A rental property is a machine for producing cash. Everything else — the kitchen, the neighbourhood, the view — matters only insofar as it affects how much cash comes out and how reliably.

1. Gross yield: the two-second filter

Annual rent ÷ purchase price. It ignores every cost, so it is not a decision — it is a filter. If the gross yield is already poor before costs, no amount of spreadsheet work will rescue it. Use it to bin listings quickly.

2. Net yield: the number that means something

Now subtract everything the agent left out:

  • maintenance fund, building insurance, property tax
  • vacancy — budget for at least a month a year, whatever the agent says
  • repairs and periodic renewal of the kitchen, bathroom, appliances
  • letting fees or your own time managing it
  • income tax on the rent

Add purchase costs to the denominator too — transfer tax, legal fees, survey, initial furnishing. That money is spent whether you like it or not, and ignoring it flatters your return.

The gap between gross and net is routinely a third or more of the headline number. That gap is where amateur landlords lose their margin.

3. Cash-on-cash: what you actually earn on your money

With a mortgage, the yields above stop telling the real story. Cash-on-cash return = annual cash flow after the mortgage payment ÷ the cash you actually put in.

This is where leverage shows its face in both directions. A modest net yield can become a strong cash-on-cash return if borrowing is cheap — and turn negative the moment rates rise past your rental yield.

The comparison people avoid

Run your net yield against what the same deposit would do in a broad index fund, honestly, including your time. Property can still win — leverage is a real advantage, and few brokers will lend you 80% to buy shares. But make the comparison explicitly rather than assuming bricks are safer.

Summary

Filter on gross, decide on net, size the leverage with cash-on-cash. And treat every optimistic assumption — no vacancy, no repairs, rent rising forever — as the place your investment case will break.