Rental yield, cash flow and the real return on a buy-to-let
Yield is the headline number every landlord quotes, but gross yield alone has bankrupted plenty of investors. This guide explains gross vs net yield, the costs that quietly erode returns, the lender stress test that decides whether you even get the mortgage, and the Section 24 tax change that reshaped UK buy-to-let.
Gross yield vs net yield
Gross yield is annual rent divided by the property price. A £220,000 flat let at £1,150/month produces £13,800 a year, a gross yield of about 6.3%. It's a useful first filter but ignores every cost. Net yield subtracts running costs (management, maintenance, insurance, voids, service charges) before dividing by the price, and is far closer to reality. The gap between the two is often 1.5 to 2.5 percentage points, the difference between a good investment and a money pit.
Net yield = (annual rent − running costs) ÷ property price × 100What counts as a good yield?
Yields vary hugely by region. Northern English cities, parts of Scotland and Wales often deliver gross yields of 6 to 8%+, while London and the South East can sit below 4% because capital values are so high relative to rents. As a rule of thumb, a net yield of 5% or more is healthy, 3.5 to 5% is workable with the right strategy, and below 3.5% leaves little cushion for voids, repairs or rate rises. Higher-yield areas often trade lower capital growth for stronger cash flow, your strategy should decide which you prioritise.
The costs landlords forget
- Letting & management. A full management service is typically 10 to 15% of rent plus VAT; tenant-find only is cheaper but more hands-on.
- Maintenance reserve. Budget around 1% of the property value, or ~10% of rent, a year for repairs and wear.
- Void periods. Even good tenants leave gaps. Modelling 2 to 4 weeks empty a year (roughly 4 to 8% of rent) keeps you honest.
- Insurance. Specialist landlord buildings and liability cover, plus optional rent-guarantee insurance.
- Compliance. Gas safety, EICR electrical checks, EPC, smoke and CO alarms, and licensing in some areas.
- Service charge & ground rent. On leasehold flats these can be substantial and rise over time.
The ICR mortgage stress test
Buy-to-let lenders apply an Interest Coverage Ratio (ICR): the rent must cover a multiple of the mortgage interest, calculated at a stressed rate (commonly around 5.5%). The required ICR is typically 125% for basic-rate taxpayers and 145% for higher and additional-rate landlords. If the rent doesn't clear that hurdle, no amount of income or deposit will get you the loan at that level, you'll need a bigger deposit, a higher rent, or a cheaper property. The calculator shows a live pass/fail.
ICR before you offer
Section 24 and the end of full interest relief
Since the phased introduction of Section 24 (fully in force from 2020), individual landlords can no longer deduct mortgage interest as an expense. Instead you pay tax on the rent (after other costs) and receive only a flat 20% tax credit on the interest. For basic-rate taxpayers the effect is broadly neutral; for higher and additional-rate landlords it can sharply cut net cash flow, and in highly leveraged cases push a paper profit into a real-terms loss. This is why many portfolio landlords now buy through a limited company (SPV), where interest remains fully deductible, at the cost of higher mortgage rates and more admin.
Yield isn't the whole return, ROI and growth
Yield measures income against the property value, but as a leveraged investor your real return is on the cash you put in. Cash-on-cash ROI divides your annual post-tax cash flow by your actual cash invested (deposit plus buying costs), and a mortgage can amplify it well above the headline yield. On top of that sits capital growth, if the property appreciates, your equity grows on the whole asset value, not just your deposit. A complete view weighs yield, ROI and expected growth together, against the risks of voids, rate rises and falling prices.
£220,000 flat at £1,150/month
Annual rent is £13,800, a 6.3% gross yield. Knock off 10% management, an 8% maintenance reserve, a 5% void allowance and £350 insurance, roughly £3,520 of costs, and net yield falls to about 4.7%. With a 75% loan at 5.2% interest-only, mortgage interest is about £8,580 a year, leaving pre-tax cash flow near £1,700. For a higher-rate landlord, Section 24 tax then takes a further bite. The lesson: a 6%+ gross yield can become a thin net return once the real numbers land, model them all before committing.
Common mistakes
- Quoting gross yield only. Gross ignores every cost. Always work to net yield and post-tax cash flow.
- Forgetting voids and arrears. Properties don't earn 52 weeks a year, every year. Build in an allowance.
- Underestimating maintenance. Boilers, roofs and white goods fail. A reserve of ~1% of value a year is realistic.
- Ignoring Section 24. Higher-rate landlords can owe tax even on a property that barely breaks even on cash flow.
- Skipping the ICR check. A purchase that fails the stress test simply won't get the mortgage you assumed.