What it means
Gross yield answers a simple question: for every $100 put into this asset, how much income comes back in a year? A flat costing $200,000 and renting for $12,000 a year yields 6% gross.
The calculation is deliberately crude, which is what makes it useful for comparing many opportunities quickly. In property it is the number most often quoted in listings and by agents, because it needs only two inputs that are always available: the asking price and the advertised rent.
In bonds the equivalent is the running yield, calculated as the annual coupon divided by the current market price rather than the face value. In both cases the yield moves inversely with price, so a rising price on an unchanged income means a falling yield.
The gap between gross and net yield is where the real money sits, and in property it is usually wide. Letting agent fees, maintenance, insurance, service charges, ground rent, void periods between tenants and property taxes commonly consume between a quarter and a half of the gross rent.
A headline 6% can easily become 3.5% by the time the money reaches the landlord's account, before any mortgage interest. Different markets have very different typical yields, and higher is not automatically better.
Prime city centre property often shows low gross yields because buyers expect capital growth to make up the difference, while cheaper regional stock can show high gross yields that reflect weaker tenant demand, higher void risk and greater maintenance needs. A yield that looks unusually generous is normally being paid for a reason.
One practical trap is which price sits in the denominator. Quoting the yield against the original purchase price makes a long-held asset look far better than it is, because the income is being compared with a price from years ago rather than what the asset is worth today.
For decisions about whether to keep holding, current market value is the honest denominator.
In practice
Real-world examples.
Example
A letting agent advertises a terraced house at $180,000 with rent of $1,125 a month, a gross yield of 7.5%. A cautious buyer models two void months and $3,000 of annual repairs, which brings the realistic net figure below 5%.
Example
A pension fund screens commercial property across four cities using gross yield as the first filter, then discards anything where the tenant covenant is weak or the lease has under three years to run. The yield gets it to a shortlist, not to a decision.
Example
An income investor compares a corporate bond with a running yield of 5.2% against a dividend-paying share with a gross yield of 5.0%. She notes the bond coupon is contractual while the dividend can be cut at the board's discretion, so the near-identical yields carry very different reliability.
Formula
Calculation
Gross Yield = (Annual Gross Income / Purchase Price or Current Market Value) x 100.
An investor buys a two-bedroom flat for $600,000 and lets it at $3,000 a month. Annual gross rent = $3,000 x 12 = $36,000.
Gross Yield = $36,000 / $600,000 = 0.06, or 6%.
Now bring in the costs the gross figure ignores. Letting agent fees, buildings insurance, service charge, an annual maintenance allowance and an allowance for one void month total $9,600 a year. Net income = $36,000 - $9,600 = $26,400, and the net yield is $26,400 / $600,000 = 0.044, or 4.4%. Roughly a quarter of the headline yield has gone before any financing cost.
The same arithmetic works on bonds. A bond paying a $50 annual coupon and trading at $1,000 yields $50 / $1,000 = 5%. If the market price rises to $1,250, the yield falls to $50 / $1,250 = 4%, even though the coupon has not changed at all.Case study
Seen in the real world.
Fielding Row Investments is a fictional landlord created to illustrate the difference between the two yield measures. It built a portfolio of twelve flats chosen almost entirely on gross yield, targeting anything above 8% and ignoring anything below 6%.
Three years in, the numbers told a different story. The high-yielding flats sat in areas with rapid tenant turnover, so voids averaged nearly two months a year rather than the two weeks assumed, and maintenance ran at more than double the budget on the older stock. Meanwhile two lower-yielding flats bought early on, at a gross 5.4%, had produced almost unbroken occupancy and had also risen in value. On a net basis the supposedly weaker properties were outperforming the headline stars.
In this illustrative example the company rewrote its acquisition rules. Gross yield stayed as the opening screen, but no property could be bought without a modelled net yield including a realistic void allowance and a maintenance provision scaled to the age of the building.
Watch out
Common mistakes.
- Treating gross yield as income the investor will actually receive. Fees, repairs, insurance, voids and tax typically remove a quarter to a half of it before anything reaches the owner.
- Chasing the highest available yield. Unusually high yields normally compensate for higher risk, whether that is void risk, tenant quality or the condition of the asset.
- Calculating the yield against a purchase price from years ago. Once an asset has risen in value, the honest denominator for a hold-or-sell decision is what it is worth today.
Questions
People also ask.
What is a good gross yield on rental property?
It depends heavily on the market, with prime locations often running between 3% and 5% and higher-yield regional stock reaching 7% or more, though the higher figures carry more risk.
How does gross yield differ from yield to maturity on a bond?
Gross or running yield uses only the annual coupon against the price, while yield to maturity also accounts for the capital gain or loss if the bond is held to redemption.
Should mortgage interest be deducted from the yield?
Not from the property yield itself, which measures the asset; financing cost belongs in a separate cash-on-cash or return-on-equity calculation.
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