How to calculate rental yield: gross, net and cash flow

To calculate rental yield, you divide what a property earns in a year by what it's worth. That one division hides three different answers, though, and the one people quote first is usually the most flattering. A unit with a 9% gross yield can still cost you money every month once you count taxes, repairs, a month without a tenant and the loan.

This guide is for owners who want to know what a rental earns. It walks through gross yield, net operating yield and monthly cash flow with one example, lists the costs that usually go missing, and shows what a single empty month does to the result.

Why the yield you quote matters

The yield number drives real decisions: which rent to ask, whether to keep a property or sell it, whether you can afford a manager, how much to set aside for repairs. If the number is too high, those decisions start from a figure that isn't true.

It also matters when you compare. Two apartments with the same rent can earn very different amounts once you count the building fees, the property tax and how long each one sits empty between tenants. You can only compare them fairly with the same method and the same list of costs.

Why the numbers rarely add up the first time

Most owners know the rent to the dollar. The costs are spread out: property tax once or twice a year, insurance at renewal, the plumber whenever something leaks, the HOA every month. Many owners only add them up at tax time, and by then the receipts are in three places.

Empty months are the other blind spot. When a tenant leaves, the unit may need cleaning, a coat of paint and a few weeks on the market. Those weeks bring in no rent, but the mortgage and the fees keep coming. A calculation with twelve months of rent a year leaves those weeks out.

How to calculate rental yield, step by step

You need five numbers: the property's value, the monthly rent, how many months a year you expect it to be empty, the yearly costs, and the monthly loan payment if there is one.

For the value, use today's market value to see what the property earns now, or what you paid (plus closing costs and any initial renovation) to see the return on your purchase. Say which one you used, and use the same one when you compare properties.

We'll use one made-up example all the way through. These numbers are illustrations, not advice and not a typical result:

• Value: $250,000
• Rent: $1,800 a month
• Empty months: 1 a year
• Yearly costs: property tax $3,000, insurance $1,200, HOA fees $1,800, repairs reserve $2,500, other $300. Total: $8,800
• Loan payment: $800 a month in principal and interest. If your mortgage payment includes escrow for property tax and insurance, leave that part out here, since those costs are already in the list.

1. Gross yield: rent against value

Gross yield = (monthly rent × 12) ÷ value

In the example: $1,800 × 12 = $21,600, and $21,600 ÷ $250,000 = 8.64%.

Gross yield is quick and useful for one thing: a first comparison between properties in the same area. It ignores every cost and every empty month, so it's always higher than the net yield. Listings and sales pitches tend to quote this one.

2. Net operating yield: after costs and empty months

First work out the rent you actually collect, then take off the yearly costs:

• Collected rent = monthly rent × (12 − empty months)
• Net operating income = collected rent − yearly costs − management fee (if a manager takes a percentage of the rent collected)
• Net operating yield = net operating income ÷ value

In the example: $1,800 × 11 = $19,800 collected. $19,800 − $8,800 = $11,000 of net operating income. $11,000 ÷ $250,000 = 4.4%.

That's about half the gross yield, before any loan payment or income tax. In the US, investors call a similar figure the cap rate, though they usually leave reserves and one-off improvements out of the costs.

3. Monthly cash flow: what's left after the loan

Monthly cash flow = (net operating income − loan payment × 12) ÷ 12

In the example: $800 × 12 = $9,600 a year in loan payments. $11,000 − $9,600 = $1,400 a year, or about $117 a month, before income tax.

Cash flow answers the question most owners care about: does the rental pay for itself, or do you top it up from your own pocket each month? Yield describes the property. Cash flow includes your loan, so two owners of the same unit can get different answers.

This is a monthly average. In a month when the unit is empty or the tax bill arrives, the account can go negative even if the average is positive, so keep a cash buffer for those months.

What one more empty month does

Now say the unit sits empty for two months instead of one. Collected rent drops to $18,000. Net operating income drops to $9,200, the net operating yield to 3.68%, and the cash flow to about −$33 a month. One extra empty month turned a small surplus into a small loss.

If you hand the property to a manager at 8% of the rent collected (one empty month), the fee is $1,584 a year. Cash flow falls to about −$15 a month. A manager may still be worth it for the time and the calls you save. Put the fee in the calculation before you decide, so you know what that time costs.

The costs people leave out

Go through this list once a year and put a number on each line, even if the number is zero:

• Property tax, and any local fees billed with it.
• Insurance for the building and, where it applies, liability.
• HOA, condo or building fees, including special assessments.
• Repairs and maintenance. If you don't know what to put, our guide on how much to budget for rental property maintenance shows a few ways to set the reserve.
• Utilities you pay, such as water, trash or common-area power.
• Management or leasing fees, as a percentage of rent or a fixed fee per new tenant.
• Costs between tenants: cleaning, paint, small fixes and listing fees.
• Other: accounting, permits, inspections, bank fees.

Leave income tax out of these formulas and look at it separately with an accountant: the rules and the deductions depend on the country, and sometimes on the state or city. The same goes for rent limits and fees that only apply in some places. Check the rules where the property is.

Run your own numbers

Once you have the five inputs, a calculator saves the arithmetic. Our free rental yield calculator runs in your browser: enter the value, the rent, the empty months, each yearly cost and the loan payment, and it shows the gross yield, the net operating yield and the monthly cash flow, with the formulas it used. It doesn't send your numbers anywhere, and like this guide it gives an estimate, not financial, tax or legal advice.

A few habits make the result more useful:

• Use real figures where you have them. Last year's tax bill and insurance renewal beat a guess.
• Run it twice: once with your expected empty months and once with one more.
• Check the rent you assume. If you're not sure the rent is right, our guide on how much rent to charge shows how to compare it with similar homes.
• Compare with what happened. At the end of the year, replace the estimates with the actual rent and costs. Our guide on tracking income and expenses per property shows a simple way to keep them.

How RentalThread will make it easier

The hardest part of the calculation is having the real numbers. With RentalThread, rent and expenses will be recorded per property and month, so the yearly costs come from what you paid. You'll be able to capture receipts and expenses from a photo, and get a monthly AI summary of each property that you review before relying on it. At tax time, the yearly reports per property will already be organized.

See what's planned for owners.