How to Calculate Rental Yield and Cap Rate

Q: What's the difference between gross yield and net yield?

Gross rental yield divides annual rental income by the property's purchase price and ignores expenses. Net rental yield subtracts annual operating expenses — property tax, insurance, HOA fees, maintenance, and a vacancy allowance — from rental income before dividing by the purchase price, making it a more realistic, decision-useful number.

Q: Is cap rate the same as rental yield?

They're very similar concepts. Cap rate is the more standardized term professional real estate investors and appraisers use, calculated as net operating income divided by current market value or purchase price. Like net yield, it deliberately excludes financing costs, so it measures a property's earning power independent of your mortgage.

Q: What's a good cap rate?

There's no single universal number. Acceptable cap rates vary by market (higher-cost coastal or urban markets typically show lower cap rates than lower-cost secondary markets), by property type and condition, and relative to alternative investments like current bond yields. Cap rate is best used as a comparison framework rather than a fixed target.

Q: Should I include vacancy in my yield calculation?

Yes. Including a vacancy allowance in your operating expenses gives a more realistic net yield, since few rental properties stay occupied 100% of the time. Ignoring vacancy tends to overstate a property's real return.

Before buying a rental property as an investment, you need a way to measure how much income it actually produces relative to its price. Three formulas do most of the work: gross rental yield, net rental yield, and cap rate. They sound similar but answer slightly different questions — here's how to calculate each one, and how professional investors use them.

Gross Rental Yield

Gross Rental Yield = (Annual Rental Income ÷ Property Purchase Price) × 100

This is the simplest measure: it tells you what percentage of the purchase price you collect in rent each year, before any expenses. It's a quick, easy first filter for comparing properties, but it ignores property tax, insurance, maintenance, vacancy, and every other cost of actually owning the property — so it can make a property look far more attractive than it really is.

Net Rental Yield

Net Rental Yield = ((Annual Rental Income − Annual Operating Expenses) ÷ Property Purchase Price) × 100

Operating expenses typically include property tax, insurance, HOA fees, maintenance, and a vacancy allowance (an estimate for the months the unit sits empty between tenants). Net yield is the more realistic, decision-useful number, because it reflects what you actually keep, not just what you collect.

Cap Rate (Capitalization Rate)

Cap Rate = (Net Operating Income ÷ Current Market Value or Purchase Price) × 100

Cap rate is the standard metric professional real estate investors and appraisers use to compare the earning power of income properties. It's conceptually close to net rental yield, but it's the more standardized, widely used professional term — and critically, it deliberately ignores financing. Cap rate doesn't account for your mortgage payment, down payment, or loan terms at all; it measures how much the property itself earns, independent of how you paid for it.

That's different from cash-on-cash return, a separate, more personalized metric that does account for your specific down payment and mortgage — it measures the return on the actual cash you put in, rather than the property's standalone earning power. Cash-on-cash return is worth knowing exists as a third concept, though it's a topic in its own right beyond the scope of this article.

Worked Example

Take a rental property purchased for $300,000, rented at $2,000/month ($24,000/year), with $4,500/year in operating expenses (property tax, insurance, a maintenance reserve, and a vacancy allowance).

Metric	Calculation	Result
Gross Rental Yield	$24,000 ÷ $300,000	8.0%
Net Rental Yield	($24,000 − $4,500) ÷ $300,000	6.5%
Cap Rate	$19,500 (NOI) ÷ $300,000	6.5%

Notice that net rental yield and cap rate land on the same 6.5% here — that's expected, since Net Operating Income (rental income minus operating expenses) is the same figure used in both formulas when purchase price and current market value are the same. The gross yield of 8.0%, by contrast, overstates the property's real return by ignoring expenses entirely.

What's a "Good" Cap Rate?

There's no single universal target cap rate — it's better understood as a comparison framework than a fixed number. A few things drive what counts as reasonable:

Market — higher-cost coastal and urban markets typically show lower cap rates than lower-cost secondary markets, reflecting a price-vs-yield tradeoff: you pay more upfront, so the income return relative to price is lower.
Property type and condition — a newly renovated property in a stable neighborhood carries different risk (and typically a different cap rate) than an older property needing repairs.
Alternative investments — comparing a property's net yield or cap rate against current bond yields is a useful sanity check: if a property's cap rate is barely above what a low-risk bond pays, the extra risk and illiquidity of owning real estate may not be worth it.

In short: don't chase a specific number you saw somewhere online. Compare a property's cap rate against similar properties in the same market and against your own alternative uses for the capital.

Not the Same as Rent vs. Buy

This article is about evaluating a property as an income-producing investment. That's a different question from the one answered by our Rent vs Buy calculator, which compares renting versus buying a home for your own personal residence. If you're deciding whether to live in a property, use that tool; if you're deciding whether a property will make money as a rental, use the formulas above.

Frequently Asked Questions

What's the difference between gross yield and net yield?

Gross rental yield divides annual rental income by the purchase price and ignores expenses. Net rental yield subtracts annual operating expenses — property tax, insurance, HOA fees, maintenance, and a vacancy allowance — first, making it the more realistic, decision-useful number.

Is cap rate the same as rental yield?

Very similar. Cap rate is the more standardized professional term, calculated as net operating income divided by current market value or purchase price, and it explicitly ignores financing — unlike a cash-on-cash return, which does account for your mortgage.

What's a good cap rate?

There's no universal number. It varies by market (lower-cost markets tend to show higher cap rates), property type and condition, and relative to alternative investments like current bond yields. Use it as a comparison framework, not a fixed target.

Should I include vacancy in my yield calculation?

Yes. Including a vacancy allowance gives a more realistic net yield, since few rental properties stay occupied 100% of the time. Skipping it tends to overstate a property's real return.

What's cash-on-cash return, and is it the same as cap rate?

No. Cash-on-cash return is a separate, more personalized metric that accounts for your specific down payment and mortgage financing, unlike cap rate, which deliberately ignores financing to measure a property's standalone earning power.

Rent vs Buy Calculator

For a personal residence, not an investment

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Real Estate Investing 101

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Sources

Appraisal Institute — Income Capitalization Approach
Internal Revenue Service — Topic No. 414, Rental Income and Expenses

Note: These formulas are standard real estate investment analysis tools for educational purposes only. This is not investment advice, and past performance does not guarantee future results. Actual returns depend on financing, local market conditions, and property-specific factors — consult a real estate or financial professional before investing.