Let’s use one simple example all the way through.
Say you’re looking at a property that costs $500,000 and rents for $500 a week.
That means it could earn $26,000 a year in rent. Here’s what the different metrics look at:
Gross yield – the quick check
Gross yield is usually the first number investors look at.
It compares the annual rent with the purchase price.
In simple terms: Gross yield = annual rent ÷ purchase price
Using our example: Gross yield = $26,000 ÷ $500,000 = 5.2%
Gross yield is useful because it’s quick and easy to calculate.
The downside is that it doesn’t include any of the property’s costs. And it doesn’t consider that you might not have a tenant for all 52 weeks of the year.
So while it’s a useful first check, it shouldn’t be the only number you rely on.
Net yield – the better check
Net yield takes things a step further.
Instead of just looking at rent, it also includes operating costs like:
- rates
- insurance
- maintenance
- property management
- accountant fees
- vacancy
- body corporate or residents’ association fees
But it ignores your mortgage. That’s because everyone’s mortgage is different. We pay different interest rates, and some investors take out bigger mortgages than others.
So the net yield still just looks at the property.
In simple terms: Net yield = (annual rent - operating expenses) ÷ purchase price
Let’s say this property has $10,565 of operating expenses each year.
That means: Net yield = ($26,000 − $10,565) ÷ $500,000 = 3.1%
Net yield gives you a more realistic picture because it shows how much the expenses are eating into the property’s income.
Cashflow – the affordability check
Cashflow goes one step further again.
It includes operating expenses and mortgage costs.
This is often the number investors care about most because it tells you whether the property is likely to cost you money or make you money each year.
Let’s say this property has $14,000 of mortgage interest costs each year.
That means: Cashflow = $26,000 − $10,565 − $14,000 = $1,435
In this example, the property is cashflow positive.
That means the rent covers the expenses and leaves a little money left over.
But a cashflow-negative property is not automatically a bad investment.
A property might cost you $150 a week to hold, but if it increases in value by more than that you can still make money.
Which brings us to the final metric.
Return on investment – the decision metric
Gross yield, net yield and cashflow are all useful.
But they only tell part of the story.
Return on investment, or ROI, looks at the bigger picture.
In plain English: ROI works out how many dollars you may get back for every dollar you put in.
That’s important because property investors don’t just make money from rent.
They can also make money from:
- capital growth
- paying down debt
- rental cashflow
- increasing rents over time
This is why ROI is often the most useful metric when comparing two properties.
A good ROI calculation brings all the major parts of the investment together.
For example, one property might have stronger cashflow.
Another might have stronger growth potential.
Looking at cashflow alone won’t tell you which investment is better.
ROI helps you compare the total expected return against the money you actually need to put in.
But the catch is ROI is only as good as the assumptions behind it.
If you assume a property will grow by 6% a year and it only grows by 2%, the result will look very different.
The same is true if:
- interest rates rise
- rent grows more slowly
- maintenance costs are higher
- the property sits empty for longer
- tax rules change
That’s why it’s important to test different scenarios rather than relying on one optimistic forecast.
But the Return on Investment takes more number crunching. You can analyse investment properties for free using Opes+.
This is a free property-investing app we built to help investors run the numbers on their properties.
