Rental yield calculator for UK landlords

How to use the rental yield calculator

1. Enter the price and the monthly rent. Use what you paid, or the current value if you already own the property.
2. Add running costs and empty weeks. Enter a year of costs as one figure, or itemise them, including the letting agent fee as a percentage of the rent.
3. Set the mortgage. Enter your deposit and interest rate, and choose interest only or repayment. Untick the box for a cash purchase.
4. Include income tax. Enter your other income and where you live, so the rental profit is taxed at your own rates.
5. Add stamp duty and buying costs under More options, so the return on your cash reflects everything you paid.

The result shows the net yield first, because it is closer to what a property really earns, with the gross yield, cash flow, return on cash and interest cover alongside.

How to calculate rental yield

There are two rental yield formulas. Gross rental yield is the annual rent divided by the property price, multiplied by 100. Net rental yield takes the rent lost to empty weeks and the running costs off the annual rent first, then divides by the price and multiplies by 100.

Here is the example already in the calculator: a £250,000 flat let for £1,250 a month, with two empty weeks and £2,500 of running costs a year.

Annual rent, £1,250 × 12

£15,000

Gross yield, £15,000 ÷ £250,000 × 100

6.00%

Less two empty weeks

£577

Less running costs

£2,500

Net rental income

£11,923

Net yield, £11,923 ÷ £250,000 × 100

4.77%

Gross yield is quick and useful for comparing adverts. Net yield is the better guide to what a property earns, because two homes with the same rent and price can have very different service charges, repair bills and letting fees.

Cash flow and the return on your cash

Yield ignores how you paid for the property. With a 75% interest-only mortgage at 5%, the example pays £9,375 of interest a year, leaving a cash flow of £2,548 before tax. The rent is 160% of the interest, a figure lenders call interest cover.

The return on cash, sometimes called cash-on-cash return, compares that cash flow with what you actually put in: the deposit plus stamp duty and buying costs, £77,500 here. Before tax it is 3.29%. A repayment mortgage lowers the cash flow further, because capital repayments come out of the rent even though they build up your equity rather than costing you money.

How income tax changes your rental return

You pay income tax on the rental profit at your own rates, and since Section 24, mortgage interest earns a tax credit instead of coming off the rent. For a basic rate taxpayer, the example's tax is £510, leaving £2,038 a year and a return on cash of 2.63%. A higher rate taxpayer with the same property keeps less. The rental income tax calculator shows the full tax working, and the guide to Section 24 mortgage interest relief explains the credit.

Is a 5% rental yield good?

It depends on what the yield has to pay for. Take the same £250,000 property let at a 5% gross yield, £1,041.67 a month, with the same costs, a 75% interest-only mortgage at 5% and a basic rate taxpayer. The net yield is 3.81%, the rent is 133% of the mortgage interest, and after income tax the landlord keeps £115 a year.

With a smaller mortgage, a lower rate or lower costs, the same 5% yield leaves far more. That is why the calculator shows cash flow and return on cash, not just the yield.

What this property yield calculator does not cover

• Capital growth, and Capital Gains Tax when you sell.
• Stamp duty worked out for you. Enter your own figure; GOV.UK sets out the higher rates for additional homes.
• Mortgage payments after the first year, or a change of rate when a fixed deal ends.
• Property owned through a limited company, which pays Corporation Tax instead of income tax.
• Joint owners' tax. The rental income tax calculator splits the profit between owners.