The Myth: Rental Yield is the Only Metric That Matters
New investors chase high gross yields without accounting for voids, management costs, maintenance, and financing. Net cash flow and return on capital are far more important measures.
Gross rental yield is the first number quoted in any property listing — typically calculated as (annual rent / purchase price) × 100. A 10% yield sounds impressive. But this number is often misleading without context.
The critical metric is net cash flow after all costs. For a typical HMO with a 10% gross yield, deduct: mortgage interest (assume 6% on 75% LTV), 15% for HMO management, council tax, all utilities, 1–2 months of void per year, and ongoing maintenance (typically budgeted at 1% of property value annually). The net yield can drop to 3–4%, sometimes less.
Even more importantly, sophisticated investors measure Return on Capital Deployed (ROCD) — the net annual profit as a percentage of their actual cash invested, after financing. A property generating £5,000 net profit where you invested £30,000 as a deposit represents a 16.7% ROCD, regardless of its quoted yield. This metric correctly captures the power of leverage.