Yield measures the rent against the property's value. Return measures what you actually made against the cash you actually put in, and once a mortgage is involved the two diverge sharply. A landlord who put down a deposit and borrowed the rest earns the rental profit and any growth on the whole property while having risked only the deposit, which is why buy to let returns can look far higher than yields, and why they carry more risk than yields suggest. This page is for the UK buy-to-let landlord working the return on a property, and it sets out the three figures a rental return calculator should produce and how to read them together. The rental yield calculator and the rental income tax calculator on this site produce the inputs.
How to calculate ROI on rental property: start with the net rental profit
Annual rent from the rent roll, less the costs of letting: agent fees, insurance, service charge and ground rent, repairs, certificates, voids. That is the net rental profit before finance and it is the same figure the net yield uses. Everything below builds on it, so get it from the record rather than from a forecast where you can.
Subtract the finance, after tax
Mortgage interest comes next, and it comes after tax in the sense that relief on finance costs for residential lettings is restricted to the basic rate and given as a reduction from the tax bill. The rental income tax calculator here works the tax on the rental profit with that restriction applied, so what remains after tax and interest is the cash the property actually leaves you each year.
Divide by the cash you put in, as a buy to let investment calculator should
The return on cash is that annual figure divided by the deposit plus the buying costs plus any refurbishment you paid for, as a percentage. This is the figure that a buy to let investment calculator should headline and that yield cannot show, because two landlords with the same property and different deposits have the same yield and very different returns.
In property investment returns, growth is a separate line and a forecast
Capital growth adds to the return and is unknown until the property is sold. Show it as its own line with the assumption stated, never folded into the cash return, so that a property investment returns figure can be read as what is being earned now and what is being hoped for. When growth is assumed, remember that selling has its own costs and its own tax.
Reading the three together
Yield tells you how hard the price is working. Return on cash tells you how hard your deposit is working, and how exposed you are to a rate rise. Growth tells you what the bet is. A good property reads well on the first two without needing the third; a property that only reads well with growth included is a bet, and should be entered as one. How to calculate roi on rental property, then, is three calculations kept apart rather than one number.
Questions people ask about rental return calculator
What is the difference between rental return and rental yield?
Yield is rent against the property's value, before finance. Return is what you keep after costs, interest and tax, against the cash you put in. The second depends on your deposit and tax rate; the first does not.
Should a rental property return calculator include capital growth?
As a separate, labelled line with the assumption stated. Never inside the cash return.
Why do buy to let returns fall when interest rates rise?
Because the interest is paid from the rental profit and relieved only at the basic rate, so each rise in the rate takes a larger share of a fixed profit.