You have found a flat. The agent's particulars say it yields 7%. Your own spreadsheet says the return is nearer 5%. A forum post about the same street claims the real number is 14%. None of them is lying. They are answering different questions, and if you cannot tell which question each metric answers, you can talk yourself into a weak deal or walk away from a strong one.
So let us take one deal and run it through gross yield, net yield, ROI and cash-on-cash. Same flat, same numbers, four answers. By the end you will know which one tells you "this is a good buy" and which one tells you "your cash is working hard".
The deal we will use
Every figure below is a worked example, not a market average. Swap in your own and the logic holds.
- Purchase price: £180,000 (freehold terraced house)
- Rent: £1,050 a month, so £12,600 a year
- Deposit: 25%, which is £45,000
- Mortgage: £135,000 interest-only at 5.5% (rates move often, so treat this as "at the time of writing")
- Buying costs: stamp duty £10,100, legal fees £1,500, survey £500
- Annual running costs: letting and management £1,260, insurance £300, maintenance allowance £900
Two derived numbers we will reuse:
- Net operating income (rent minus running costs, before any mortgage): £12,600 - £2,460 = £10,140
- Total cash invested (deposit plus all buying costs): £45,000 + £12,100 = £57,100
- Annual mortgage interest: £135,000 x 5.5% = £7,425
Gross yield: the 10-second screen
Gross yield is annual rent divided by price.
£12,600 / £180,000 = 7.0%
That is all it is. It ignores your mortgage, your buying costs and every running expense. Its only job is triage: comparing dozens of listings quickly and binning the obvious duds. A 7% gross yield in an area where similar stock sits at 5% is worth a second look. But nobody banks gross yield, so never let it decide anything on its own.
Net yield: what the asset is actually worth owning
Net yield takes the running costs out but still ignores how you paid for the place.
£10,140 / £180,000 = 5.6%
This is the honest measure of the asset. It answers "if I owned this flat outright, what income would it throw off relative to what it cost?" Because it strips out financing, net yield lets you compare a cash purchase against a mortgaged one, or one property against another, without your particular deposit muddying the picture. The gap between 7.0% and 5.6% here is the £2,460 of costs the headline number quietly ignored.
Cash-on-cash: how hard your money is working this year
Now bring in the mortgage and your actual cash. First, pre-tax annual cash flow:
Net operating income £10,140 - mortgage interest £7,425 = £2,715
Cash-on-cash return is that cash flow divided by the cash you actually put in:
£2,715 / £57,100 = 4.8%
This is the number that tells you how hard your money is working. It cares about your deposit size, your buying costs and your interest rate, none of which yield notices. Put down more, and cash-on-cash falls even though the flat is identical. Borrow more cheaply, and it rises. It is the return most investors quietly live on, because it maps to real money landing in your account each year.
Because the inputs move together, cash-on-cash is fiddly to redo by hand every time you tweak the rent or the rate. The cash-on-cash return calculator does the recalculation for you, which is useful when you are stress-testing a deposit or a rate against several offers.
ROI: the whole-picture number
ROI (return on investment) is the widest lens. A sensible version for property adds expected capital growth to your cash flow, then divides by cash invested. If we pencil in 3% growth on £180,000, that is £5,400 of paper gain in year one:
(£2,715 cash flow + £5,400 growth) / £57,100 = 14.2%
Notice how far ROI sits above cash-on-cash. That whole gap is capital growth you cannot spend until you sell or refinance. ROI answers "is this a good buy over time?" but it leans on an assumption you do not control. Change the growth figure to 0% and ROI collapses back to the 4.8% cash-on-cash number. Always show the growth rate you used, and be honest that it is a guess.
One deal, four answers
| Metric | What it divides | This deal | The question it answers |
|---|---|---|---|
| Gross yield | Rent / price | 7.0% | Worth a second look? |
| Net yield | Net income / price | 5.6% | How good is the asset itself? |
| Cash-on-cash | Cash flow / cash in | 4.8% | How hard is my cash working now? |
| ROI (with growth) | (Cash flow + growth) / cash in | 14.2% | Is this a good buy overall? |
Same flat. The numbers range from 4.8% to 14.2% and every one of them is correct.
So which one decides the deal?
Use them in order, and let each answer a different question:
- Gross yield to screen and shortlist.
- Net yield to judge the property on its own merits, financing aside.
- Cash-on-cash to decide whether your money is better here than in the next deal, or in an easy-access savings account paying a comparable rate with no tenants attached.
- ROI to sanity-check the long game, with a growth assumption you would defend out loud.
If you only keep two, keep net yield and cash-on-cash. One tells you the flat is sound; the other tells you the purchase is sound for you.
A note on tax, because cash-on-cash hides it
Every figure above is pre-tax. That matters more for landlords than it used to. Under Section 24, individuals can no longer deduct mortgage interest from rental income; relief is now a 20% basic-rate tax credit (gov.uk guidance). A higher-rate taxpayer will see a real return below the 4.8% cash-on-cash headline, because tax is charged on rent before the full interest cost is relieved. Companies still deduct interest in full, which is one reason the personal-versus-company question keeps coming up. Run your own after-tax number before you commit.
This is general information, not tax or financial advice.
The point is not to crown one metric. It is to stop letting a single number, usually the flattering one on the listing, stand in for a decision it was never built to make.
