Calculate gross yield by dividing annual scheduled rent by the property’s purchase price and multiplying by 100. To estimate net operating yield, subtract a clearly stated allowance for vacancy and operating costs first. To estimate pre-tax cash flow, subtract mortgage payments and any separately budgeted reserve from net operating income (NOI). These are different measures: a strong gross yield does not guarantee positive cash flow.
What the three calculations tell you
- Gross rental yield is a quick rent-to-price ratio. It excludes vacancy, operating expenses, financing and tax.
- Net operating yield measures operating income after the expenses you specify, relative to a stated property-cost basis. It normally excludes mortgage payments and tax.
- Pre-tax cash flow estimates the cash left from operations after mortgage debt service and any separately identified cash outlays, such as a replacement reserve.
Keep the labels and assumptions beside each result. “Net yield” is not used consistently: state both which costs you deduct and whether the denominator is the purchase price, current property value or total acquisition cost.
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How to calculate each figure
Gross rental yield
Gross yield (%) = annual scheduled rent ÷ property value basis × 100
For a purchase comparison, the basis is usually the purchase price. If you use current market value instead, label it as a current-value yield; it answers a different question. Annualize rent consistently: multiply monthly rent by 12 or weekly rent by 52.
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Effective rental income and NOI
Start with scheduled rent, then subtract an explicit allowance for vacancy and non-payment or collection losses. Add other reliable property income separately, if applicable. The result is effective rental income.
NOI = effective rental income − operating expenses
Operating expenses are recurring costs needed to operate and lease the property. Depending on the property and location, they may include property taxes or rates, insurance, landlord-paid utilities, management, repairs and maintenance, leasing costs, and service or association fees. Itemize what you include. Keep unusual, one-time improvements separate, and do not assume their tax treatment follows their treatment in an operating calculation.
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In the investor-guide and appraisal frameworks cited here, NOI excludes mortgage principal and interest. It is therefore a property-level operating measure, not the cash a financed owner keeps.
Net operating yield
Net operating yield (%) = NOI ÷ stated property-cost basis × 100
Declare the basis and expense set next to the result—for example, NOI divided by purchase price, after a specified vacancy allowance and listed annual operating costs. If you use total acquisition cost or current value instead, say so. Do not silently include mortgage payments or tax in this measure.
Pre-tax cash flow
Pre-tax cash flow = NOI − mortgage debt service − separately budgeted cash outlays
Debt service means scheduled principal and interest payments. If you set aside money for future capital replacements, show that reserve as a separate outflow after NOI. Principal repayment reduces current cash but also reduces the loan balance; keep that equity-building effect distinct from cash flow.
Worked example with hypothetical figures
The following arithmetic illustration is not a market estimate or benchmark. Every input is hypothetical and is shown on an annual basis.
| Input or result | Calculation | Amount |
|---|---|---|
| Purchase price | Chosen yield denominator | £240,000 |
| Scheduled rent | £1,600 monthly × 12 | £19,200 |
| Vacancy and collection-loss allowance | 5% of scheduled rent | −£960 |
| Effective rental income | £19,200 − £960 | £18,240 |
| Property taxes or rates | Hypothetical annual cost | −£1,800 |
| Insurance | Hypothetical annual cost | −£600 |
| Management | Hypothetical annual cost | −£1,440 |
| Repairs and maintenance | Hypothetical annual cost | −£1,200 |
| Landlord-paid utilities and service fees | Hypothetical annual cost | −£1,000 |
| NOI | £18,240 − £6,040 operating costs | £12,200 |
| Gross yield | £19,200 ÷ £240,000 × 100 | 8% |
| Net operating yield | £12,200 ÷ £240,000 × 100 | 5.08% |
| Annual principal-and-interest debt service | Hypothetical scheduled payments | −£10,800 |
| Replacement reserve | Separately budgeted hypothetical outflow | −£600 |
| Pre-tax cash flow | £12,200 − £10,800 − £600 | £800 |
The example’s yield uses purchase price as its denominator and excludes financing. Cash flow includes the stated loan payments and reserve. Change the inputs to match the property; do not treat these figures as a typical yield or cost level.
Calculate it in a repeatable order
- Choose a period and basis. Use a year unless you have a reason to use another period. Record whether the yield denominator is purchase price, current value or total acquisition cost.
- Annualize scheduled rent. Use monthly rent × 12 or weekly rent × 52. Include only other property income you can reasonably expect, and list it separately.
- Allow for lost rent. Estimate vacancy and non-payment or collection losses rather than assuming uninterrupted full occupancy. State the allowance and how you derived it.
- List recurring operating costs. Include the costs relevant to operating and leasing this property. Separate one-time improvements and explain any categories you have left out.
- Calculate NOI and net operating yield. Subtract operating expenses from effective income, then divide NOI by the declared cost basis.
- Subtract financing and reserves for cash flow. Use scheduled principal and interest payments for the same period. Deduct any planned reserve separately and consistently.
- Check the result under less favorable assumptions. Test lower rent, longer vacancy, higher repairs, insurance or taxes, and different loan terms.
Compare properties on the same basis
A fair comparison uses the same period, denominator convention and expense definitions for each candidate. Set out scheduled rent and realistic effective rent, vacancy and collection risk, recurring operating costs, financing amount and terms, and cash flow after debt service and planned reserves. A property with a higher gross yield can still have a weaker net yield or negative financed cash flow.
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There is no universal “good yield” threshold established by the sources cited here. The result depends on local costs, rental risk, property condition, financing and the assumptions used. Stress-test those inputs rather than relying on a headline percentage.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Optional: calculate cash-on-cash return
To compare the annual cash flow with the cash invested, use:
Cash-on-cash return (%) = annual cash flow ÷ initial cash invested × 100
Define “initial cash invested” precisely—for example, identify which acquisition and setup outlays you include. State whether the numerator is before or after any reserve. This is an investor-level return measure, not rental yield.
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Taxable rental profit is not automatically the same as NOI or cash flow. Tax rules can classify costs differently, and the answer depends on jurisdiction, ownership structure and property type. Keep a record of receipts and expenses, check current local rules, and seek qualified advice for your circumstances.
UK example
For UK landlords, HMRC’s guidance on rental income and tax describes allowable day-to-day expenses, record keeping and rental-profit calculations. For individual residential landlords, Income Tax relief on finance costs has been restricted to the basic rate since 6 April 2020; the treatment differs for companies and other circumstances. HMRC also explains that under the cash basis, receipts and expenses are generally recognized when money is received or paid, so the accounting basis affects when profits are reported (Property Income Manual PIM1092).
HMRC’s 2026 property rental income statistics report £34.75 billion in total allowable expenses and £12.82 billion in residential finance costs declared for 2024–25 by unincorporated landlords in Self Assessment. These are aggregate reported amounts, not estimates of typical costs or financing bills for an individual property.
Quick Recap
Sources
- HMRC: Work out your rental income when you let property
- HMRC: Property Income Manual PIM1092
- HMRC: Property rental income statistics: 2026
- California Board of Equalization: Lesson 11
- City of Guelph Investor Guide: Understand the Numbers That Matter
- National Australia Bank: What is rental yield in property investment?
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