Every rental listing pitched as an investment leads with the same number, and it is the least informative one available. Gross yield is annual rent divided by price, and it deliberately pretends the property costs nothing to own.
The gap between gross and net is not a small adjustment. For a typical single-family rental in the US, net yield commonly lands near half the gross figure, and occasionally below it.
The two calculations
Gross yield is annual rent divided by purchase price. Buy at $300,000, rent at $2,000 a month, and you have $24,000 of annual rent against $300,000, which is 8%. It is genuinely useful for one thing: comparing many listings quickly before doing real work on any of them.
Net yield is annual rent minus annual operating expenses, divided by total acquisition cost — the price plus closing costs plus whatever it took to make the place rentable. That denominator change alone matters: $300,000 plus $7,000 in closing costs plus $3,000 in initial repairs is $310,000 of capital actually deployed.
The expense list nobody writes out
Property taxes come first and vary enormously by location — the national average effective rate is roughly 0.99% of home value annually, but the real range across states runs from around 0.3% to over 2.2%. On a $300,000 property that is anywhere from $900 to $6,600 a year, which alone can decide whether a deal works.
Landlord insurance costs more than an owner-occupied policy, typically by a noticeable margin, because it covers liability and loss of rents.
Vacancy is a cost even though it is not a bill. A property that is empty one month a year is running at roughly 92% occupancy, which removes about 8% of gross rent before anything else.
Maintenance and repairs are the ongoing small items — plumbing, appliances, paint between tenants. A common planning figure is 1% of property value per year, though older properties run higher.
Capital expenditure reserves cover the big-ticket replacements: roof, HVAC, water heater, flooring. These do not occur annually, which is exactly why they get omitted. A roof with a 25-year life and a $12,000 replacement cost is $480 a year whether or not you spend it this year.
Property management runs roughly 8% to 12% of collected rent if you hire it out. If you self-manage, you have not eliminated the cost — you have chosen to be paid it in labor, and you should still price it when comparing to a passive investment.
The worked example
Take the $300,000 property renting at $2,000 a month, gross yield 8%.
Annual gross rent: $24,000. Subtract vacancy at 8%, or $1,920. Property taxes at 1.1%: $3,300. Insurance: $1,800. Maintenance at 1% of value: $3,000. Capital reserves: $2,400. Self-managed, so no management fee.
Total operating expenses: $12,420. Net operating income: $11,580. Against $310,000 of acquisition cost, net yield is about 3.7%.
The listing said 8%. The property returns 3.7% before financing and before taxes on the income. That is not a bad property — it is a normally performing one, described honestly.
Where financing enters
Net yield deliberately excludes the mortgage, because it measures the asset rather than your financing choices. The metric that includes debt service is cash-on-cash return: annual cash flow after the mortgage payment, divided by the cash you actually invested.
Leverage cuts both ways here in a way gross yield hides completely. If the property nets 3.7% and your mortgage costs 6.5%, borrowing reduces your return rather than amplifying it — you are paying more for the money than the asset produces. Positive leverage requires the net yield to exceed the borrowing rate, and in higher-rate environments that is a demanding bar for many markets.
The tax layer
Rental income is taxable and reported on Schedule E, but the deductions are substantial. Mortgage interest, property taxes, insurance, repairs, management fees, and travel related to the property are generally deductible against rental income.
Depreciation is the significant one. Residential rental property is depreciated over 27.5 years, which produces an annual paper deduction on the building portion — not the land — that reduces taxable income without a cash outlay. It is also why the after-tax return on a rental frequently looks better than the pre-tax net yield.
The catch arrives at sale, through depreciation recapture: the IRS taxes the accumulated depreciation you claimed, generally at up to 25%. Depreciation is a deferral with a bill attached, not a permanent exemption.
How to screen honestly
Use gross yield to sort a long list and net yield to evaluate anything you are serious about. Get the actual property tax bill for the specific parcel rather than a state average, get a real insurance quote, and price capital reserves based on the age of the roof and mechanical systems rather than a percentage.
And apply the 50% rule as a reality check on your own numbers. If your projected operating expenses come to 25% of gross rent, you have probably left something out — most often reserves, vacancy, or the value of your own time.