How to Calculate Rental Yield and ROI Correctly
Gross yield is misleading. Net yield and cash-on-cash return are what actually matter. Here's the maths every landlord should run before buying.
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Introduction
Property forums are full of gross yield boasts and ignored running costs. Smart investors run the full maths before buying. Here's the framework — with a worked Norwich example.
Gross yield
Annual rent ÷ purchase price × 100. Quick and useful for screening, useless for decision-making. A £200,000 Norwich flat at £1,150 pcm has a gross yield of 6.9% — looks great until you take £8,000+ off for running costs.
Net yield
Net yield = (annual rent – annual operating costs) ÷ property price × 100. Operating costs include mortgage interest (or notional interest for cash buyers), management or agent fees (10–15%), service charge, insurance, maintenance allowance (8–10% of rent), voids (5–8%), and accountancy.
Worked example
£200,000 flat, 25% deposit (£50,000), 75% mortgage at 5.5% interest only = £8,250 mortgage interest. Rent £13,800. Less: 10% void/maintenance £1,380, agent 12% £1,656, insurance £180, accountancy £200. Net pre-tax profit = £13,800 – 11,666 = £2,134. Net yield on £200k = 1.07%. After-tax (higher rate) closer to break-even.
Cash-on-cash return
Annual net pre-tax profit ÷ cash invested. In the worked example: £2,134 ÷ £62,000 cash in (deposit + stamp duty + fees) = 3.4%. Not great. Run the same example as a Norwich HMO with £24,000 rent and the cash-on-cash jumps to 18%+.
Tax leverage
For mortgaged BTL held personally, Section 24 caps mortgage interest relief at 20%. Higher-rate taxpayers can see effective tax rates of 50%+ on rental profit. Limited-company ownership keeps full interest deductibility — model both.
Capital growth — the bonus
Yield is one return; capital appreciation is the other. A flat returning 4% net yield with 3% annual growth delivers 7% total return — equity that compounds tax-free until sale.
Benchmarks for 2026
Sensible minimums: gross yield 7%+, net yield 5%+, cash-on-cash 8%+. HMOs and serviced accommodation should hit higher to compensate for management intensity and regulatory risk. Anything below should justify itself on growth or strategic grounds.
Final word
Smart Sleep Property handles the heavy lifting — referencing, compliance, deposits, repairs, and full tenancy management across Norwich and Norfolk. Get in touch if you'd like us to handle this for you.
Frequently asked questions
What is the key rule for how to calculate rental yield?+
Gross yield = annual rent ÷ property price × 100. Net yield deducts all operating costs (mortgage interest, management, voids, maintenance, tax). Cash-on-cash return measures the actual return on the deposit. For a meaningful comparison use net yield ≥5% and cash-on-cash ≥8% as 2026 minimum benchmar
Does this apply across England?+
Yes — this guide covers England. Scotland, Wales and Northern Ireland have separate but broadly similar regimes.
Where can I get help?+
Smart Sleep Property offers compliance support, document templates and full management for Norwich and Norfolk landlords.
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