Why one number isn’t enough
When someone asks “what’s the return on this property?”, there’s no single right answer. A property generates returns in multiple ways — rental income, capital appreciation, mortgage paydown — and each metric captures a different slice.
Understanding these metrics helps you compare properties fairly and avoid the most common mistake in property investing: confusing a high gross yield with a good investment.
Gross yield
What it measures: Rental income as a percentage of the property’s purchase price, before any expenses.
Formula: (Annual rental income ÷ Purchase price) × 100
Example: A property purchased for $400,000 that rents for $2,500/month has a gross yield of ($30,000 ÷ $400,000) × 100 = 7.5%.
When to use it: Gross yield is useful as a quick screening tool to compare properties in the same market. It’s fast to calculate and widely quoted by property portals and agents.
The catch: Gross yield tells you nothing about what you’ll actually take home. A property with an 8% gross yield might have a 2% net yield after expenses — or a negative one.
Net yield
What it measures: Rental income minus operating expenses, as a percentage of the purchase price.
Formula: ((Annual rental income − Annual operating expenses) ÷ Purchase price) × 100
Operating expenses include: property tax, insurance, maintenance, management fees, vacancy allowance, body corporate/HOA fees, and any other ongoing costs. They do not include mortgage payments — that’s a financing cost, not an operating cost.
Example: That same $400,000 property earning $30,000/year with $12,000 in annual expenses: ($30,000 − $12,000) ÷ $400,000 × 100 = 4.5%.
When to use it: Net yield is the more honest measure of a property’s operating performance. Two properties with identical gross yields can have very different net yields depending on their country’s property taxes, insurance costs, and levies.
This is why our calculator factors in country-specific recurring costs — they vary enormously. Council tax in England, municipal rates in South Africa, ENFIA in Greece, and property tax in the US can represent very different proportions of your rental income.
Cap rate (capitalisation rate)
What it measures: Net operating income as a percentage of the property’s current market value (not your purchase price).
Formula: (Net operating income ÷ Current market value) × 100
How it differs from net yield: Cap rate uses the property’s current value, while net yield uses your purchase price. In year one, they’re the same. After five years of appreciation, the cap rate may be lower (the property is worth more) while your net yield on cost stays the same.
When to use it: Cap rate is the industry standard for comparing properties regardless of when they were bought. It strips out financing and focuses purely on the property’s income-generating ability relative to its value. Commercial property investors rely heavily on cap rates.
Cash-on-cash return
What it measures: Annual pre-tax cash flow as a percentage of the total cash you invested.
Formula: (Annual cash flow after mortgage payments ÷ Total cash invested) × 100
Total cash invested includes: your deposit, closing costs, and any renovation costs — everything you paid out of pocket.
Example: You put $110,000 into a property (deposit + closing costs). After collecting rent and paying all expenses including the mortgage, you have $5,500 in positive cash flow for the year. Cash-on-cash return = $5,500 ÷ $110,000 × 100 = 5.0%.
Why it matters: Cash-on-cash return captures the effect of leverage. If you buy a $400,000 property with 20% down and the property returns 4.5% net yield, your cash-on-cash might be 6% or more — because you’re earning returns on $400,000 of property with only $80,000 of your own money.
The flip side: Leverage amplifies losses too. If expenses exceed income, your cash-on-cash return goes negative, and you’re losing a percentage of a much smaller number (your deposit), not the full property value.
Payback period
What it measures: How many years it takes for your cumulative cash flow to repay your total cash invested.
Formula: Total cash invested ÷ Annual cash flow
Example: With $110,000 invested and $5,500/year in cash flow, the payback period is 20 years. This doesn’t account for appreciation or mortgage paydown — it’s a pure cash flow measure.
When to use it: Payback period is a useful gut-check. If the payback period is longer than your investment horizon, you’re relying on capital appreciation to make money.
How they fit together
| Metric | Includes mortgage? | Includes expenses? | Uses your cash or full price? |
|---|---|---|---|
| Gross yield | No | No | Full price |
| Net yield | No | Yes | Full price |
| Cap rate | No | Yes | Current market value |
| Cash-on-cash | Yes | Yes | Your cash only |
A good investment typically shows: a healthy gap between gross and net yield (meaning expenses are manageable), a positive cash-on-cash return (meaning it cash-flows after the mortgage), and a reasonable payback period.
Try it with real numbers
Our free calculator computes all five metrics for your specific property — with country-specific transfer taxes, closing costs, and ongoing expenses built in. It covers 9 countries including South Africa, the US, England, Australia, and more.
Pick your country, enter your numbers, and see exactly what a property will cost you and return.