Gross yield and Net yield. While they may seem similar at first glance, understanding the difference between them is a non-negotiable if you want to make informed decisions and avoid ugly surprises.
Gross yield and Net yield. While they may seem similar at first glance, understanding the difference between them is a non-negotiable if you want to make informed decisions and avoid ugly surprises.
Gross Yield - The Quick Snapshot
Gross yield is the simpler of the two. It measures the return on a property before any expenses are taken into account. You calculate it by dividing the annual rental income by the purchase price of the property, then multiplying by 100.
For example, imagine a property in Liverpool priced at £150,000 with an annual rent of £11,400. The gross yield would be 7.6 percent. This figure provides a useful starting point for comparing properties because it shows the potential income relative to the purchase price.
However, gross yield only tells part of the story. It does not account for the costs of running a property, such as maintenance, insurance, letting agent fees, or periods when the property is empty. Relying on gross yield alone can make an investment look more profitable than it actually is.
Net Yield - The Real Returns
Net yield gives a clearer picture of what you can expect to earn after expenses. Using the same Liverpool example, if annual expenses amount to £2,000, the net yield drops to 6.27 percent. This is the figure that truly matters for investors because it reflects the income you can realistically expect to receive each year.
Consider another example in Redcar and Cleveland, where a property costing £81,000 might generate £650 per month in rent, or £7,800 per year. The gross yield here is 9.63 percent, which looks attractive at first glance. But after accounting for £1,500 in annual costs, the net yield falls to 7.78 percent. If you’ve been paying attention, this should show you why net yield is crucial for understanding the real profitability of an investment.
What’s the big deal?
Two properties with identical gross yields can have very different net returns depending on their expenses. Net yield allows investors to make informed comparisons, highlighting properties that are genuinely profitable rather than superficially appealing.
Location also plays a big role in the UK market. London properties often offer lower gross yields but can benefit from strong capital growth, while properties in towns like Liverpool may offer higher yields and more long-term growth. Understanding both gross and net yield will help you balance immediate income with future potential.
Making Smarter Investment Decisions
Long story short - yield shows the potential, while net yield shows the reality. Considering both gives a complete picture of an investment’s performance and helps investors make decisions with confidence.
