Understanding Rental Yield: Gross vs Net
Rental yield is the most important metric for evaluating a buy-to-let investment. It tells you the annual return on your capital expressed as a percentage, allowing you to compare properties across different areas and price ranges, and to benchmark against other investments such as ISAs, bonds, or equities.
Gross Yield Formula
Gross yield is the simplest measure and the one most commonly quoted by estate agents and property portals:
Example: A property purchased for £200,000 that achieves £1,000 per month in rent generates £12,000 per year in gross income. Gross yield = (£12,000 ÷ £200,000) × 100 = 6.0%.
Net Yield Formula
Net yield accounts for all running costs and gives a much more realistic picture of your actual return:
Using the same example with £3,500 in annual expenses (mortgage interest, insurance, agent fees, maintenance, voids): Net yield = ((£12,000 − £3,500) ÷ £200,000) × 100 = 4.25%.
UK Average Gross Rental Yields by Region (2025)
Regional yields vary enormously across the UK. Below are current average gross rental yields for 2025 based on Rightmove, Zoopla, and HMRC property data:
| Region / City | Avg Gross Yield | Avg Property Price | Typical Monthly Rent | Rating |
|---|---|---|---|---|
| Liverpool | 7.0–9.0% | £170,000 | £1,000–£1,300 | High |
| Manchester | 6.0–8.0% | £210,000 | £1,050–£1,400 | High |
| Sheffield | 6.0–8.0% | £185,000 | £925–£1,250 | High |
| Leeds | 5.5–7.5% | £220,000 | £1,000–£1,400 | High |
| Newcastle | 6.5–8.5% | £160,000 | £875–£1,150 | High |
| Birmingham | 5.0–7.0% | £230,000 | £960–£1,350 | Medium |
| Nottingham | 6.0–8.0% | £195,000 | £975–£1,300 | High |
| Bristol | 4.5–6.0% | £330,000 | £1,250–£1,650 | Medium |
| Edinburgh | 5.0–7.0% | £275,000 | £1,150–£1,600 | Medium |
| London (Outer) | 4.0–5.5% | £450,000 | £1,500–£2,100 | Medium |
| London (Inner) | 3.0–4.5% | £650,000 | £1,750–£2,450 | Lower |
| South East | 3.5–5.0% | £380,000 | £1,100–£1,600 | Lower |
Source: Rightmove, Zoopla, Land Registry average prices Q4 2025. Yields are indicative ranges based on typical rental values and property prices.
Typical Buy-to-Let Expenses to Include in Your Net Yield
Accurate net yield calculation depends on using realistic cost estimates. Here is a comprehensive breakdown of typical annual landlord expenses in 2025:
Letting Agent Fees
- Tenant-find only: 50-100% of first month's rent (one-off)
- Full management: 8-12% of monthly rent + VAT
- Premium management: 12-15% of monthly rent + VAT
- Annual avg on £1,000/month rent: £960-£1,440
Insurance
- Buildings insurance: £150-£300/year
- Landlord liability: £50-£150/year
- Rent guarantee insurance: £200-£400/year
- Contents (furnished): £100-£200/year
- Total typical: £200-£400/year unfurnished
Maintenance & Repairs
- Budget 1% of property value annually
- £200,000 property = £2,000/year budget
- Boiler service: £70-£120/year
- Gas safety certificate (CP12): £70-£120/year
- EICR: £150-£300 every 5 years (£30-60/year)
- EPC: £60-£120 every 10 years
Leasehold Costs (Flats)
- Ground rent: £0-£500/year (varies widely)
- Service charge: £1,200-£5,000+/year
- Reserve fund contributions included
- Always check service charge history before buying
Section 24: Impact on Your After-Tax Yield
Since April 2020, individual landlords cannot deduct mortgage interest as a business expense. Instead, you receive a 20% basic rate tax credit on mortgage interest. This has a significant and asymmetric impact on higher rate taxpayers.
Example: Section 24 Impact on a Higher Rate Taxpayer
Scenario: £20,000 annual rent, £15,000 mortgage interest, other allowable expenses £2,000
- Taxable profit: £20,000 − £15,000 − £2,000 = £3,000
- Tax at 40%: £1,200
- After-tax profit: £1,800
- Taxable profit: £20,000 − £2,000 = £18,000
- Tax at 40%: £7,200
- Less 20% credit on £15,000: −£3,000
- Net tax: £4,200 (3.5× increase!)
- After-tax profit: −£1,200 (a loss!)
For basic rate (20%) taxpayers, Section 24 has no net impact — the 20% tax credit exactly offsets what was previously deducted. The damage falls entirely on higher and additional rate taxpayers. Solutions include: incorporating into a limited company (which retains full mortgage interest deductibility), remortgaging to a lower rate, or selling underperforming properties.
Worked Examples: UK Buy-to-Let Yield Calculations
Example 1 — Manchester Terraced House
- Purchase price: £185,000 | Monthly rent: £950 | Annual rent: £11,400
- Mortgage (interest only at 5.5%, 75% LTV): £708/month = £8,496/year
- Letting agent (10%): £1,140/year | Insurance: £280/year
- Maintenance (1%): £1,850/year | Void (3 weeks): £657/year
- Total annual expenses: £12,423
Note: Despite good gross yield, Section 24 and high mortgage costs create negative cashflow at this LTV. Consider larger deposit or lower mortgage rate.
Example 2 — Liverpool Two-Bed Terrace (Cash Purchase)
- Purchase price: £130,000 | Monthly rent: £825 | Annual rent: £9,900
- No mortgage costs | Letting agent (10%): £990/year
- Insurance: £250/year | Maintenance (1%): £1,300/year | Void (3 wks): £572/year | Other: £150/year
- Total annual expenses: £3,262
Excellent result. Cash purchases eliminate mortgage cost and Section 24 risk, producing strong net yields in northern cities.
Example 3 — London Zone 3 Flat
- Purchase price: £420,000 | Monthly rent: £1,600 | Annual rent: £19,200
- Mortgage (75% LTV at 5.5%, interest only): £1,444/month = £17,325/year
- Letting agent (10%): £1,920/year | Insurance: £350/year | Maintenance (1%): £4,200/year
- Service charge: £3,000/year | Void (3 weeks): £1,108/year | Other: £200/year
- Total annual expenses: £28,103
Negative cashflow. London flats with high service charges and current mortgage rates are very difficult to make work on income alone. Capital appreciation is the primary investment thesis.
ROI vs Rental Yield: What Is the Difference?
Return on Investment (ROI) measures your return specifically against the cash you personally invested (your deposit and purchase costs), rather than the total property value. This is a more nuanced measure used by sophisticated investors:
Total cash invested includes: deposit, stamp duty, legal fees, survey costs, initial furnishing and refurbishment. If you put in £60,000 (25% deposit + costs on a £200,000 property) and net £4,000 per year, your ROI is 6.67% — higher than the net yield of 2% on the full property value, because leverage amplifies returns. This is why buy-to-let can outperform cash savings even at modest yields.
Frequently Asked Questions
What is gross rental yield and how do I calculate it?
Gross rental yield is the annual rental income expressed as a percentage of the property purchase price, before deducting any expenses. Formula: (Annual Rent / Property Value) × 100. For example, if a property costs £200,000 and achieves £1,000 per month in rent (£12,000 per year), the gross yield is (£12,000 / £200,000) × 100 = 6%. Gross yield is the headline figure most commonly quoted in property listings, but it does not reflect the true return after costs.
What is a good rental yield in the UK in 2025?
A good gross rental yield is generally considered to be 5-8%, with net yield of 3-5% regarded as healthy after expenses. Regional averages: London 3-4% gross, Manchester 6-8%, Liverpool 7-9%, Birmingham 5-7%, Leeds 5-7%, Sheffield 6-8%. Northern England generally offers higher percentage yields than the South East, though southern properties may offer stronger capital appreciation.
How does Section 24 affect my rental yield calculations?
Section 24 restricts individual landlords to a 20% basic rate tax credit on mortgage interest. Higher rate (40%) and additional rate (45%) taxpayers pay significantly more tax on rental profits. For basic rate taxpayers there is no net impact. Always calculate net yield on an after-tax basis. Consider a limited company structure if you are a higher rate taxpayer with significant mortgage debt, as companies retain full mortgage interest deductibility.
What expenses reduce rental yield?
Key deductions from gross yield include: mortgage interest (now only as a 20% tax credit for individuals), letting agent fees (8-12% of rent), buildings and liability insurance (£200-400/year), maintenance and repairs (budget 1% of property value), void periods (typically 3-4 weeks/year), ground rent and service charges for leaseholds, gas safety certificate (£70-120/year), EICR every 5 years, and EPC every 10 years. Capital improvements like extensions or new kitchens are not deductible against income.
Should I buy in the North or South for better rental yield?
Northern England generally offers higher rental yields due to lower property prices relative to achievable rents — cities like Liverpool, Manchester, Leeds, and Newcastle typically offer gross yields of 6-9%. Southern England, particularly London and the South East, offers yields of 3-5% gross but historically stronger capital appreciation. Income-focused investors prioritise northern high-yield markets; capital-growth investors may prefer southern locations. Many portfolio landlords hold properties in both regions to balance income and growth.
How do void periods affect my rental yield?
Void periods are weeks when your property is empty and generating no rental income. The UK average is 3-4 weeks per year (roughly 6-8% of annual income lost). On a £1,000/month rental, a 4-week void costs £1,000. Always budget for voids by reducing your annual income figure by at least one month. Properties in high-demand university cities or near major employers typically experience shorter voids. Furnished properties and those with inclusive bills often let faster.
What is the difference between yield and ROI for a buy-to-let?
Yield measures return against the total property value. ROI (Return on Investment) measures return against the cash you personally invested — your deposit plus purchase costs (stamp duty, legal fees, survey). If you invest £60,000 cash (25% deposit + costs on a £200,000 property) and net £4,000 per year, your ROI is 6.67%, even if the net yield on the full property value is only 2%. Leverage means ROI can be significantly higher than yield when mortgage finance is used, which is why buy-to-let can outperform cash savings.
Sources & References
- GOV.UK — Renting out a property: landlord responsibilities
- HMRC — Income Tax when you rent out a property
- GOV.UK — Stamp Duty Land Tax: residential property rates
- Rightmove Rental Trends Tracker Q4 2025
- Land Registry UK House Price Index, January 2026
Disclaimer: This calculator provides estimates for informational purposes only and does not constitute financial or tax advice. Actual rental yields, expenses, and tax liabilities will vary. Consult a qualified financial adviser, tax specialist, or RICS-registered surveyor before making buy-to-let investment decisions.