Gross yield vs. net yield: which one should you trust?

Imagine two properties for sale in different cities. Property A costs $200,000 and rents for $1,800 a month. Property B costs $200,000 and rents for $1,700 a month. On gross yield alone, Property A wins — 10.8% versus 10.2%. Case closed, right?

Not quite. Property A sits in a high-tax county with $4,800 a year in property tax and needs a management company at 10% of rent, because the owner lives out of state. Property B is in a lower-tax area, self-managed, and needs less maintenance because it’s newer. Once you subtract real operating costs, Property B might easily come out ahead. This is the entire reason net yield exists.

What gross yield actually tells you

Gross yield is annual rent divided by purchase price — nothing else. It’s a screening tool, not an investment decision. It’s useful for scanning through dozens of listings quickly to see which ones deserve a second look. It is not useful for choosing between two or three finalists, because it treats every property’s cost structure as identical, which is almost never true.

The formula is short: gross yield = annual rent ÷ purchase price × 100. Property A brings in $21,600 a year on a $200,000 price, so its gross yield is 10.8%. Listing sites and agents quote this figure because it needs only two numbers, both of which are already in the advert.

What net yield adds back

Net yield takes the same rent figure and subtracts everything it actually costs to generate that income: property tax, insurance, a maintenance reserve, property management fees if you use them, and a realistic allowance for vacancy. What’s left, divided by price, is a far more honest estimate of the income the property will actually put in your pocket.

The gap between gross and net yield tends to be larger in older properties, in high-tax jurisdictions, and in markets where you’ll need professional management. A property with a 9% gross yield and heavy expenses can end up with a lower net yield than a property advertised at 7% gross with light running costs.

The two properties, worked through

Property A’s costs add up quickly: $4,800 of property tax, $2,160 of management (10% of the rent), $1,500 of insurance, a $2,000 maintenance reserve (1% of the price), and $1,080 set aside for vacancy (5% of the rent). That is $11,540 a year. Subtract it from $21,600 of rent and $10,060 is left — a net yield of 5.0%.

Property B is cheaper to run: $2,000 of property tax, no management fee, $1,200 of insurance, a $1,000 maintenance reserve because the building is newer, and the same 5% vacancy allowance of $1,020. That is $5,220 a year. Subtract it from $20,400 of rent and $15,180 is left — a net yield of 7.6%.

The property that looked worse on gross yield earns about $5,000 more a year once costs are counted. Nothing about the rent or the price changed; the only difference is that the second calculation looked at the whole picture.

Which expenses belong in net yield

Include every cost of owning and running the property that you would pay even if you bought it outright: property tax, landlord insurance, routine repairs and a reserve for bigger replacements (roof, boiler, appliances), management or letting fees, ground rent or HOA dues, utilities you cover, and an allowance for months without a tenant.

Leave out the mortgage. Net yield is a return on the property, not on your particular loan, so that two buyers with different financing see the same figure for the same building. Financing belongs in cash flow and cash-on-cash return, which answer a different question. Income tax is usually left out as well, because it depends on the owner rather than the property.

Net yield on total cost

There is a third, even more conservative version. Instead of dividing net income by the purchase price, divide it by everything you spent to acquire the property — price plus closing costs, transfer taxes, and any upfront repairs. If Property B needed $6,000 of closing costs, its net yield on total cost would be $15,180 ÷ $206,000, or about 7.4%.

This is the figure to use when comparing a property against other uses of the same cash, because it reflects what the deal really cost you, not just the headline price.

Common mistakes that flatter the numbers

Using the asking rent. The rent in the listing is often the best case. Check what similar properties actually let for, and use that.

Assuming zero vacancy. Even good properties sit empty between tenants. A few weeks a year is normal, which is why 4–8% of rent is a common allowance.

Forgetting big-ticket repairs. A year with no repairs is not a typical year. Setting aside a fixed share of the price or rent every year spreads the cost of the roof you will eventually replace.

Valuing your own time at zero. Self-managing saves the management fee but costs hours. If you would not do it for free forever, include a fee anyway so the comparison stays honest.

A rule of thumb, held loosely

As a rough starting point, net yield often lands two to four percentage points below gross yield once realistic expenses are included, and it can fall much further: Property A above loses almost six points. It varies enormously by property age, location, and whether you self-manage. The only way to know for a specific deal is to run the actual numbers.

Net yield on the purchase price is also very close to what commercial investors call the cap rate — net operating income divided by value. If you want to compare a residential deal with commercial property, or see how financing changes the picture, the cap rate vs. cash-on-cash return explainer picks up where this one stops.

To run your own numbers, the rental yield calculator shows gross yield, net yield, and net yield on total acquisition cost side by side. For a full deal with a mortgage, cash flow, and long-term equity, use the property investment calculator.