A landlord could describe the same £200,000 rental property as producing £12,000 a year in rent, a 6% gross yield, a 3.55% net operating yield or an annual cash loss. All four statements can be true at the same time, because each one measures something different.
That is why asking how much profit a buy-to-let makes is harder than taking the monthly rent and subtracting the mortgage payment. The number that appears most prominently on a property listing is usually several steps removed from what ultimately reaches the owner’s bank account. This article follows one illustrative property from advertised rent through acquisition costs, operating expenses, mortgage interest and tax, with every assumption stated plainly so the same method can be applied to a real property using its own figures.
The example property
To keep every figure traceable, this uses a single illustrative property, with assumptions stated clearly and rounded for clarity. None of the figures below represents a guaranteed or typical outcome for any real property — they’re a worked example of the method.
Purchase price: £200,000. Deposit: 25%, or £50,000. Mortgage: £150,000, on an interest-only basis at an illustrative rate of 4.9%. Achievable monthly rent when occupied: £1,000, giving potential annual gross rent of £12,000.
The example assumes the property is bought by an individual landlord who already owns another residential property and therefore pays the higher rates of Stamp Duty Land Tax applying to an additional property in England. The tax examples later also assume individual rather than company ownership.
Step one: gross yield
Gross yield is simply potential annual rent as a percentage of the purchase price: £12,000 ÷ £200,000 = 6.0%. This is a genuinely useful first screening tool — it lets you compare properties quickly and tells you how much rent the asset potentially produces relative to its price — but it is exactly that: a screening tool, not a profit figure.
It says nothing about financing costs, running costs, void periods or tax, all of which sit between this number and anything a landlord actually keeps.
Step two: what it costs to get in
Before any rent is collected, this purchase requires the £50,000 deposit; £11,500 of higher-rate Stamp Duty Land Tax on this £200,000 purchase, assuming the higher rates apply; legal fees of around £1,500; a survey at around £500; an initial refurbishment and furnishing allowance of £2,000; and a mortgage arrangement fee of around £1,500, assuming that fee is paid upfront rather than added to the mortgage.
Total cash committed to acquire and prepare this property: approximately £67,000.
The transaction-tax position differs in Scotland and Wales, and the amount due can also depend on the buyer and transaction, so the applicable property tax should always be calculated for the actual purchase.
The £67,000 figure matters because it is the amount any return on the investor’s cash should actually be measured against — not the £50,000 deposit alone. The deposit becomes equity in the property; the SDLT, legal costs, survey, mortgage fee and initial setup expenditure do not. They are nevertheless real cash the investor has had to commit before earning the first pound of rent.
Step three: operating costs
Working through an illustrative annual cost base for this property, excluding mortgage interest for now:
- Letting and management: £1,200
- Landlord insurance: £350
- Maintenance and repairs: £2,000
- Compliance costs: approximately £150
- Void allowance: £900, representing roughly four weeks without rent
- Accountancy: £300
Total operating costs and modelled lost rent: £4,900.
These are planning assumptions, not standard costs every landlord will incur. Maintenance in particular can be highly uneven: one year may involve little more than routine work, while another may bring a boiler replacement, roof problem, damp investigation or other substantial repair that overwhelms a tidy annual allowance.
Nor is the list exhaustive. A leasehold property may carry service charges and major-works costs; some properties may require licensing; and there may be landlord-paid utilities, council tax during void periods or other property-specific expenditure. Those costs need adding where they actually apply rather than being ignored simply because they do not appear in a standard yield formula.
Subtracting the £4,900 of operating costs and modelled lost rent from the £12,000 potential annual rent leaves £7,100. This is the amount remaining before mortgage interest and tax. Already, the original £12,000 rent has fallen substantially, but £7,100 still is not the landlord’s profit.
Step four: financing cost
The mortgage interest on this example — £150,000 at 4.9%, interest-only — costs £7,350 a year. Because the mortgage is interest-only, none of that £7,350 reduces the £150,000 loan balance. A repayment mortgage would require higher monthly payments but would also reduce the outstanding debt, so cash flow and equity building would need to be considered separately.
Subtracting the financing cost from the £7,100 remaining after operating costs gives £7,100 − £7,350 = −£250. Before tax is even considered, this particular property, at this rent, purchase price, cost base and mortgage rate, is running at a small cash loss for the year.
That does not make a 6% gross yield mathematically wrong. It shows that gross yield and cash profit are answering different questions.
Step five: tax — and why it doesn’t simply follow cash flow
This is where the calculation becomes less intuitive. Since April 2020, an individual landlord with finance costs relating to residential property cannot generally deduct those finance costs from rental income in the same way as ordinary operating expenses when calculating taxable property profit. Instead, qualifying finance costs can generate a basic-rate tax reduction.
There is an important distinction in this worked example. The £900 void allowance above is useful for investment modelling, but it is not itself an allowable tax expense. If the assumed void actually occurs, the landlord simply receives less rent. For the tax calculation, therefore, assume approximately £11,100 of rent is actually received after the modelled void and £4,000 of qualifying non-finance expenditure is incurred. That again produces £7,100 of property profit for tax purposes. HMRC’s guidance on allowable rental expenses covers the types of costs that can potentially be deducted, depending on what the expenditure actually represents.
The finance-cost tax reduction is also not automatically 20% of the full £7,350 mortgage interest. HMRC calculates the reduction using 20% of the lowest of the relevant finance costs, property-business profits and adjusted total income. In this example, assuming adjusted total income is not the limiting figure, the lower amount is the £7,100 property profit, so the available tax reduction is £1,420.
For a landlord in England, Wales or Northern Ireland whose entire £7,100 property profit falls within the 40% higher-rate Income Tax band, £2,840 of tax would initially arise on that profit. Deducting the £1,420 finance-cost tax reduction leaves approximately £1,420 of Income Tax attributable to the property. Added to the £250 pre-tax cash shortfall, the investment leaves that landlord approximately £1,670 worse off in cash terms for the year, before any capital repayment or change in the property’s value.
For an equivalent landlord whose entire £7,100 property profit falls within the 20% basic-rate band, the initial £1,420 tax charge is offset by the £1,420 finance-cost tax reduction. The property therefore remains around £250 cash-negative for the year rather than producing a meaningful rental profit.
Because only £7,100 of the £7,350 finance cost has been used in calculating the tax reduction, the remaining amount may be carried forward under the finance-cost rules, subject to the landlord’s circumstances.
These examples deliberately simplify the wider Income Tax calculation. Personal Allowance, other income, losses and the landlord’s overall tax position can change the result, while Scottish Income Tax bands and rates differ. The finance-cost restriction also does not apply to UK-resident companies in the same way, so a company-owned buy-to-let needs its own calculation rather than taking this example and simply replacing Income Tax with Corporation Tax.
The important point is that two people can own economically identical rental properties and retain different amounts of cash because the owner’s tax position and ownership structure form part of the profitability calculation.
By this stage, the same £200,000 property has produced several perfectly valid figures:
| Measure | Illustrative result | What it tells you |
|---|---|---|
| Potential annual rent | £12,000 | Rent if occupied throughout the year |
| Gross yield | 6.0% | Potential rent relative to purchase price |
| Income after operating costs and modelled void | £7,100 | Property performance before finance and tax |
| Net operating yield | 3.55% | £7,100 relative to the £200,000 property price |
| Pre-tax cash flow after mortgage interest | −£250 | Cash result before tax |
| Post-tax cash flow, illustrative basic-rate case | −£250 | Approximate annual retained cash result |
| Post-tax cash flow, illustrative higher-rate case | −£1,670 | Approximate annual retained cash result |
None of these figures is inherently the return. They measure different stages of the investment, which is why a 6% gross yield and a £250 annual cash loss can describe exactly the same property without contradiction.
What net yield actually means — and why it varies by source
Net yield is commonly calculated as annual rental income after relevant operating costs, divided by property value. Using the convention applied here, £7,100 ÷ £200,000 gives a net operating yield of 3.55%, before financing and tax.
The difficulty is that “net yield” is not always used consistently. Some calculations include mortgage interest and some do not; some make an allowance for voids while others assume full occupancy; some use the purchase price as the denominator while others consider acquisition costs as well.
A quoted net yield is therefore only as useful as the assumptions sitting underneath it. Two properties can both be advertised with a 5% “net yield” while the calculations behind those percentages contain different costs. The workings matter more than the label.
Cash flow: what actually happens to the bank balance
Setting aside the yield percentages, cash flow answers a simpler question: after money comes in and money goes out, what actually happens to the landlord’s bank balance?
On this example, the answer before tax is an annual cash loss of £250. For the illustrative basic-rate taxpayer, that remains approximately £250 negative after tax. For the illustrative higher-rate taxpayer, the interaction between taxable property profit and restricted finance-cost relief increases the annual cash loss to approximately £1,670.
This is why a property can have a positive rental yield while still requiring its owner to put money into it, and why monthly rent should never be treated as monthly profit.
Return on the cash actually invested
There is one more calculation that answers a different investment question. The owner has not merely invested the £50,000 deposit: this example required approximately £67,000 of cash to acquire and establish the property.
Cash-on-cash return measures the annual cash result against that actual capital commitment. A £250 annual cash loss represents a return of about −0.4% on £67,000 in the illustrative basic-rate case. A £1,670 annual cash loss represents roughly −2.5% in the illustrative higher-rate case.
Those percentages tell a very different story from the original 6% gross yield. This is not because one calculation is correct and another is wrong; they measure different things. Gross yield describes the relationship between potential rent and property price, while cash-on-cash return asks what the investor’s actual cash commitment is producing after the relevant cash costs have been paid.
For an investor comparing property with other possible uses of their capital, that distinction is fundamental.
Rental income is not the only possible source of property-investment return, of course. If the property increases in value over time, the owner may ultimately make money through capital appreciation even where annual rental cash flow is modest or negative. But capital growth should be kept separate from the rental-income calculation.
This worked example does not assume that the £200,000 property will become worth £220,000, £250,000 or any other future figure. Whatever capital growth eventually occurs is uncertain, and selling a property can also involve transaction costs and potentially tax. Using an assumed future house-price increase to make an otherwise weak rental-return calculation look attractive therefore changes the proposition: the investor is no longer demonstrating that the property generates strong rental profit, but relying partly on an expectation about its future sale value.
Why a high headline yield can still disappoint
Consider two properties side by side. Property A is a leasehold flat advertised at a punchy 8% gross yield, but carries a substantial service charge, sits in a building with known upcoming major works and experiences meaningful costs between tenancies.
Property B is a freehold house advertised at a more modest 5.5% gross yield, with no service charge, lower anticipated maintenance expenditure because of its condition and fewer property-specific costs.
It is entirely possible, once every relevant cost is included, for Property B to leave its owner with more cash than Property A despite the lower advertised yield. Gross yield does not reveal that difference because gross yield stops at the rent. Profitability does not.
What to actually do with this framework
Applied to a specific property, this method turns an advertised percentage into something much more useful. Potential rent gives the starting point; acquisition costs reveal how much capital has actually been committed; operating costs and voids show what the property consumes simply by being owned and let; financing determines what leverage costs; and tax converts an accounting profit into the amount the particular owner may ultimately retain.
The result is not one magic percentage but several figures that answer different questions: gross yield, net operating yield, pre-tax cash flow, post-tax cash flow and return on the cash actually invested.
Whether buy-to-let as a broader investment is attractive involves questions beyond this calculation — financing risk, capital-growth expectations, time commitment, liquidity and what else the investor could do with the same money. Those are considered in our broader Is Buy-to-Let Still Worth It? guide.
But the narrower question here — how much profit does this rental property actually make? — should be answerable without optimism or guesswork.
The calculation starts with the rent on the listing. It ends with what the investor actually retains. Everything in between is where the difference lies.
This article provides a general illustrative framework and is not personalised financial, investment or tax advice. All figures in the worked example are hypothetical and for illustration only. Actual rental yields, costs, financing, tax treatment and returns depend on the property, ownership structure and investor’s individual circumstances, and tax rules can change. Take appropriate independent financial and tax advice before making an investment decision.
