Gross yield answers: how much rent am I buying per pound of capital? Net yield answers: what is left after the recurring costs I actually pay, before finance and tax? Both are useful if they are calculated on a consistent basis.
To run a quick screening calculation, use the free gross and net yield calculator before executing full underwriting comparisons.
Definitions (same basis for every deal)
Underwriters must establish a uniform definition for both yield metrics:
- Gross Yield = Annual Rent ÷ Total Capital Employed (purchase price, stamp duty surcharge, legal fees, and survey costs).
- Net Yield = Net Operating Income (NOI) ÷ Total Capital Employed.
Net Operating Income (NOI) is calculated by subtracting allowable property running costs from the gross rent. These expenses include building insurance, safety certifications, lettings management, maintenance, ground rent, and service charges. Landlords can consult the HMRC Property Income Manual for guidance on which property repairs and running costs are classified as revenue expenses.
Detailed worked calculations (worked example)
To illustrate the gap between gross and net yields, consider a Victorian mid-terraced property purchased for BTL investment:
1. Total Capital Stack:
- Purchase Price: £150,000
- Stamp Duty Land Tax (SDLT additional surcharge rate): £7,500
- Legal & Survey Fees: £2,500
- Initial Refurbishment Cost: £10,000
- Total Capital Base: £150,000 + £7,500 + £2,500 + £10,000 = £170,000
2. Gross Rent Income:
- Monthly Rent: £1,100 pcm (£13,200 per annum)
3. Operating Expenses Deductions:
- Void Allowance (5% of rent): £660
- Letting Management Fee (10% + VAT = 12%): £1,584
- Ongoing Maintenance Provision (10% of rent): £1,320
- Building Insurance & Gas Safety: £450
- Service Charge & Ground Rent: £600
- Total Annual Expenses: £660 + £1,584 + £1,320 + £450 + £600 = £4,614
4. Yield Output Comparison:
- Gross Yield Calculation: $$\text{Gross Yield} = \frac{\text{Annual Rent}}{\text{Total Capital Base}} \times 100 = \frac{13,200}{170,000} \times 100 = \mathbf{7.76%}$$
- Net Operating Income (NOI): £13,200 − £4,614 = £8,586
- Net Yield Calculation: $$\text{Net Yield} = \frac{\text{Net Operating Income}}{\text{Total Capital Base}} \times 100 = \frac{8,586}{170,000} \times 100 = \mathbf{5.05%}$$
The gap between 7.76% and 5.05% represents the cash drag of ongoing expenses. Relying solely on gross yield metrics can hide an unviable deal, especially where service charges or maintenance lines are high.
Four rules that stop double counting
- Voids: Deduct a void percentage (e.g., 5%) from the gross rent line once. Do not deduct it from both rent and maintenance.
- Lettings setup: Deduct tenant-find fees as a capital acquisition or setup cost. Do not double-count it inside the recurring monthly management percentage.
- Service charges: Ensure the annual service charge and ground rent figures are factored in. Flats with low council tax but £3,000 service charges will destroy net yields.
- Standardised rent: Use realistic market rents backed by portal comparables. Do not inflate gross yields to force a deal to fit.
Use gross yield for initial sorting of leads, but rely on net yield to structure your offer. By modelling both in one platform, you ensure that changes to expenses flow directly into the final return metrics.
