, Property
A two-bedroom terrace in a northern town is advertised at £120,000 with a rent of £750 a month. The listing says 7.5% yield. That figure is arithmetically correct and practically useless, because it describes a property owned outright, never empty, never repaired and never managed.
Work the same property through properly and the number that reaches your bank account is usually less than half of it.
Gross yield is a sorting tool, not a decision
Gross yield is annual rent divided by purchase price. £9,000 of rent on £120,000 is 7.5%.
It is genuinely useful for one thing: comparing properties quickly before you look closely. It tells you how a town in the north of England differs from one in the south, where a similar rent sits on a much larger capital value. It does not tell you whether a specific property makes money.
The first correction is to the denominator. The price is not the price. You have to add the acquisition tax, including the surcharge on an additional dwelling, the legal fees, the survey, the lender's fees, and whatever the property needs before anyone will live in it. On our terrace, £120,000 might really be £133,000 once the tax, fees and a new bathroom are counted. The gross yield has already fallen to about 6.8%.
Net yield is the same sum after the costs nobody lists
Net yield is annual rent, minus annual operating costs, divided by total capital invested. The costs are all ordinary and all predictable:
- Letting and management. Full management typically runs around 10% to 12% of rent plus VAT, and tenant find fees come on top. Self-managing saves it and costs you time and availability at nine o'clock on a Sunday.
- Insurance. Landlord buildings insurance, which is not the same product as owner-occupier cover.
- Maintenance and repairs. A realistic allowance is a percentage of rent set aside every month rather than a figure you hope for. Older properties need more.
- Compliance. An annual gas safety check by a Gas Safe registered engineer, electrical installation condition reports at least every five years under the 2020 regulations in England, smoke and carbon monoxide alarms, an EPC, and deposit protection in a government-approved scheme within 30 days.
- Service charge and ground rent on a leasehold flat, which can be substantial and which you do not control.
- Voids and arrears. This is the big one, and it is the one most spreadsheets omit.
Six weeks of vacancy in a year is about 11.5% of the rent gone, and it happens more often than people plan for, especially between tenancies where you are also paying council tax and standing charges on an empty property.
Run the terrace through: £9,000 of rent, less £1,200 management, £250 insurance, £900 maintenance allowance, £250 compliance, and a void allowance of £700. That is £5,700 net against £133,000 invested, a net yield of about 4.3%. The same property that was advertised at 7.5%.
The mortgage is where the yield stops being academic
Most buy-to-let purchases are geared, and the yield only matters relative to the cost of the borrowing.
Lenders test affordability with an interest cover ratio rather than income multiples. Under the underwriting standards the Prudential Regulation Authority set out for buy-to-let lending, lenders assess whether the rent covers the mortgage interest by a margin, commonly 125% for a basic rate taxpayer and 145% for a higher rate taxpayer, and they apply that test at a stressed interest rate that is usually well above the rate you are actually paying. A five-year fixed product is often tested more leniently than a two-year one.
That is what decides how much you can borrow, and in low-yield areas it is the binding constraint. A property in the south east can fail the interest cover test at 75% loan to value even though it would be perfectly profitable, because the rent is low relative to the capital value.
Then there is tax. Since the phasing in of the finance cost restriction completed in 2020/21, an individual landlord cannot deduct mortgage interest from rental profits. Instead you receive a basic rate tax reduction of 20% of the interest. The effect is that a higher rate taxpayer pays tax on rent before interest, and a heavily geared portfolio can produce a tax bill larger than the actual cash profit. This is the reason so many landlords moved to limited company structures, where interest is still an ordinary deductible expense, though incorporating an existing portfolio triggers its own tax charges.
The point at which the numbers stop working
Ask a simpler question than yield: at what interest rate does this property cost me money every month.
Take the rent, take off the operating costs, and see what is left to pay the mortgage. On our terrace that is £5,700 a year, or £475 a month. On a £95,000 interest-only mortgage, £475 a month is covered comfortably at 5%, is roughly break-even at 6%, and is a monthly loss above that.
Anyone who bought on a two-year fix in 2021 discovered this arithmetic in 2023. The rent had not moved much and the payment had doubled.
Two habits protect you. Model the property at a payment rate two or three points above the one on offer, which is what the lender is doing anyway. And keep a reserve per property rather than per portfolio, because boilers, voids and a bad tenant do not arrive in an orderly rota.
Where this shows up in the game
Letting property is a business type of its own in Business Baron, and it comes with the Property & Construction Track, an add-on to the full game. A turn is a month, so the costs behind a rent land in the month they fall due rather than as a tidy annual percentage. The bank manager who lends against the portfolio is a named person with a risk appetite, and his view of you is set by the figures, not the advert.