How to Calculate Rental Yield Correctly
Rental yield is the primary metric investors use to benchmark the performance of a property. However, many new landlords confuse Gross Yield with Net Yield. Understanding the difference is critical to ensuring your investment doesn't become a financial drain.
The Formulae
- Gross Yield = (Annual Rental Income / Property Purchase Price) × 100
- Net Yield = ((Annual Rent - Total Annual Costs) / Total Investment) × 100
While Gross Yield gives you a quick snapshot (useful for comparing two properties on Rightmove), Net Yield tells the true story. It accounts for "hidden" UK-specific costs like the Stamp Duty Land Tax (SDLT), letting agent fees (typically 10-15% + VAT), and maintenance reserves.
Is Buy-to-Let Still Worth It in 2026?
The "golden era" of buy-to-let, where you could offset all mortgage interest against your income tax, ended totally in 2020. Since then, Section 24 tax changes and rising interest rates have squeezed margins. However, strictly speaking, bricks and mortar remain a resilient asset class in the UK.
In 2026, the strategy has shifted from "capital appreciation" in London to "yield generation" in regional hubs. With mortgage rates stabilising around the 4-5% mark, highly leveraged deals (75% LTV) are riskier unless the yield is high. Professional investors are increasingly looking North.
Regional Analysis: Average Rental Yield London vs. The North
London continues to offer stability and strong tenant demand, but yields are historically low due to high entry prices. Conversely, cities like Manchester, Leeds, and Liverpool offer lower entry points and significantly higher returns relative to the asset price.
| Region | Avg. Entry Price | Avg. Gross Yield | Risk Profile |
|---|---|---|---|
| Central London (Zone 1-2) | £500,000+ | 3% - 4% | Low (High Stability) |
| Manchester / Leeds | £180,000 - £250,000 | 6% - 8% | Medium |
| North East | £80,000 - £120,000 | 7% - 9%+ | High (Void Periods) |
Understanding Your Costs
Stamp Duty (SDLT): As of late 2024, the surcharge for additional properties (second homes) sits at 5%. This is often the largest upfront cost outside the deposit. For a £300,000 property, your Stamp Duty bill alone could be £14,000+.
Maintenance Reserve: We recommend allocating 10% of gross rent for repairs. Even in a new build, things break, and boilers need servicing.
Void Periods: Factor in 2-4 weeks of vacancy per year. If your yield calculation assumes 52 weeks of full occupancy, it is overly optimistic.