Gross vs net rental yield in property investment: how to calculate them

When sellers of investment flats tell you "8% yield", they are almost always talking about gross yield. When wealth managers tell you property returns 4%, they're probably talking about net yield. They are different metrics, and you need to understand both to make the right decisions.

Gross yield: the basic formula

Gross yield = (annual rent / purchase price) × 100. If you buy a flat for €100,000 and charge €700/month in rent (€8,400/year): gross yield = 8.4%. It's the metric adverts use. It's useful for quick comparisons, but it doesn't reflect what you really earn.

Net yield: the one that really matters

Net yield = ((annual rent - annual costs) / total purchase price) × 100. The costs you have to subtract: IBI (Impuesto de Bienes Inmuebles, the local property tax), community fees for the owners' association, home insurance, rent guarantee insurance (optional but advisable), a provision for repairs and maintenance (~1% of the value/year), estimated void periods (usually 1 month/year), and management fees if you use a property manager.

In the example above: €8,400 of gross rent - €1,200 of IBI - €600 of community fees - €200 of insurance - €600 of voids - €500 of repairs = €5,300 net. Net yield = 5.3% on €100,000. That is very different from the 8.4% gross.

The total purchase price, not just the price of the property

The denominator of the calculation must include the purchase price PLUS all the purchase costs (ITP, the Impuesto de Transmisiones Patrimoniales or property transfer tax; notary; land registry; valuation). If you paid €100,000 for the flat plus €9,000 in costs, the total investment is €109,000. The net yield falls to 4.9%: still good, but different.

What minimum yield to demand

A practical guide: demand at least 4.5-5% net yield in big-city markets, and 6-7% in medium-sized cities or higher-risk assets (auctions, assets that need renovating). Below those thresholds, the property risk isn't worth it compared with financial alternatives that are less complex to manage.

Calculate the real net yield: RadarPro automatically calculates the estimated gross and net yield of each asset with all the typical costs included. Get free access.