowers cash flow but builds equity, so read cash-on-cash and equity together.
• Comparing yields across different price levels without the fixed costs. Service charges and insurance do not scale with the rent.

What this calculator leaves out

Tax is not modeled. Rental income, mortgage interest and property sales are taxed differently by country and by owner, so every figure here is before tax. The calculator also leaves out capital growth or loss on the property, rent increases, voids longer than the vacancy you enter, major one-off works, the costs of finding tenants beyond the management fee, and changes in the mortgage rate. Cash-on-cash uses year-1 payments; on a repayment loan the interest share falls each year. To include the sale price and the years held, use the ROI calculator.

Glossary

Gross yield: a full year's rent divided by the price. Net operating income (NOI): rent collected less running costs, before mortgage payments and tax. Net yield: NOI divided by the price, or by price plus purchase costs. Cash-on-cash return: cash left after mortgage payments divided by the cash put in. Vacancy: the share of the year a property earns no rent. Loan-to-value (LTV): the loan as a percentage of the price. Leverage: using borrowed money; on an interest-only loan it raises cash-on-cash only when the loan rate is below the net yield on total cost.

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