Every rental listing comes with a return figure, and they rarely mean the same thing. An agent quotes a yield, an investor forum talks about cap rates, and your spreadsheet spits out a cash-on-cash return. All three are useful. They just answer different questions.
This guide defines each one, works a single property through all three, and shows when each number should drive your decision and when it can mislead you.
Gross rental yield: the quick filter
Gross rental yield is the simplest measure. It compares a year’s rent with the price of the property.
Gross yield = annual rent ÷ property price × 100Use the purchase price for a property you are buying, or the current market value for one you already own.
A $300,000 house that rents for $2,500 a month brings in $30,000 a year, so its gross yield is 10%.
Gross yield is fast and needs only two numbers, which makes it good for screening dozens of listings in the same area. Its weakness is that it ignores every cost of owning the property. Two homes with the same gross yield can produce very different profits if one has high property taxes, a hefty homeowners association (HOA) or strata fee, or an old roof.
Net yield and cap rate: what the property itself earns
Net yield takes the running costs off the rent first. In the US, investors usually call the same idea the capitalization rate, or cap rate.
Net operating income (NOI) = rent collected − operating expensesRent collected allows for vacancy. Operating expenses include property tax, insurance, management fees, repairs, HOA or strata fees and utilities the owner pays.
Cap rate (or net yield) = NOI ÷ property price × 100Mortgage payments, depreciation and income tax are left out on purpose.
Leaving out the mortgage is the whole point. The cap rate describes the property, not the buyer. It tells you what the asset would return to someone who paid cash, so you can compare a duplex in one city with a condo in another regardless of how either is financed.
In commercial real estate, cap rates also work in reverse: buyers often value a building by dividing its NOI by the cap rate typical for similar properties. That is why a small change in expected rent or costs can move a valuation a long way.
Cash-on-cash return: what your own money earns
Most people buy rentals with a mortgage, so the money they actually put in is far less than the price. Cash-on-cash return measures the cash that comes back each year against the cash you invested.
Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested × 100Cash flow is NOI minus mortgage payments (principal and interest). Cash invested is your deposit plus closing costs and any upfront repairs.
This is the most personal of the three numbers. It changes with your deposit, your interest rate and your loan term, and it is the one that tells you whether the property will put money in your pocket or take money out of it each month.
One property, all three numbers
Here is a single rental worked through every measure. The figures are assumptions for illustration, not a forecast for any market.
Worked example: a $300,000 single-family rental
Income. Rent is $2,500 a month, or $30,000 a year. Allowing 5% for vacancy ($1,500) leaves $28,500 of rent collected.
Operating expenses. Property tax $3,600, insurance $1,500, property management at 8% of rent collected $2,280, and a repairs and maintenance allowance of $3,000. Total: $10,380.
NOI = $28,500 − $10,380 = $18,120.
Financing. A 25% deposit ($75,000) plus 3% closing costs ($9,000) means $84,000 of your own cash. The $225,000 loan runs 30 years at an assumed 6%, so repayments are $1,348.99 a month, or $16,188 a year.
Cash flow = $18,120 − $16,188 = $1,932 a year.
| Measure | Calculation | Result |
|---|---|---|
| Gross yield | $30,000 ÷ $300,000 | 10.0% |
| Cap rate (net yield) | $18,120 ÷ $300,000 | 6.04% |
| Cash-on-cash, with the loan | $1,932 ÷ $84,000 | 2.30% |
| Cash-on-cash, paying all cash | $18,120 ÷ $309,000 | 5.86% |
The gap between 10% and 2.3% is the lesson. The gross yield looks excellent, but costs take away about 40% of the rent, and the mortgage takes most of what is left.
Notice too that the leveraged return (2.3%) is lower than the all-cash return (5.86%). That happens whenever you borrow at a rate close to, or above, what the property earns. Investors call it negative leverage. Borrowing still lets you buy with less cash, and the tenant is paying down your loan (about $2,763 of principal in the first year here), but the yearly cash return shrinks.
The interest rate makes a large difference:
| Assumed rate | Monthly repayment | Annual cash flow | Cash-on-cash |
|---|---|---|---|
| 5.0% | $1,207.85 | $3,626 | 4.3% |
| 5.5% | $1,277.53 | $2,790 | 3.3% |
| 6.0% | $1,348.99 | $1,932 | 2.3% |
| 6.5% | $1,422.15 | $1,054 | 1.3% |
| 7.0% | $1,496.93 | $157 | 0.2% |
A two-point rise in the rate wipes out almost all of the cash flow. If you are considering a variable-rate loan for an investment, read fixed vs variable rates before you commit. You can test your own figures in the investment property calculator, which also shows a 10-year projection.
When each metric matters
| Metric | Best for | What it ignores |
|---|---|---|
| Gross yield | Screening many listings quickly in one area | All costs, vacancy and financing |
| Net yield or cap rate | Comparing properties fairly, whatever the financing; valuing income property | Your loan, tax and future price growth |
| Cash-on-cash | Judging your actual deal and the effect of your deposit and rate | Principal repaid, price growth, tax and the timing of a sale |
None of the three is a total return. A property can have a modest cash-on-cash return and still build wealth through loan paydown and rising value, or a high yield in an area where prices are falling. Use the yields to compare and filter, use cash-on-cash to check you can carry the property comfortably, and then look at the full picture over your holding period.
Tip: Always be clear about which number you are looking at. An advertised "yield" is almost always gross. Ask for the expenses and work out the net figure yourself in the rental yield calculator.
The 1% rule and other shortcuts
The 1% rule says a rental is worth a closer look if the monthly rent is at least 1% of the purchase price. On a $300,000 property, that means $3,000 a month. Our example rents for $2,500, which is 0.83%, so it fails the test.
Yet the property still has a 6% cap rate and positive cash flow at a 6% mortgage rate. That shows the rule’s limits. It is the same as asking for a 12% gross yield, and it says nothing about expenses, which vary enormously with local property taxes, insurance costs and the age of the building. In expensive cities, almost nothing passes. In cheap areas, plenty of properties pass and still lose money.
A related shortcut, the 50% rule, assumes operating costs and vacancy will eat about half the rent. In our example they come to $11,880, or about 40%. Both rules are rough filters for deciding what to analyze, never a substitute for the analysis.
Australian and UK yield conventions
In Australia, rent is usually quoted per week, and yields are quoted as gross unless stated otherwise. The usual formulas are:
- Gross yield = weekly rent × 52 ÷ property price × 100
- Net yield = (annual rent − annual running costs) ÷ property price × 100
Running costs typically include property management and letting fees, council rates, water service charges, strata levies for units, landlord insurance, repairs and land tax where it applies. Some investors also add stamp duty and legal costs to the price in the denominator, which gives a lower and more conservative net yield. Neither convention is wrong, but you need to know which one you are reading.
Worked example: an Australian unit
A $650,000 unit rents for $600 a week. Gross yield is $31,200 ÷ $650,000 = 4.8%.
Allow two vacant weeks, so rent collected is $30,000. Costs: management at 7% ($2,100), council rates $2,200, water $900, strata levies $4,000, landlord insurance $1,500 and maintenance $1,500, totalling $12,200.
Net yield is ($30,000 − $12,200) ÷ $650,000 = $17,800 ÷ $650,000 = 2.74%.
The UK works the same way, with rent quoted monthly. Costs to include are letting or management fees, service charges and ground rent for leasehold flats, landlord insurance, safety certificates and repairs.
Negative and positive gearing
Gearing describes whether a borrowed investment makes or loses money before tax.
- Positively geared: rent exceeds all costs, including loan interest. The property produces taxable income.
- Negatively geared: costs, including interest, exceed the rent. The property runs at a loss.
- Neutrally geared: income and costs roughly cancel out.
Take the Australian unit above. If it were bought with an interest-only loan of $520,000 at an assumed 6%, interest would be $31,200 a year. Net rent is $17,800, so the property loses $13,400 a year before tax. That is negative gearing.
In Australia, a net rental loss can generally be deducted against other income, such as wages, which reduces the after-tax cost. The key word is reduces. You are still out of pocket, and the strategy only works if the property’s value grows by more than your accumulated after-tax losses. Other countries treat rental losses differently, and the US and UK both limit how far rental losses or mortgage interest can reduce tax on other income. Tax rules are complex and change often, so get advice from a qualified tax professional before relying on them.
Putting it together
A sensible order of work for any rental:
- Use gross yield to shortlist properties in an area.
- Gather real expense figures and calculate net yield or cap rate to compare the shortlist fairly.
- Add your deposit, rate and term to find cash flow and cash-on-cash return, and stress-test it at a higher rate.
- Check the loan side: your loan-to-value ratio, your repayments in the mortgage calculator, and how your debt-to-income ratio will look to a lender with the new loan added.
If you are still deciding whether to own a home before investing in one, our guide to renting vs buying uses the same kind of cost-by-cost thinking.
This guide is general information, not personal financial advice. Rules and products vary by country and lender.