Real Estate Glossary
What is Rental Yield? Definition, Formula & Examples
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Definition
Rental yield is the annual rental income expressed as a percentage of the property's value. Gross rental yield uses income before expenses; net rental yield deducts operating costs, giving a truer picture of returns. It is commonly used in the UK and Australia (equivalent to cap rate in US usage), but also useful for quick US comparisons.
The Rental Yield Formula
Variables explained:
Annual Rent is the total rent collected over 12 months at full occupancy. Property Value is the purchase price or current market value. For net rental yield, subtract annual operating expenses from annual rent before dividing.
Rental Yield Example with Real Numbers
A property purchased for $220,000 rents for $1,800/month ($21,600/year). Gross Rental Yield = ($21,600 / $220,000) × 100 = 9.8%. After operating expenses of $7,000/year, Net Rental Yield = ($21,600 − $7,000) / $220,000 × 100 = 6.6%. The net rental yield closely approximates the US cap rate.
Why Rental Yield Matters for Investors
Rental yield gives a fast international benchmark for comparing returns across markets. Gross yield above 8–10% suggests a high-income property; below 4–5% suggests an appreciation-driven market where income is low relative to value. It is most useful for a quick initial filter — follow up with full NOI analysis for any serious investment evaluation.
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Frequently Asked Questions
Is rental yield the same as cap rate?
Net rental yield and cap rate are essentially the same concept. Gross rental yield (before expenses) is different — it overstates returns by ignoring operating costs. Always use net yield for fair comparisons.
What is a good rental yield?
It depends on the market. In high-growth urban areas, 3–5% gross yield is common. In regional and secondary markets, 7–10%+ is achievable. Net yield of 5–7% is generally considered healthy in US markets.
Does rental yield include mortgage payments?
No. Rental yield (both gross and net) excludes mortgage payments — it is an unlevered return metric like cap rate. To measure levered returns, use cash-on-cash return.
How often should I recalculate rental yield?
Recalculate whenever rents change significantly, operating expenses shift meaningfully, or the property's market value changes. Annual recalculation is a good discipline for portfolio tracking.
Related Terms
Cap Rate
Cap rate (capitalization rate) is the ratio of a property's annual net operating income (N…
Gross Rent Multiplier (GRM)
The Gross Rent Multiplier (GRM) is a quick valuation metric that divides a property's purc…
NOI (Net Operating Income)
Net Operating Income (NOI) is the annual income a property generates after all operating e…
Cash-on-Cash Return
Cash-on-cash return is the ratio of a property's annual pre-tax cash flow to the total cas…