Rental yield calculator
Gross yield, net yield, and the number that decides it: what actually lands in your account each month.
- Rent a year
- £0
- Running costs
- £0
- Mortgage interest
- £0
- Taxable profit, interest not deducted
- £0
- Tax, after the 20% interest credit
- £0
- Left over a year
- £0
Gross yield flatters, net yield informs
Gross yield is annual rent divided by the price, and it is the figure every listing quotes because it is the largest one available. It ignores the agent, the insurance, the boiler, the empty months and the mortgage. Net yield subtracts the running costs and the interest, and measures them against what the property actually cost you including fees. The gap between the two is usually several percentage points.
The rule that changed buy-to-let
Before April 2020 a landlord deducted mortgage interest from rental income and paid tax on what was left. That is no longer how it works. Interest is not an expense for tax purposes. You are taxed on rent minus running costs, with the interest still to pay out of the taxed remainder, and you receive a tax reduction worth 20% of the interest to compensate.
For a basic rate taxpayer the 20% credit roughly restores the old position. For a higher rate taxpayer it does not come close: you are taxed at 40% on income of which a large part went straight to the lender, and get 20% back. On a heavily mortgaged property that can turn a paper profit into a real loss, which is exactly what the cash flow figure above is for.
Be honest about the costs
The commonest way to talk yourself into a bad purchase is to model twelve months of rent and no maintenance. A tenanted property is empty sometimes, and things break. Ten per cent of rent for maintenance plus five per cent for voids is a conventional starting point, and on a Victorian terrace it is optimistic. Put those in the running costs figure above and see whether the property still works.
What this does not model
Capital growth, which is a different question and a far less certain one. Capital repayment on the mortgage, since only the interest is relevant to tax and cash flow is shown before capital. Buying through a limited company, which changes the tax treatment entirely. And the tax reduction here is capped at the lower of the finance costs, the property profit, and your income above the personal allowance, which is the ordinary rule but can bite in a low-profit year.
Common questions
- What is a good rental yield?
- Gross yields of 5% to 8% are typical outside London, and 3% to 5% inside it. But gross yield ignores costs, mortgage interest and tax, so a headline 7% can still be a loss-making property. Net figures are the ones to judge on.
- Why can I not deduct my mortgage interest?
- Since April 2020 private landlords cannot deduct finance costs from rental profit. Instead the interest earns a tax reduction at the basic rate of 20%. A basic rate taxpayer ends up roughly where they were. A higher rate taxpayer pays tax on income that has already gone to the lender.
- Would a limited company be better?
- A company can still deduct mortgage interest in full and pays corporation tax rather than income tax, which is why so many landlords now buy through one. Against that: higher mortgage rates, extra stamp duty in some cases, accountancy costs, and tax to pay again when you take the money out. It depends on your income and how long you plan to hold.
- What costs should I include?
- Letting agent fees, landlord insurance, ground rent and service charge, gas safety and certificates, and a realistic maintenance allowance. Ten per cent of rent for maintenance and another five for void periods is a common starting point and is often still optimistic on an older property.
- Does this include capital growth?
- No, deliberately. Yield measures the income the property produces. Capital growth is a separate and much less certain matter, and mixing the two is how people talk themselves into properties that lose money every month.