What is yield?
Yield is a measure of rental income relative to the purchase price of a property. It is usually expressed as a percentage and calculated using annual rent.
A commonly used formula is:
Gross yield = annual rent ÷ purchase price
For example, if a property costs £250,000 and generates £15,000 in rent per year, the gross yield is 6%.
Yield is often used as a quick comparison tool because it does not depend on how the property is financed. Two buyers purchasing the same property will see the same yield, regardless of deposit size or mortgage rate.
Limitations of yield
While yield is simple to calculate, it does not account for many important factors, including:
- Mortgage costs
- Ongoing expenses such as maintenance and insurance
- Upfront costs like legal fees or refurbishment
As a result, yield alone does not indicate profitability or cash flow. A property with a high yield may still produce low or negative profit once costs are included.
What is return on investment (ROI)?
ROI measures profit relative to the amount of cash invested, rather than the purchase price.
A commonly used formula is:
ROI = annual profit ÷ total cash invested
Total cash invested typically includes:
- Deposit
- Purchase taxes
- Legal and professional fees
- Refurbishment or setup costs
Annual profit is calculated after deducting mortgage payments and ongoing costs from rental income.
Why ROI can look very different from yield
ROI is highly sensitive to:
- Deposit size
- Mortgage interest rate
- Ongoing running costs
- Upfront fees
Two investors buying identical properties can have very different ROIs depending on how much cash they invest and how the property is financed.
For example, using a larger deposit may reduce mortgage costs and increase annual profit, but it also increases the amount of cash invested, which can reduce ROI.
Using yield and ROI together
Yield and ROI answer different questions:
- Yield helps compare rental income across properties
- ROI helps assess how efficiently invested cash is generating profit
Neither metric is sufficient on its own. Looking at both together provides more context and helps avoid misleading comparisons.
How the calculator uses these metrics
The calculator displays both yield and ROI using the same underlying assumptions for rent, costs, and financing.
This allows you to:
- Compare properties using yield
- Understand the impact of deposits and costs using ROI
- See how changes to inputs affect both metrics
Summary
Yield and ROI are related but distinct measures. Yield focuses on income relative to price, while ROI focuses on profit relative to invested cash. Understanding the difference helps interpret calculator outputs more accurately and compare properties on a like-for-like basis.
You can explore how yield and ROI change by adjusting assumptions in the calculator.