Rental yield is annual rent as a percentage of the property's cost. It exists to compare income potential quickly, but there are two versions, and confusing them is the most common mistake in property screening.
Two formulas
- Gross yield = annual rent ÷ price × 100. Fast, but blind to costs.
- Net yield = (annual rent − operating expenses) ÷ price × 100. Slower, but honest.
A tale of two apartments
Apartment A costs $200,000 and rents for $1,500/month: gross yield = 9.0%. But its building charges high service fees, taxes and insurance total $6,000/year, so NOI is $12,000 and net yield is 6.0%.
Apartment B costs $250,000 and rents for $1,600/month: gross yield = 7.7%. With lean costs of $2,800/year, NOI is $16,400 and net yield is 6.6%. On gross yield, A looks better. On net yield, the number that reaches your bank account, B wins.
What neither yield includes
Yield is unleveraged and first-year. It ignores mortgage payments (use cash-on-cash return for that), appreciation, income tax and big-ticket replacements. Treat yield as a screening lens, not a verdict.