Rental yield calculation: gross yield, net yield and cash flow, with a worked example

A listing says “7% yield”. Once purchase costs, renovation, property tax, a month without a tenant and the mortgage are factored in, the same property can cost its owner €400 a month. Both numbers are accurate: they simply don't measure the same thing.

Three indicators are enough to judge a rental investment: gross yield, net yield and cash flow. Here are their formulas, a complete worked example and the method for comparing two properties on the same basis. This article explains calculation methods; it isn't investment advice.

Gross yield, and why it flatters

The simplest formula:

The catch is in the denominator. Listings often divide the rent by the asking price. Yet the real cost also includes purchase costs (closing costs, transfer taxes, notary or legal fees — around 7 to 8% of the price for an older property in France), renovation work and, where applicable, agency and mortgage arrangement fees. On a €150,000 property, the gap easily exceeds half a percentage point of yield.

Gross yield is useful for quickly sorting a list of listings. It isn't a basis for a decision.

Net yield: what's left after expenses

The expenses to subtract are the ones you pay and can't pass on to the tenant:

• Property tax, often equivalent to one or two months' rent
• Non-recoverable building or HOA charges (management fees, major maintenance)
• Landlord insurance
• A maintenance reserve, because a water heater always gives out eventually
• Vacancy: assuming at least one month a year without rent is a prudent assumption
• Management fees if you use an agency, often 6 to 8% of the rent

People sometimes talk about “net-net” yield when tax is also subtracted. That depends on your personal situation and your country, which is why it's best handled separately.

Cash flow: what the property costs or earns each month

Neither yield takes financing into account. Cash flow measures what actually leaves your bank account:

Negative cash flow means you're topping up the investment every month. That isn't automatically a bad sign: part of every payment repays principal, so it builds equity. The real question is whether that monthly top-up is sustainable for you for the whole length of the loan, including if a tenant stops paying or unexpected repairs come up.

A complete worked example

A one-bedroom apartment in a mid-sized French city, rented unfurnished. All amounts are annual unless stated otherwise.

Gross yield: 9,000 ÷ 170,000 = 5.29%. Calculated on the purchase price alone, the listing would have shown 6%.

Net yield: (9,000 − 2,730) ÷ 170,000 = 3.69%.

Financing: €10,000 down, €160,000 borrowed over 20 years at 3.5%. The monthly payment excluding insurance is about €928, plus €40 of mortgage insurance, so €968 a month or €11,616 a year.

Cash flow: rent collected €8,250 (eleven months) − expenses excluding vacancy €1,980 − mortgage €11,616 = −€5,346 a year, or about −€446 a month.

The honest reading: this property requires a monthly top-up of €446. In return, about €5,600 of principal is repaid in the first year. The owner is therefore saving slightly more, in the form of property, than they're paying out. If that isn't sustainable for their budget, the deal isn't right for them, whatever the advertised yield.

Comparing two properties on the same basis

Second candidate: a studio at €95,000, with €7,125 of purchase costs and €2,875 of renovation, so €105,000 in total. Rent of €520 a month, expenses of €1,890 a year including vacancy, €100,000 borrowed on the same terms (about €605 a month including insurance).

On the numbers, the studio is more profitable and needs half the monthly top-up. But a table doesn't tell the whole story: studios change tenants more often, which increases real vacancy, and rental demand depends heavily on the neighbourhood. The comparison helps you ask the right questions; it doesn't answer them for you.

The classic mistakes

1. Dividing by the asking price instead of the total purchase cost.
2. Taking the listed rent for granted. Check the rents actually charged for comparable properties, and whether rent controls apply locally.
3. Forgetting vacancy, then discovering that finding a new tenant takes six weeks.
4. Mixing up recoverable and non-recoverable charges. Only the latter reduce your yield.
5. Ignoring energy efficiency. In several countries, a poorly rated property can become impossible to rent out without major work.
6. Judging on yield alone. A high yield in an area with no rental demand is a theoretical yield.

To put the investment in the context of your overall situation, see also how to calculate your net worth.

Taxes: why they come last

Tax can turn a good deal into an average one — and rental income is taxed very differently from one country to another. Deductible expenses, depreciation, loan interest relief and furnished-rental rules all vary, and they change often. In France, for example, unfurnished rentals can be taxed under a flat-rate allowance scheme or under actual expenses, and furnished rentals follow their own rules.

The sound approach is to calculate yield and cash flow before tax, as above, then simulate the tax separately for each regime available to you, with the help of a tax adviser or accountant in your country.