How Do You Calculate Rental Yield on a Buy-to-Let Property?

What is gross rental yield and how do you work it out?

Gross rental yield is annual rent divided by the property value, multiplied by 100. It ignores every cost, which makes it a fast filter rather than a profit figure.

The gross yield formula

Gross yield = (annual rental income / property value) x 100. Use the purchase price when you are comparing deals and the current market value when you are reviewing a property you already own.

The two give different answers once prices move. A flat bought at £150,000 and now worth £200,000 has quietly lost a third of its gross yield without the rent changing.

Worked example: A manchester terrace

A two-bedroom terraced house in south Manchester costs £180,000 and lets at £1,050 a month. Annual rent is £12,600.

Gross yield = (£12,600 / £180,000) x 100 = 7.00%. On paper that beats almost anything on the high street, which is exactly why gross yield is the number agents quote.

What costs belong in a net rental yield calculation?

Everything you pay to keep the property let: insurance, management, maintenance, voids, safety certificates, ground rent and service charge, then mortgage interest and tax.

The running costs that come off the rent

Budget a real number for each of these rather than a single percentage. Landlord insurance typically runs £150 to £400 a year for a standard let, and our guide to what landlord insurance costs breaks that down by property type.

• Letting agent fees: 8% to 12% of rent plus VAT for full management, or 6% to 8% for let only.
• Maintenance and repairs: 1% of the property value a year is the standard allowance, and older stock needs more.
• Void allowance: two to four weeks of rent a year, or longer if you let to students. Unoccupied property cover becomes a separate cost once a void runs past 30 to 45 days.
• Safety certificates: an annual gas safety check at £70 to £120, an EICR every five years at £150 to £250, plus alarm testing.
• Ground rent and service charge: nothing on a freehold house, but £1,200 to £3,000 a year on a leasehold flat in a managed block.

Service charge is the line that quietly kills flat yields. A £900 a month flat carrying a £2,400 service charge loses more than two months of rent before anything else is paid.

Where mortgage interest and tax fit

Only the interest part of a mortgage payment counts as a cost, because capital repayments build equity. Since 6 April 2020 individual landlords cannot deduct that interest from rental profit at all, and HMRC guidance on working out rental income instead gives a 20% basic rate tax credit.

That means your taxable profit is rent minus running costs, with the interest added back. The gov.uk guide to paying tax on rental income also confirms the £1,000 property allowance, which is only useful on very small lettings.

The same terrace after costs

The house is bought on a 75% loan to value interest-only mortgage of £135,000 at 4.79%. The landlord is a basic rate taxpayer using a full management agent.

A 7.00% gross yield turns into a 1.03% net yield once the mortgage is paid. The 4.62% net operating yield in the middle is the property’s own earning power, which is the fair way to compare two houses financed differently.

How is return on investment different from yield?

Yield measures the return against the property value. Return on investment measures it against the cash you put in, which is a much smaller number once you borrow.

Working out the cash you put in

Add the deposit, the stamp duty, the legal and survey fees and any work needed before the first tenant moves in. The additional property surcharge is now 5% on top of every band, so the stamp duty on the £180,000 terrace is £10,100.

• Deposit at 25%: £45,000
• Stamp duty land tax including the 5% surcharge: £10,100
• Legal fees, searches and a survey: £1,700
• Initial works, safety checks and furnishings: £3,200

Total cash invested is £60,000. That is the denominator for return on investment, not the £180,000 purchase price.

The same property as a cash-on-cash return

Return on investment = (annual net profit after tax / total cash invested) x 100. Using £1,477 of profit against £60,000 of cash gives 2.46%.

So the terrace shows 7.00% gross, 1.03% net and 2.46% return on investment. Quoting any one of them on its own tells you almost nothing about the deal.

Return on investment is the number that rewards a bigger deposit or a cheaper rate, because both cut the interest bill without touching the rent. It is also the number to compare against a savings account.

What is a good rental yield in the UK right now?

Around 6% gross is the current UK average, with the North East near 8% and London closer to 5%. Anything under 5% gross rarely survives a mortgage.

Gross yields by region

The regional figures below come from Zoopla data published by the NRLA, with the UK row calculated from the ONS private rent and house price release covering July 2026 rents and June 2026 prices.

London sits at roughly 5.1% gross on the same Zoopla dataset, and the ONS puts the average London rent at £2,317 a month. The spread between the North East and London is close to three percentage points.

Why a high yield often signals a low-growth area

Yield is a ratio, so it rises when prices are low relative to rents. Cheap housing stock is usually cheap because demand to buy is weak, and weak buyer demand is what holds capital growth back.

High-yield areas also tend to carry higher arrears and turnover, which is why rent guarantee insurance and legal expenses cover get bought far more often there.

The trade is real rather than imaginary. You are choosing between cash today and equity in ten years, and the honest answer depends on whether you need the income now.

What yield do lenders need you to hit?

Most buy-to-let lenders want the rent to cover 125% to 145% of the mortgage interest at a stressed rate of at least 5.5%. In practice that means about a 6% gross yield at 75% loan to value.

How the interest coverage ratio works

The Prudential Regulation Authority’s underwriting standards for buy-to-let tell lenders to run an interest coverage ratio test and to assume a minimum borrower interest rate of 5.5% over five years.

A 145% ratio is standard for higher rate taxpayers and 125% for basic rate taxpayers and limited companies. Some lenders push to 160% on HMOs or on low deposits.

The stressed interest is £135,000 at 5.5%, which is £7,425 a year or £619 a month. The Manchester terrace at £1,050 covers 170% of that, so it clears every test above.

Why portfolio landlords face a tighter test

Once you own four or more mortgaged rental properties the regulator treats you as a portfolio landlord, and lenders stress the whole portfolio rather than the single purchase. One weak multi-property asset can then block a good one.

Keep a yield figure for every property and know your blended average before you apply. A portfolio landlord policy does the same job on the insurance side by putting every property on one schedule.

How do yield and capital growth combine into total return?

Total return adds the rise in property value to the rental profit, then measures both against the cash you invested. It is the only figure that lets a London flat and a Sunderland terrace be compared fairly.

Adding growth to the manchester example

UK house prices rose 2.0% in the year to June 2026 according to the ONS. On the £180,000 terrace that is £3,600 of paper gain.

Total return = (£1,477 rental profit + £3,600 growth) / £60,000 cash = 8.46%. The gain is unrealised until you sell, and capital gains tax will take a slice when you do.

What total return tells you that yield does not

A 5% gross yield with 4% annual growth beats an 8% gross yield with flat prices over a ten year hold. Yield pays the bills, growth builds the equity, and gearing multiplies whichever one you get.

The risk runs the same way. A 2% fall in value wipes out several years of net rental profit on a geared property, so total return can go negative while the rent still arrives.

How can you improve the yield on a property you already own?

Push the rent up to market, cut the void weeks, and take a hard look at the four biggest cost lines. Small changes on both sides compound quickly.

Lifting the income side

Since 1 May 2026 every rent increase runs through a Section 13 notice with at least two months’ warning, and rent review clauses no longer work. Converting to an HMO typically lifts gross income by 20% to 40%, subject to licensing and a different insurance rating.

Short-let and serviced accommodation can double gross income in the right location, but needs holiday let and Airbnb cover and carries far more void risk. Reletting quickly matters more than the headline rent.

Cutting a four-week void to one week on our terrace adds £727 a year. That is worth more than a £25 a month rent rise and costs nothing but preparation.

Cutting the cost side

• Remortgage: dropping 0.5% on £135,000 saves £675 a year, which is over a third of the pre-tax profit in the example above.
• Self-manage: full management at 10% costs £1,260 a year on a £1,050 a month let.
• Insure for rebuild cost, not market value: landlord buildings insurance is priced on what it would cost to rebuild, which is usually well below the sale price.
• Fix small faults early, and consider home emergency cover so an out-of-hours boiler call-out does not become a £600 invoice.

Review the insurance every renewal rather than letting it roll. Loss of rent sits inside most let property policies, and it protects the income side of the yield calculation directly.