Gross yield vs net yield — the difference that matters
Gross yield is annual rent divided by property price — a quick screening metric. Net yield subtracts operating expenses and vacancy, giving you the real return. Many properties that look great at 8% gross yield turn into 4% net yield once real costs are included.
Operating expenses investors forget
- Property taxes (0.5%–2.5% of value)
- Insurance ($800–$2,500/year)
- Property management (8–12% of rent)
- Maintenance and repairs (1% of value annually)
- CapEx reserves (roof, HVAC, appliances) — 5–10% of rent
- Vacancy (5–10% loss of rent)
- Leasing fees (one month's rent per turn)
What's a "good" yield?
Yields vary dramatically by market. In high-appreciation coastal cities, gross yields of 5–6% (net 3–4%) are common — investors accept low cash flow for appreciation. In Midwest and Sunbelt markets, gross yields of 10–12% (net 6–8%) are achievable. A common rule: net yield should beat the 30-year mortgage rate by at least 2 percentage points to justify the risk.
Cash-on-cash return — annual cash flow divided by cash invested — is the metric most investors actually care about. If you put 25% down on a $300,000 property ($75,000) and net $6,000/year, your CoC return is 8%.
Frequently asked questions
What is a good rental yield?
It depends on the market. In high-appreciation coastal cities, 5-6% gross (3-4% net) is common — investors accept low cash flow for appreciation. In Midwest and Sunbelt markets, 10-12% gross (6-8% net) is achievable. A common rule: net yield should beat the 30-year mortgage rate by at least 2 percentage points.
What is cash-on-cash return?
Annual cash flow (rent minus all expenses, including mortgage) divided by cash invested (down payment + closing costs). If you put $75,000 down on a property and net $6,000/year after all expenses, your CoC return is 8%. This is the metric most investors actually track.
What expenses do most rental investors forget?
Vacancy (5-10% loss of rent), property management (8-12% of rent), maintenance (1% of value annually), CapEx reserves (5-10% of rent for roof, HVAC, appliances), leasing fees (one month's rent per turn), and travel/legal/eviction costs.
Should I pay cash or finance a rental property?
Generally finance. Mortgages let you leverage — a 25% down payment means you control 100% of the asset's appreciation. Plus mortgage interest is deductible against rental income. Paying cash makes sense only if you can't qualify for financing or rates are very high.
What is the 1% rule?
A quick screening rule: monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for $2,000+/month. The 2% rule is even better but rarely achievable in 2025 markets. Use the 1% rule to filter, then run the full numbers.
Does the calculator include mortgage payments?
No — it calculates yield on the property itself (cap rate style). To include financing, calculate cash-on-cash return: net operating income minus debt service, divided by cash invested.
How does depreciation affect rental returns?
The IRS lets you depreciate the building (not land) over 27.5 years. On a $300K property with $225K building value, that's $8,182/year in non-cash deductions that shelter rental income from tax. This is one of the biggest tax advantages of real estate investing.
Glossary of key terms
- Gross Yield
- Annual rent ÷ property price. A quick screening metric.
- Net Yield
- (Annual rent − operating expenses − vacancy) ÷ property price. The real return.
- Cash-on-Cash Return
- Annual cash flow after debt service ÷ cash invested. The metric investors track.
- Cap Rate
- Net Operating Income ÷ property value. Pure property return, ignoring financing.
- NOI
- Net Operating Income — gross rent minus vacancy minus operating expenses (not including debt service).
Common mistakes to avoid
- Using gross yield instead of net yield — operating expenses eat 30-50% of gross rent
- Underestimating vacancy — even good tenants leave eventually
- Forgetting CapEx reserves — roof, HVAC, and appliance replacements will happen
- Assuming you'll always have a tenant — budget for 1-2 months vacant per year minimum
- Not accounting for property management if you don't want to manage yourself
Pro tips
- Screen with the 1% rule (monthly rent ≥ 1% of purchase price), then run full numbers.
- Always include 10% for property management in your calculations — even if you self-manage initially.
- Reserve 5-10% of rent for CapEx (roof, HVAC, appliances) — these expenses are inevitable, just infrequent.
- Factor in depreciation tax benefits — they shelter thousands in rental income from tax each year.
- Buy in landlord-friendly states (Texas, Florida, Indiana) — easier evictions, lower taxes, better tenant screening options.
Results are estimates for educational purposes only and not financial advice. Consult a licensed professional for advice specific to your situation.