How to Calculate your Gross Yield, Net Yield and ROI

As a landlord, it is important to stay on top of your gross yield and be able to calculate rental ROI to ensure that your investment is profitable. These metrics are vital for understanding the financial performance of your rental property.

We’ll explain definitions, formulas, and calculations so that you can use and understand these key metrics. We’ll also discuss the factors influencing each metric and provide expert tips on maximising your rental income.

What is a gross yield?

Gross rental yield is basically profit before taxes and expenses are deducted. It is a great calculator to use when working out whether a property is worth investing in. Here is how you can calculate the gross yield of your property.

1. Calculate annual income: Multiply the monthly rent by 12.
2. Divide by property value: Divide the annual income by the property’s value.
3. Multiply by 100: Convert the decimal result into a percentage to discover your rental yield as a percentage.

Here is an example:

• Annual income: 2000 x 12 = 24000
• Calculation: 24000 ÷ 250000 = 0.096
• Gross rental yield: 0.096 x 100 = 9.6%

So, the gross rental yield in this case is 9.6%. Gross yield can be affected by various factors such as property location, property condition, tenant history, property expenses, etc. It is important as a landlord that you understand your gross rental yield to ensure that you can invest in a property that you are confident can offer a strong return on investment.

What is a net yield?

Net yield, alternatively, is profit after tax and expenses have been deducted. So this is the real return on investment for landlords. Here is how you can calculate the net yield of your property.

1. Calculate annual income: Multiply the monthly rent by 12.
2. Subtract annual expenses: Subtract the total annual expenses (e.g., mortgage interest, property taxes, insurance, maintenance, management fees) from the annual income.
3. Divide by property value: Divide the remaining amount (net income) by the property’s value.
4. Multiply by 100: Convert the decimal result into a percentage to get the net yield as a percentage.

Here is an example:

• Annual income: 2000 x 12 = 24000
• Annual expenses: 10000
• Net income: 24000 – 10000 = 14000
• Calculation: 14000 ÷ 250000 = 0.056
• Net rental yield: 0.056 x 100 = 5.6%

So, the net rental yield is 5.6%. This figure ultimately depends on various factors, from interest rates to tax rates and rental income. It is important to ensure a good return on investment as a landlord that you ensure your monthly rental income covers your expenses and is aligned with the current market conditions.

How do you calculate rental ROI?

ROI is a calculation of the return on investment of your property. This can be used to figure out whether your property is offering a good financial return. Here is how you can calculate your ROI.

1. Calculate net income:
   • Annual income: Multiply the monthly rent by 12.
   • Subtract annual expenses: Subtract the total annual expenses (e.g., mortgage interest, property taxes, insurance, maintenance, management fees) from the annual income.
2. Divide by initial investment: Divide the net income by the initial investment in the property (including the purchase price, closing costs, and any renovations).
3. Multiply by 100: Convert the decimal result into a percentage.

Here is an example:

• Initial investment: $250,000
• Annual income: 2000 x 12 = 24000
• Annual expenses: 10000
• Net income: 24000 – 10000 = 14000
• Calculation: 14000 ÷ 250000 = 0.056
• ROI: 0.056 x 100 = 5.6%

So, the ROI for this rental property is 5.6%. It is important to note that if you purchase the property with cash, then the net yield will be the same as the ROI. However, if you purchase your property with a mortgage, then they will differ as the costs will be higher due to the mortgage payments. In this case, interest rates, investment duration, and inflation can all impact the ROI of your property.

What is the difference between gross yield, net yield, and ROI?

The main difference between these metrics is that gross yield is the potential income before expenses, while net yield considers expenses to show actual profit, and ROI measures the overall profitability of an investment relative to the initial cost paid.

How can I improve my return on investment?

There are various ways you can improve your return on investment as a landlord, here are some examples:

• Reduce your expenses: Attempt to reduce expenses by investing in comprehensive insurance to avoid unexpected costs, screening tenants effectively and regularly inspecting your property for early signs of damage. 

• Increase rental income: Regularly review your rental income to ensure it’s competitive with market rates for similar properties in your area.

• Leverage tax benefits: Take advantage of available tax deductions and credits to minimise your tax liability as a landlord.
• Grow your investment portfolio: By expanding your investment portfolio, you can increase your potential for long-term returns.

As we have discussed, it is important as a landlord to know how to calculate your gross yield, net yield, and ROI. For added peace of mind, invest in landlord insurance to protect your investment in the event of unforeseen circumstances. 

CIA Landlords compare quotes with nine leading insurers to ensure you get the best quote possible. Get a quote or contact our team today for more information or advice.