How do I calculate rental yield on a buy-to-let property?

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Rental yield is the standard way landlords and property investors measure the return a property generates relative to its value, and understanding the difference between gross and net yield is essential for realistic investment comparisons. **Gross yield formula** Gross yield = (Annual rental income ÷ Property value) × 100. This is quick to calculate and useful for a rough initial comparison between properties, but it ignores all costs, so it overstates the actual return you will experience as a landlord. **Net yield formula** Net yield = ((Annual rental income − Annual costs) ÷ Property value) × 100. Annual costs should include mortgage interest, letting agent management fees (typically 10-15% of rent if using an agent), landlord insurance, maintenance and repairs budget, void periods (time the property sits empty between tenants), and safety certificate costs (gas safety, EICR electrical checks) -- net yield gives a far more realistic picture of your actual return. **Worked example -- gross yield** A property bought for £200,000 rents for £950 a month (£11,400 a year). Gross yield = (£11,400 ÷ £200,000) × 100 = 5.7%. **Worked example -- net yield** Using the same property, annual costs total: letting agent fees £1,368 (12%), insurance £300, maintenance budget £600, and mortgage interest (on a £150,000 interest-only mortgage at 5.5%) £8,250. Total costs: £10,518. Net income: £11,400 − £10,518 = £882. Net yield = (£882 ÷ £200,000) × 100 = 0.44% -- dramatically lower than the gross figure, illustrating why gross yield alone can be misleading. **Section 24 and tax on top** Remember that Income Tax is due on rental profit calculated under Section 24 rules (where mortgage interest only gets a 20% tax credit rather than being fully deductible), which further reduces the true after-tax return beyond the net yield figure -- particularly significant for higher-rate taxpayer landlords. **Why location and property type affect yield** Yields vary significantly by region and property type -- lower-value areas (often in the North of England or parts of Scotland/Wales) tend to show higher gross yields relative to purchase price, while higher-value areas (particularly London and the South East) often show lower yields but potentially stronger capital growth prospects, so yield alone should not be the only investment metric considered. **Practical tip** Always calculate net yield (accounting for realistic costs including void periods and maintenance) rather than relying on gross yield figures often quoted in property listings, and factor in the after-tax position given Section 24 restrictions if you are a higher-rate taxpayer landlord, since the true return can be substantially lower than headline gross yield figures suggest.

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