Most rental deals look good on a listing and lose money on a spreadsheet. The gap is almost always the yield math. This guide shows you how to calculate the three numbers that actually decide whether a property pays: gross yield, net yield, and cash-on-cash return. By the end you will be able to screen a listing in five minutes and tell if it is worth a deeper look.

Why gross yield alone will mislead you

Gross yield is annual rent divided by purchase price. It is fast and useful for a first filter, but it ignores every real cost of ownership. A property with an 8% gross yield can still bleed cash each month once you subtract management, tax, maintenance, and vacancy. Treat gross yield as a triage tool, never as the deciding number.

The three metrics and what each one answers

Metric	Formula	Question it answers
Gross yield	Annual rent / price	Is this worth analyzing further?
Net yield	(Annual rent – operating costs) / price	Does the asset itself perform?
Cash-on-cash	Annual pre-tax cash flow / cash invested	Does my actual money perform?

How to build a net yield you can trust

Net yield subtracts the costs the landlord actually pays. Be honest and conservative here. The costs people forget are the ones that turn a paper profit into a real loss.

• Vacancy: budget at least a few weeks per year even in strong markets.
• Management fee: assume you will pay it, even if you self-manage today.
• Maintenance and capital repairs: a common working assumption is around 1% of property value per year, higher for older buildings.
• Property tax, insurance, and any HOA or building fees.

Subtract those from annual rent, divide by price, and you have a net yield that survives contact with reality.

Cash-on-cash: the number that reflects your wallet

Net yield judges the asset. Cash-on-cash judges your money, because most investors use a loan. Take your annual cash flow after the mortgage payment, then divide by the cash you actually put in: down payment, closing costs, and any upfront repairs. Leverage can lift this number well above the net yield, but it also raises risk, which is a tradeoff you should choose deliberately.

A worked example

Suppose a two-bedroom unit costs 200,000 and rents for 1,300 a month, so 15,600 a year. Gross yield is 7.8%, which looks attractive. Now subtract operating costs: 8% vacancy (1,248), 8% management (1,248), 2,000 maintenance and reserves, and 2,600 for tax and insurance. Operating costs total roughly 7,096. Net operating income is about 8,500, so net yield is around 4.25%. Still positive, but far from the headline 7.8%.

Add a loan: 25% down (50,000) plus 6,000 in closing costs, so 56,000 invested. If the mortgage costs 8,400 a year, annual cash flow is roughly 100, a razor-thin 0.2% cash-on-cash. That deal is not broken, but it depends entirely on appreciation and rent growth, not cash flow. Knowing that before you sign changes how you negotiate.

Common mistakes and how to fix them

• Using asking rent, not achievable rent. Fix: verify with actual signed leases nearby, not other listings, which are also just asking prices.
• Ignoring vacancy and management. Fix: always include both, even for self-managed properties, so the number holds if your life changes.
• Confusing cash flow with return. Fix: separate cash-on-cash (money now) from total return, which also includes principal paydown and appreciation.
• Forgetting capital expenses. Fix: keep a separate reserve line for roofs, boilers, and appliances; they are not optional, only delayed.

Your five-minute screening checklist

• Calculate gross yield to decide if the deal deserves attention.
• List every operating cost honestly, including vacancy and management.
• Compute net yield on the asset alone.
• Add your financing and compute cash-on-cash on real cash invested.
• Stress-test: does it survive one extra month of vacancy and a rate rise?
• Compare the result against a safe alternative return before committing.

Conclusion and next step

Yield is not one number, it is three, and each answers a different question. Run all three before you fall for a listing. Your next step: build a simple reusable spreadsheet with these formulas so every property you view gets the same honest test.

Frequently asked questions

What is a good rental yield?

It depends on market and risk. A safe habit is to compare net yield against a low-risk return you could earn elsewhere, and require a premium for the extra effort and risk of property. A yield that only beats savings by a hair rarely justifies the work.

Should I count appreciation in my yield?

No. Keep appreciation separate. Yield measures income you can count on; appreciation is a forecast. Mixing them lets optimism hide a weak cash-flow deal.

Is higher leverage always better for cash-on-cash?

Not always. More leverage can raise cash-on-cash when the property earns more than the loan costs, but it also amplifies losses and shrinks your safety margin if rents fall or rates rise.

How much should I budget for maintenance?

Around 1% of property value per year is a common starting assumption, but adjust up for older buildings and down for newer ones. Track actual spending and refine it over time.

References

Investopedia provides clear, widely used definitions of cap rate, cash-on-cash return, and net operating income for readers who want to check the standard formulas.