Rental investing guide
Rental Yield vs. Cap Rate: What Should a Landlord Use?
Both metrics help screen rental properties, but they answer different questions. Use the right one at the right stage of your underwriting.
Gross rental yield is a quick screen
Gross rental yield divides annual rent by purchase price. It is fast and useful when comparing a long list of properties, but it ignores taxes, insurance, maintenance, vacancy, management, and financing. A high gross yield can hide expensive ownership costs.
Net yield removes operating costs
Net rental yield subtracts recurring operating costs from annual rent before dividing by the purchase price. Include property taxes, insurance, HOA dues, routine maintenance, and a realistic vacancy reserve. Keep mortgage payments separate because financing differs between buyers.
Cap rate measures the property before debt
Capitalization rate, or cap rate, is net operating income divided by the property's value or purchase price. It helps compare assets with different financing structures, while cash-on-cash return answers a different question about the buyer's invested equity.
A practical sequence
Use gross yield to eliminate obviously weak deals, net yield to understand recurring operations, and cap rate to compare properties before financing. Then run the mortgage assumptions separately and review monthly cash flow.
Put the numbers into practice
Choose a local benchmark and test the assumptions with our free calculator.
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