How to calculate rental yield on an investment property (without fooling yourself)
A client called me last spring about a duplex he'd just bought. He was proud of his number: 9.2% yield. Then I asked him what he'd paid in closing costs. There was a long silence on the line. He'd used the purchase price and the gross rent, and nothing else. Real figure: 6.8%. Still decent. But not what he thought he'd bought.
This happens constantly. Not because investors are lazy, but because the word "yield" gets used for four or five different calculations depending on who's talking. So let's fix the arithmetic first, then talk about what the numbers actually mean.
Key Takeaways
- Gross yield = annual rent ÷ total acquisition cost. The denominator is where most people cheat by accident.
- Net yield subtracts operating expenses, vacancy, and management. This is the number that pays your mortgage.
- The 50% rule is a quick screening shortcut, not a valuation tool. It's useful for filtering listings in 30 seconds.
- Whether 3.5% is "good" depends entirely on your market and your financing. In some cities it's strong; in others it's a slow bleed.
- Cash-on-cash return and IRR tell you what your money is doing. Yield tells you what the property is doing. They are not the same question.
The denominator problem nobody warns you about
Here's the thing: two investors can look at the same building, run the same formula, and get yields that differ by two full percentage points. The rent is rarely the issue. The denominator is.
I made this mistake on my second property. I divided the annual rent by the listing price and felt clever. What I'd excluded: $11,400 in closing costs, $3,200 in immediate repairs (the kitchen faucet was decorative), and about $2,000 in paint and flooring between tenants. On a $210,000 purchase, that's $16,600 I'd quietly ignored. My "7.1%" was really 6.3%.
What actually belongs in the denominator?
Everything you had to spend to make the property rentable. In practice, that means:
- The purchase price
- Closing costs (title, transfer taxes, legal fees, lender origination)
- Initial renovation or "make-ready" work
- Any deferred maintenance you inherited from the seller
- Broker fees if you used one
Some investors include the cost of their own time during the first months. I don't, but I understand the argument — if you spent 80 hours managing a rehab, that time has a price.
Gross vs net, in one line each
Gross yield uses the top-line rent and the total acquisition cost. Net yield uses the rent you actually collect, minus the expenses you actually pay, divided by the same acquisition cost. That's it. The complexity is all in deciding what counts as an expense.
The rule I follow: if a cost only exists because the property exists, it's an operating expense. Mortgage principal is not — that's debt service, and it belongs in a cash flow calculation, not a yield calculation.
A complete yield calculation, step by step
Numbers make this concrete. Let's take a small two-bedroom I looked at in early 2026: asking price $248,000, rent $1,750/month, and the seller's disclosure mentioned a roof that was 19 years old.
Step 1 — total acquisition cost. Purchase $248,000 + closing costs $9,300 + immediate flooring and paint $4,100 = $261,400.
Step 2 — gross annual rent. $1,750 × 12 = $21,000.
Step 3 — gross yield. $21,000 ÷ $261,400 = 8.03%.
That number looked fine. Then I started subtracting.
Step 4 — operating expenses.
| Expense | Annual amount |
|---|---|
| Property tax | $2,680 |
| Insurance (landlord policy) | $1,340 |
| Vacancy allowance (one month every 18) | $1,167 |
| Property management (8% of collected rent) | $1,587 |
| Maintenance and repairs reserve | $1,800 |
| Roof sinking fund ($9,000 over 15 years) | $600 |
| Total | $9,174 |
Step 5 — net operating income. $21,000 − $9,174 = $11,826.
Step 6 — net yield. $11,826 ÷ $261,400 = 4.52%.
From 8% to 4.5% in five steps. The property wasn't a bad deal — the roof alone ate 0.7 points of yield — but it wasn't the deal the listing suggested. That gap between the headline number and the honest number is exactly where most bad purchases happen.
What is the 50% rule in rental income?
The 50% rule says that, on average, half of your gross rent will disappear into operating expenses — taxes, insurance, repairs, vacancy, management, the lot — before you ever touch a mortgage payment. So if a unit rents for $1,750 a month, expect roughly $875 to go out the door in costs.
It is not a precise tool. It is a screening tool. I use it when I have 40 listings to look at and 20 minutes to eliminate the obvious no-gos. If the 50% rule leaves no room for a mortgage payment and a small profit, the deal fails immediately and I don't need to open a spreadsheet.
When the 50% rule lies to you
It breaks in two directions. Older buildings with a lot of deferred maintenance run well above 50% — I've seen 65% on a 1920s fourplex where everything leaked. Newer construction with low taxes can run at 35-40% for the first few years, then creep up as systems age.
The rule also ignores the mortgage entirely. It tells you nothing about cash flow. A property can pass the 50% rule and still lose money every month if you financed it badly.
Is 3.5% a good rental yield?
It depends on what you're buying. 3.5% net is respectable in central London, Paris, or coastal California. In those markets, you're not buying income — you're buying capital preservation and appreciation, with rent covering most of the holding cost. I've owned a property in a market like that. The yield was 3.2% net and I'd buy it again tomorrow, because the equity gain over the holding period dwarfed the rental income.
In a market where prices sit at 8-10× annual rent, 3.5% is a warning sign. You're paying for hope.
What makes a yield "good," really?
The honest answer: a good yield is one that beats your alternatives after accounting for risk and effort. If a 10-year government bond pays 4% and requires zero phone calls from tenants, a 4.2% net yield on a property that needs a new water heater every other year is not a good deal. It's a hobby.
I keep a simple test. Take your net yield, subtract a realistic risk premium — I use 2 percentage points for single-family, 2.5 for small multifamily, more for anything with commercial tenants — and see what's left. If the remainder doesn't beat a boring index fund, you should know that before you sign.
What is a good ROI for rental property?
ROI is a different animal from yield, and mixing them up costs people money. Yield measures the property's performance. ROI measures your money's performance — and it changes the moment you add a mortgage.
Put 25% down on that $261,400 property ($65,350) plus closing costs, and let's say it throws off $4,200 in cash flow in year one after debt service. Your cash-on-cash return is 6.4% — higher than the 4.52% net yield, because leverage magnifies whatever the property does. In a good year, that same leverage turns a 2% appreciation into 8%. In a bad year, it turns a small loss into a real one.
Targets I actually use
For small residential deals, I want cash-on-cash in the 6-9% range in year one, with a path to double digits as rents rise. Below 5%, I pass. Above 12%, I look very hard for what I'm missing, because usually there's something.
For the longer view, IRR is the number that matters. It accounts for the sale, the mortgage paydown, and the timing of every cash flow. I've had deals with a mediocre 5% cash-on-cash return and a 14% IRR over seven years, because the equity build and appreciation did the heavy lifting. Yield alone would have missed it.
Tools, spreadsheets, and why I still use Excel
There are dozens of rental property calculators online. Most will give you a gross yield, a net yield, and a cash flow figure in under a minute. They're fine for triage. They are not fine for a real decision, for one simple reason: they don't know your assumptions. Vacancy rates, maintenance reserves, and management costs vary wildly by market, and a calculator that hard-codes them is doing you a disservice.
I use a plain spreadsheet. One tab for acquisition costs, one for the operating expense schedule, one for the ten-year projection. It took me about four hours to build and I've used it on every deal since. The discipline of entering every line item myself has caught more mistakes than any online tool ever did.
Mistakes that quietly destroy yields
Three that I've made personally:
- Underestimating vacancy. I assumed one month per year. Reality in a soft market was closer to two.
- Ignoring the reserve. Roofs, HVAC, water heaters — they all have clocks, and if you don't fund them monthly, they'll hit you in one ugly lump.
- Using rent that I hoped to charge, not rent that comparable units actually charged. I once projected $1,900 on a unit that was renting for $1,550 two doors down.
The fix for all three is the same: use the pessimistic number. If the deal still works, you've found something. If it only works with optimistic assumptions, you've found a story you're telling yourself.
The number that actually matters
Here's what I've landed on after years of running these calculations. Gross yield is a marketing number. Net yield is an honesty number. Cash-on-cash and IRR are decision numbers. Use all four, in that order, and never skip from the first to the fourth.
The next time someone tells you their rental yields 9%, ask them what they paid in closing costs. The answer will tell you whether they've done the work — or whether they're about to learn, as I did, that the property was never yielding what they thought.
