Gross yield is the estate agent’s number. Net yield is yours.
Imagine you buy that £150,000 flat from the previous post. At £900 a month, the gross yield is a respectable 7.2%. You feel good about it. Then you start adding up your actual costs.
Management fees at 10% of rent: £1080 a year.
Buildings insurance: £250.
Maintenance reserve at 10%: £1080.
Void allowance at one month per year: £900.
Letting fee for new tenancies: £500.
Suddenly your annual rent of £10,800 has become £6,990 after costs. Your gross yield of 7.2% just became a net yield of 4.7%. That is the difference between what the agent promised and what you actually earn.
Net yield subtracts your operating costs from the rent before you divide by the property value. It gives you a realistic picture of what the property will deliver before you even factor in your mortgage.
The formula looks like this: take your annual rent, subtract your annual operating costs, divide by the property value, and multiply by 100.
The trick is being honest about your operating costs. Every landlord underestimates them. If you budget 15% of rent for management and maintenance combined, plus one month per year for voids, you are in the right ballpark.
On the South Coast, a good net yield is anything above 4% after all costs. Below that, your mortgage payments will eat into your margin and you will be banking on capital growth to make the investment worthwhile.
The formula
Net Yield (%) = ((Annual Gross Rent - Annual Operating Costs) / Property Value) × 100
Why this matters
Net yield is the real starting point for every investment decision. A property with a 7% gross yield and a 4% net yield is a different investment to one with a 7% gross yield and a 6% net yield. The gap between gross and net tells you how efficiently the property runs. Ignore it at your peril.
Running these calculations before you buy is the difference between a good investment and an expensive lesson. Xelox Properties can help you evaluate any deal.