Gross yield, net yield, cap rate, cash-on-cash return, and total ROI — the 5 metrics every property investor uses, with exact formulas and a fully worked example on a $300,000 property.
DIRECT ANSWER
There are five standard metrics for measuring real estate investment returns.Gross rental yield is the simplest: annual rent divided by purchase price.
Net yield deducts all annual costs (taxes, insurance, management, maintenance, vacancy) before dividing by price — it tells you the true income return the property generates.
Cap rate (capitalization rate) is net operating income divided by property value, calculated as if you paid all cash — it lets you compare properties independent of how they are financed.
Cash-on-cash return is the annual pre-tax cash flow (after mortgage debt service) divided by the total cash you actually put in (down payment plus closing costs) — it measures your real leveraged return.
Total ROI adds equity gain (appreciation minus remaining mortgage) to cumulative cash flow, divided by total cash invested.
All five metrics are calculated pre-tax — tax treatment varies by investor and jurisdiction. The worked example below shows all five computed on a single $300,000 property.
📊 The 5 Metrics & Their Formulas
1. Gross Rental Yield
Annual Rent / Purchase Price
The quick-and-dirty screen. Ignores all costs. Use it only for initial filtering — two properties with the same gross yield can have very different net returns once costs are factored in.
2. Net Yield
(Annual Rent − Annual Costs) / Purchase Price
Costs include: property taxes, insurance, management fees, maintenance reserve, vacancy allowance, and any owner-paid utilities. Does NOT deduct mortgage payments. Mortgage is a financing choice, not a property cost.
3. Cap Rate
NOI / Property Value
NOI = annual rent minus all operating costs (same as numerator of net yield). Cap rate is financing-agnostic — it measures the property’s income yield as if purchased all cash. The industry standard for comparing investment properties.
4. Cash-on-Cash Return
Annual Pre-Tax Cash Flow / Total Cash Invested
Annual pre-tax cash flow = NOI minus annual mortgage debt service (principal + interest). Total cash invested = down payment + closing costs + any upfront renovation. This is your real yield on the cash you actually deployed.
5. Total ROI (holding-period)
(Equity Gain + Cumulative Net Cash Flow) / Total Cash Invested
Equity gain = sale price minus remaining mortgage balance minus selling costs minus original purchase price. Cumulative net cash flow = sum of annual cash flows over the holding period. Divide by years held to annualize. This is the complete picture — it captures both the income and the appreciation.
Reading these numbers: The cap rate (5.33%) is solid — this property generates $16,000/yr in NOI on a $300k asset.
But at 6.5% financing cost, most of that income goes to service the mortgage, leaving a thin cash-on-cash of 1.64%.
The real return case rests on appreciation + principal paydown (equity building) over time — exactly what Total ROI captures.
Change the financing rate, vacancy rate, or rent growth and the picture shifts significantly. Model your specific deal below.
📋 What to Include in Operating Costs
Property taxes: varies enormously by location — from under 0.5% to over 2.5% of value per year. Always verify the actual tax bill.
Landlord insurance: typically 0.5–1% of property value per year.
Property management fees: 8–12% of collected rent if you use a manager. Zero if self-managing, but model your time as an opportunity cost.
Maintenance and repairs: commonly estimated at 1% of property value per year (the "1% rule") — more for older properties, less for new builds.
Vacancy allowance: assume 5–8% of potential annual rent (reflects periods between tenants and lost rent during re-letting).
Owner-paid utilities: water, trash, common-area electricity if applicable.
HOA or strata fees: if applicable.
Letting / leasing fees: often 1 week to 1 month of rent when placing a new tenant.
Do NOT deduct mortgage principal or interest when calculating net yield, NOI, or cap rate. Those are financing-side numbers and belong only in the cash-on-cash calculation.
❓ Frequently Asked Questions
What is a good rental yield for an investment property?
A gross rental yield of 6–10%+ is generally considered good. Below 4% usually means the return case depends heavily on capital appreciation. Net yield (after costs) typically runs 1–3 percentage points lower than gross. What’s achievable depends on location — high-cost cities (Tel Aviv, London, Sydney) often yield 2–4% gross, while secondary markets and emerging economies can yield 8–12%+.
What’s the difference between cap rate and cash-on-cash return?
Cap rate ignores financing — it measures the property’s income yield as an all-cash purchase. Cash-on-cash accounts for your actual mortgage — it measures the return on the cash you personally deployed after debt service. Same property, same NOI, but different financing produces identical cap rates and very different cash-on-cash returns. Cap rate is used to compare properties across markets; cash-on-cash is used to evaluate your personal deal economics.
What costs to include in net yield?
Property taxes, landlord insurance, management fees (8–12% of rent), maintenance reserve (typically 1% of value/year), vacancy allowance (5–8% of potential rent), and any owner-paid utilities or HOA fees. Mortgage payments are excluded — they are a financing cost, not an operating cost. Including them would conflate two separate decisions: how good the property is, and how much debt you use.
Is real estate ROI before or after tax?
By industry convention, all five standard metrics are pre-tax. This makes deals comparable across investors with different tax situations, entity structures, and jurisdictions. After-tax returns depend on your income bracket, depreciation allowances, mortgage interest deductibility, and capital gains treatment. Always analyze pre-tax first, then model your specific tax picture. A tool like WizeDeal can factor in your local tax context.
What is a good cash-on-cash return?
Most experienced investors target 6–12% cash-on-cash on leveraged rentals. Returns below 4–5% may not adequately compensate for the risk and management effort vs. alternatives like index funds. In high-cost markets, 1–4% is common, with investors relying on appreciation for total return. In the worked example above, a 1.64% cash-on-cash at current mortgage rates is realistic in many markets — the equity-building and eventual appreciation components are what make the deal work.
How does financing affect ROI — does leverage help or hurt?
Leverage amplifies both gains and losses. If a property’s cap rate exceeds your mortgage interest rate, leverage increases your cash-on-cash return (positive leverage). If your mortgage rate exceeds the cap rate — as in the worked example (6.5% rate vs. 5.33% cap rate) — leverage reduces cash-on-cash return (negative leverage). This is common in today’s high-rate environment. In negative leverage scenarios, investors are betting that appreciation and rent growth will outperform the financing cost over time.
⚠️ Disclaimer
The formulas, definitions, and worked example on this page are illustrative and educational only — not investment advice.
The $300,000 worked example uses simplified, round-figure assumptions (interest-only financing, flat costs, no vacancy variation, no rent growth, no depreciation).
Real investment returns depend on actual financing terms, local tax rates, vacancy history, maintenance needs, rent growth, market appreciation, and your personal tax situation.
Do not make investment decisions based on illustrative numbers.
Always model your specific deal — including local taxes, realistic vacancy, and your actual mortgage terms — before committing capital. WizeDeal can help you model your specific property.
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Sources: CCIM Institute · Urban Land Institute · Investopedia Real Estate · RICS Valuation Standards. ⚠️ Educational content only — not investment or financial advice. Real returns depend on financing, vacancy, taxes, and market conditions specific to each property. wizelife.ai · Privacy · Terms
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