What Is a Good Rental Yield? Understanding Gross vs Net Yield in UK Property Investment
What is a Good Rental Yield? And What is Net Yield?
When it comes to property investment, one of the most important metrics investors use to evaluate opportunities is rental yield. Whether you’re a first-time landlord or building a large portfolio, understanding how yield works is crucial for assessing profitability and long-term growth. But not all yields are created equal, gross and net yield can paint very different pictures of an investment’s performance.
Understanding Rental Yield
Rental yield is a measure of how much income a property generates in relation to its value. In simple terms, it’s the return on your investment through rent, expressed as a percentage.
The formula for Gross Rental Yield is:
Gross Yield (%) = (Annual Rental Income/ Property Value)×100
For example, if you purchase a property for £200,000 and rent it out for £12,000 per year, the gross yield is:
(£12,000/ £200,000)×100 = 6%
Gross yield is a quick and useful way to compare properties and locations. However, it doesn’t take into account the real costs of owning and managing a property. That’s where net yield becomes essential.
What is Net Yield?
Net yield provides a more accurate reflection of your return by factoring in ongoing costs such as:
Mortgage payments
Letting agent fees
Insurance
Maintenance and repairs
Service charges and ground rent (if applicable)
Void periods (when the property is vacant)
The formula for Net Rental Yield is:
Net Yield (%) = ((Annual Rental Income – Annual Costs) /Property Value)×100
Using the same example, if your annual rental income is £12,000 but your costs total £3,000, then your net income is £9,000. On a £200,000 property, your net yield would be:
(£9,000 ÷ £200,000) ×100 = 4.5%
This shows why net yield is a more reliable measure for investors, it reflects the true profitability of the property after expenses.
What is a Good Rental Yield?
The definition of a “good” rental yield varies depending on location, property type, and investment strategy. However, as a general guideline:
UK Average: Yields typically fall between 3% and 6%.
High-Demand Urban Areas: City centres and commuter hubs often deliver yields around 5%–7% due to strong rental demand.
HMOs (Houses in Multiple Occupation): Can achieve 8%+ yields, though they require more management and compliance.
Prime Locations: Central London or high-value areas often offer lower yields (2–4%), but stronger long-term capital growth.
Ultimately, a “good” yield is one that balances income with capital growth potential. A property offering a high yield in a weak location may generate cash flow but lack long-term appreciation. Conversely, a lower-yield property in a strong growth market may deliver greater overall returns over time.
Why Yield Matters for Investors
Rental yield plays a critical role in shaping your investment strategy:
It helps compare properties and regions quickly.
It ensures you can cover mortgage repayments and running costs.
It determines cash flow, which is vital for portfolio growth.
It highlights whether you’re meeting your target return on investment.
However, yield should never be the only factor. Capital appreciation, tenant demand, location fundamentals, and exit strategy all play a role in determining the success of an investment. If you are in need of a detailed guide to get you started, click here.
Final Thoughts
A good investor looks beyond the headline figures. While gross yield is useful for initial comparisons, net yield is the true measure of performance, showing exactly how much profit a property generates after costs. This will help you identify which investments carry the most benefits to you.
For most UK investors, a yield between 5%–7% is considered solid, though the right figure depends on your goals. A balanced approach, combining strong rental income with capital growth potential, will always deliver the most sustainable results.
If you want to identify the best-yielding properties while avoiding the common pitfalls, working with a professional property sourcer like O Johnston & Co can give you access to exclusive opportunities and tailored strategies that maximise your returns.
