To calculate rental yield, divide a property’s annual rent by its stated value or cost basis; to estimate cash flow, subtract operating costs and mortgage payments as well. These figures answer different questions: gross yield is a quick rent-to-price ratio, net operating yield accounts for stated property expenses, and cash flow shows what may remain after financing. Keep the period, denominator and expense definitions explicit so the numbers can be compared fairly.
What each property-investment figure tells you
Gross rental yield
Gross rental yield compares scheduled rent with a property’s stated price or value. It does not account for vacancies, operating costs, mortgage payments or tax.
Gross rental yield (%) = annual scheduled rent ÷ purchase price or explicitly stated current property value × 100
Net operating yield
Net operating yield deducts the operating expenses you identify from effective rental income, then divides by a declared cost basis. “Net yield” is not used uniformly, so state whether the denominator is purchase price, current value or total acquisition cost, and list which expenses are included. Unless you define a different investor-level metric, keep mortgage payments and tax out of this operating-yield calculation.
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Net operating yield (%) = (effective rental income − operating expenses) ÷ stated property cost basis × 100
Net operating income (NOI)
NOI is effective rental income after operating expenses, before mortgage debt service in the cited investor-guide and appraisal frameworks. It helps isolate the property’s operating performance from its financing.
NOI = effective rental income − operating expenses
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Pre-tax cash flow
Cash flow accounts for financing payments. Subtract scheduled mortgage principal and interest from NOI; if you budget a reserve for future capital replacements, show that cash outflow separately as well.
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Pre-tax cash flow = NOI − mortgage debt service − separately budgeted reserves or other cash outlays
Principal repayment reduces cash available now but also reduces the outstanding loan balance. Treat that cash-flow effect separately from the equity-building effect.
How to calculate yield and cash flow step by step
- Choose a period and cost basis. A year is a useful standard period. Decide whether you are using purchase price, current property value or total acquisition cost as the yield denominator, and use the same convention when comparing properties.
- Annualize scheduled rent. Multiply monthly rent by 12 or weekly rent by 52. Record any other reliable property income separately rather than silently folding it into rent.
- Allow for vacancy and collection losses. Subtract a stated allowance for periods without tenants and for rent that may not be collected. The remaining amount is your estimated effective rental income. Assuming full occupancy is possible, but label it as an assumption.
- Itemize operating expenses. Deduct recurring costs of operating and leasing the property, such as local property taxes or rates, insurance, landlord-paid utilities, management, repairs and maintenance, leasing costs, and service or association fees where applicable. Classify unusual or one-time improvements separately; whether a cost is tax-deductible is a different question.
- Calculate NOI and net operating yield. Subtract the itemized operating expenses from effective rental income to get NOI. Divide that NOI by your declared property cost basis and multiply by 100 for net operating yield. State exactly which costs you deducted.
- Subtract debt service to estimate cash flow. Deduct scheduled mortgage principal and interest from NOI. If you plan to set aside a capital-replacement reserve or make another cash outlay, show it as a separate deduction after NOI.
- Stress-test the inputs. Recalculate with different rent, vacancy, repair, insurance, tax or rates, and loan-term assumptions. These inputs vary by property, market, ownership and time; the cited sources do not establish a universal “good yield” threshold.
Worked example: hypothetical numbers only
The following figures are invented solely to demonstrate the arithmetic. They are not a market estimate or a benchmark. Assume a purchase price of £200,000, monthly scheduled rent of £1,500, a 5% vacancy and collection-loss allowance, and the annual operating expenses listed below. The financing terms and reserve are hypothetical too.
| Calculation | Hypothetical amount |
|---|---|
| Purchase price | £200,000 |
| Scheduled rent: £1,500 × 12 | £18,000 per year |
| Vacancy and collection-loss allowance: 5% × £18,000 | £900 per year |
| Effective rental income: £18,000 − £900 | £17,100 per year |
| Property taxes or rates | £2,000 per year |
| Insurance | £600 per year |
| Management | £1,200 per year |
| Repairs and maintenance | £1,000 per year |
| Landlord-paid utilities and other recurring costs | £400 per year |
| Total operating expenses | £5,200 per year |
| NOI: £17,100 − £5,200 | £11,900 per year |
| Net operating yield: £11,900 ÷ £200,000 × 100 | 5.95% |
| Hypothetical mortgage principal and interest | £9,000 per year |
| Hypothetical capital-replacement reserve | £1,000 per year |
| Pre-tax cash flow: £11,900 − £9,000 − £1,000 | £1,900 per year |
For the same example, gross yield is £18,000 ÷ £200,000 × 100, or 9%. That headline figure is higher than the operating yield because it ignores vacancy and operating expenses; neither percentage includes mortgage payments or tax.
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A higher gross yield does not necessarily mean stronger operating performance or more cash left after financing. Use consistent assumptions for both properties and compare the inputs behind each result:
- Scheduled rent and realistic effective rent after vacancy or collection losses.
- Recurring operating expenses, using the same categories in each calculation.
- The cost basis: purchase price, current value or total acquisition cost.
- Financing amount, interest rate, amortization and annual debt service.
- Cash flow after debt service and any separately planned reserves.
A property can have an attractive gross yield but a weaker net operating yield or negative financed cash flow. Inspecting the figures separately reveals whether the difference comes from operating costs, vacancy assumptions or financing.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Optional metric: cash-on-cash return
Cash-on-cash return compares annual cash flow with the initial cash invested. It is not rental yield. If you use it, define what “initial cash invested” includes—for example, which acquisition cash costs and upfront work you count—and specify whether the numerator is before or after reserves and tax. Without consistent definitions, the percentage is difficult to compare.
Cash-on-cash return (%) = annual cash flow ÷ stated initial cash invested × 100
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Taxable rental profit is not automatically the same as cash flow. Tax rules may classify expenses differently from an operating calculation, and the result depends on jurisdiction, property type, ownership and individual circumstances. Check the current rules where the property is located and seek qualified advice for your situation.
UK-specific points
For UK landlords, HMRC’s guidance on working out rental income explains allowable expense examples, record keeping and rental-profit calculations. It also states that, from 6 April 2020, Income Tax relief for finance costs is restricted to the basic rate for individual residential landlords; treatment can differ for companies and other circumstances.
Under the cash basis, receipts and expenses are generally recognized when money is received or paid. HMRC describes this timing in its Property Income Manual PIM1092. Accounting-basis rules can affect when reported profits are recognized.
HMRC’s 2026 statistics report £34.75 billion in total allowable expenses declared for 2024 to 2025 and £12.82 billion in residential finance costs declared for the same period. These are aggregate amounts from unincorporated landlords’ Self Assessment data, not typical costs or financing estimates for an individual property. See HMRC’s Property rental income statistics: 2026 for the figures and their context.
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