Two numbers wearing the same name
Yield is a ratio between annual rental income and the capital tied up in a property. The difficulty is that both halves of the ratio can be measured in more than one way, and the version quoted in listings, brochures and market summaries is almost always the flattering one. A yield presented without a definition is not information yet.
The two definitions worth holding in your head are:
Gross yield = annual gross rent / purchase price x 100
Net yield = (annual collected rent minus annual operating costs) / (purchase price plus acquisition costs plus initial works) x 100
Notice that the two formulas differ in both places. Gross yield shrinks the numerator by nothing and expands the denominator by nothing. Every step from gross to net either takes something out of the top or adds something to the bottom.
The leakage ladder
It helps to work down a fixed ladder rather than trying to recall costs at random. Each rung either reduces income or is an expense the owner cannot pass on.
- Vacancy and arrears. Rent is quoted as though the property is let every day of the year. It is not. A void allowance, often expressed as a number of weeks per year or a percentage of gross rent, belongs at the top of the ladder.
- Letting and management fees. A one-off tenant-finding fee, then an ongoing management percentage, usually charged on rent collected rather than rent contracted.
- Building service charges. In an apartment, the owner pays the building’s operating budget and reserve contribution, whether or not a tenant is present.
- Insurance. Buildings cover, owner liability, and sometimes rent guarantee or legal expenses cover.
- Repairs and routine maintenance. Small and constant. Best modelled as a percentage of rent or of value rather than pretended to be zero.
- Capital replacement reserve. Boilers, kitchens, bathrooms and appliances have finite lives. Spreading their replacement cost over their expected life converts a nasty surprise into a smooth annual line.
- Recurring property taxes. Annual municipal or national property taxes on the owner, plus any waste or local service levy.
- Compliance costs. Safety inspections, energy certificates, licences or registration schemes for short and long lets. These carry both a fee and a professional cost.
- Owner-paid utilities. Standing charges during voids, and any utilities included in the rent.
Two further items are deliberately excluded from net yield as defined above: mortgage interest and income tax. Net yield measures the property, not your financing and not your personal tax position. Financing is handled separately as a cash-on-cash return, and tax later still. Keeping them out makes two properties comparable.
A worked example
The following numbers are invented to demonstrate the arithmetic. They are not drawn from any market and should not be read as typical of anywhere.
Suppose the purchase price is 200,000 in local currency, acquisition costs add 9 percent, being 18,000, and initial furnishing and works cost 4,000. Total capital committed is 222,000. Suppose the contracted rent is 1,000 per month, so 12,000 a year if never empty.
Gross yield on the price alone is 12,000 / 200,000 = 6.00 percent.
Now the ladder. Suppose one month of vacancy per year, so collected rent is 11,000. Management at 8 percent of collected rent is 880. Service charge is 1,400. Insurance is 300. Maintenance plus a replacement reserve together are 1,200. Recurring property tax is 500. Operating costs total 880 + 1,400 + 300 + 1,200 + 500 = 4,280.
Net operating income is 11,000 minus 4,280 = 6,720. Net yield is 6,720 / 222,000 = 3.03 percent.
The headline halved. Nothing unusual happened in that example, no disaster and no bad tenant. Ordinary, predictable costs did the work.
| Item | Hits the top or the bottom | Usually expressed as | Value in the example |
|---|---|---|---|
| Contracted rent | Top | Monthly amount x 12 | 12,000 |
| Vacancy allowance | Top | Weeks per year or percent of rent | minus 1,000 |
| Management fee | Top | Percent of rent collected | minus 880 |
| Service charge | Top | Fixed annual amount per unit | minus 1,400 |
| Insurance | Top | Fixed annual premium | minus 300 |
| Maintenance and reserve | Top | Percent of rent or of value | minus 1,200 |
| Recurring property tax | Top | Percent of an assessed value | minus 500 |
| Purchase price | Bottom | Absolute | 200,000 |
| Acquisition costs | Bottom | Percent of price plus fixed items | plus 18,000 |
| Initial works and furniture | Bottom | Absolute | plus 4,000 |
How to interrogate a quoted yield
- Is the denominator the asking price, the agreed price, or the price plus costs?
- Is the rent contracted, collected, or an agent’s estimate of achievable rent?
- Does the figure assume full occupancy for twelve months?
- Are service charges deducted, and has the reserve fund contribution been included?
- Is any furniture, management or short-let operating cost inside or outside the number?
- Is the figure before or after income tax, and before or after mortgage interest?
Getting the real inputs
Every number in the ladder is obtainable before you buy. The building manager or owners association can supply the current service charge and reserve position. Letting agents will quote management terms in writing. The tax authority publishes how recurring property tax is assessed. Insurers quote on the specific address. We would treat any yield built on assumptions rather than quotations as a first draft only.
Tax treatment, allowable deductions and even what counts as an operating cost differ by country, and rules change. This is an explanation of a calculation, not advice on whether any property is worth buying, and we would confirm the local specifics with a qualified accountant or tax adviser in the country concerned before relying on any figure.
How to Use This Guide
Every worked example on this page is illustrative. The figures are chosen to show how the calculation behaves, not to report current market rates. Costs, tax rules and eligibility criteria differ by country and change over time, so take the method from this page and put your own current figures into it. Browse the rest of our guides, or see how we source and check our comparison figures on the about page.
Information only. This article explains how costs and rules are structured. It is not financial, tax, legal or immigration advice, and it is not a recommendation to buy any property, vehicle or investment. Confirm anything that affects a decision with the relevant local authority or a qualified professional before you act on it.
Last updated: August 14, 2026