How to calculate rental yield on a property: gross and net, with an example

General information, not financial or tax advice. The numbers in the example are made up to show the method and are not market figures.

How do I calculate rental yield?

Divide a year's rent by what the property cost, and express it as a share. That is the gross yield. For a fuller picture, take off the yearly costs of owning it and divide by the total you spent buying it. That is the net yield.

What is the formula for gross rental yield?

Gross rental yield = (monthly rent x 12) / property price x 100. It ignores every cost, so it flatters the property, but it is the quickest way to compare two homes.

What is the formula for net rental yield?

Net rental yield = (yearly rent - yearly costs) / (property price + buying costs) x 100.

• Yearly costs: property tax, society maintenance paid by the owner, repairs, insurance, agent fees, and rent lost while the home is empty between tenants.
• Buying costs: stamp duty, registration, brokerage and any fitting-out. See stamp duty and registration explained.

What does a worked example look like?

Illustration only. A flat is priced at 5,000,000 rupees and rents for 20,000 a month. Yearly rent is 240,000. Gross yield is 240,000 / 5,000,000 = 4.8 per cent.

Now the costs. Say the owner pays 6,000 property tax, 36,000 maintenance, 10,000 repairs and loses one month of rent (20,000) to a vacancy. That is 72,000, leaving 168,000. Buying costs of 350,000 bring the total spent to 5,350,000. Net yield is 168,000 / 5,350,000 = about 3.14 per cent. The net figure is well below the gross one, which is normal.

What does rental yield leave out?

• Price growth. A property can gain or lose value, and yield counts only the rent.
• Loan interest. If you borrowed to buy, your return depends on the loan's cost. See how a home loan EMI works.
• Tax on rent and on a later sale.
• The effort and risk of finding and keeping a good tenant. See how to find reliable tenants.

How do I use yield to compare properties?

1. Look up what similar homes in the same area rent for, in apartments for rent, and what they sell for in apartments for sale.
2. Calculate gross yield for each, then net yield for the finalists.
3. Compare the result with the cost of a loan and with other places you could put the money.
4. Do not choose on yield alone: location, building quality and demand decide whether the home stays let.

Thinking of owning versus renting for yourself? See rent or buy: the break-even rate and the rent vs buy calculator.