How to Calculate Return on Investment for a Rental Property

Gross Yield = (Annual Rent / Property Purchase Price) x 100 Example: £180,000 property, £850/month rent Annual rent: £850 x 12 = £10,200 Gross yield: (£10,200 / £180,000) x 100 = 5.67% Gross yield ignores ALL costs. It's useful only for rapid comparison between properties — never for calculating actual returns.

Net Yield = ((Annual Rent - Annual Costs) / Property Value) x 100 Annual costs to include: - Mortgage interest: £500/month = £6,000/year - Letting agent fees (10-15% of rent): £1,020-£1,530/year - Landlord insurance: £250/year - Maintenance (budget 1% of property value/year): £1,800/year - Gas safety certificate: £60/year - EPC/compliance: £100/year - Void periods (average 3-4 weeks/year): £650/year Total costs: ~£9,880-£10,390/year Net income: £10,200 - £9,880 = £320/year Net yield: (£320 / £180,000) x 100 = 0.18% This is a typical scenario for a leveraged UK buy-to-let in 2025 — net yields after all costs are thin, sometimes negative. Capital growth is doing the heavy lifting for most landlords.

Cash-on-Cash = (Annual Net Cash Flow / Cash Invested) x 100 Accounts for the fact you only put in a deposit, not the full price. Cash invested: deposit + purchase costs Deposit (25%): £45,000 Stamp duty (3% surcharge): £7,200 Solicitor fees: £1,500 Survey: £500 Total cash invested: £54,200 Annual net cash flow (after all costs including mortgage): £320 Cash-on-cash: (£320 / £54,200) x 100 = 0.59% Quite low — but capital growth can dramatically change total ROI.

Total annual return = Net income + Capital appreciation If property grows at 3%/year: Capital gain: £180,000 x 3% = £5,400/year Net income: £320/year Total return: £5,720/year Return on cash invested: £5,720 / £54,200 = 10.5% Key insight: buy-to-let returns are dominated by leverage effects on capital growth — the rental income is almost incidental in high-price-to-rent-ratio UK markets. This is why falling property prices eliminate the investment case for many buy-to-lets instantly.

Since 2020, mortgage interest is not a deductible expense for individual landlords — only a 20% tax credit is available. Higher-rate taxpayer (40%), £10,200 rent, £6,000 mortgage interest: Pre-Section 24: taxable profit = £10,200 - £6,000 - £3,880 other costs = £320 Tax: £320 x 40% = £128 Post-Section 24: taxable profit = £10,200 - £3,880 = £6,320 Tax at 40%: £2,528, less 20% mortgage credit (£1,200) = £1,328 net tax Net income after tax: £320 - £1,328 = -£1,008/year (loss!) Section 24 has pushed many higher-rate taxpayer landlords into negative cashflow. Company structures (Ltd co) avoid this — but have their own costs and complexities.