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Living FranchiseROI, ROCE and yield in property: what’s the difference?
When it comes to investing in property, metrics are crucial.
Yield measures a property’s rental income as a percentage of its price. ROCE, or return on capital employed, measures your annual profit as a percentage of the cash you actually put in. ROI, or return on investment, measures your total profit as a percentage of your total investment. Yield compares properties. ROCE and ROI show how hard your own money is working.
Here’s how to calculate each one, with a worked example.
Key takeaways
- Gross yield = annual rent ÷ property price × 100
- Net yield = (annual rent − running costs) ÷ property price × 100
- ROCE = annual profit ÷ cash you put in × 100
- ROI = total profit ÷ total investment × 100
What is rental yield?
Yield tells you how much rent a property earns compared with its price. It’s the quickest way to compare properties.
Gross yield uses rent before costs. Net yield takes off running costs such as management, insurance, maintenance and void periods, so it’s more realistic.
Yield doesn’t account for your mortgage, so it doesn’t show your return on your own cash.
For step-by-step worked examples, read how to calculate rental yield.
What is ROCE?
Return on capital employed shows your annual profit as a percentage of the money you’ve put in, such as your deposit, stamp duty, fees and refurbishment. It’s sometimes called cash-on-cash return.
ROCE is useful when you use a mortgage, because it shows how hard your own cash is working.
What is ROI?
Return on investment shows your total profit as a percentage of your total investment. It can include rental profit and capital growth over the whole time you own the property.
In property, people often use ROI and ROCE to mean the same thing. When someone quotes a return, always ask how they worked it out.
A worked example
This is an illustration, not a forecast.
| Item | Amount |
|---|---|
| Purchase price | £150,000 |
| Rent | £950 a month (£11,400 a year) |
| Running costs | £2,400 a year |
| Mortgage, 75%, interest only at 5% | £5,625 a year |
| Cash put in: 25% deposit, stamp duty and fees | £47,000 |
- Gross yield: £11,400 ÷ £150,000 = 7.6%
- Net yield: (£11,400 − £2,400) ÷ £150,000 = 6.0%
- Annual profit: £11,400 − £2,400 − £5,625 = £3,375
- ROCE: £3,375 ÷ £47,000 = 7.2%
Profit is before tax.
Which measure should you use?
- Comparing properties or areas? Use net yield.
- Working out the return on your cash each year? Use ROCE.
- Looking at the whole investment, including growth? Use ROI.
Good deals are judged on all three. A high yield on a property that needs constant repairs can still give a poor return.
What is a good ROCE or ROI in property?
There’s no single target, because it depends on your strategy, how much risk you take and how you finance the deal. Many investors compare their ROCE with what the same cash could earn elsewhere, such as savings or shares, and expect property to beat it to make up for the extra work and risk. Yields vary by area and strategy too, usually higher in the North and Midlands than in London, and higher for HMOs than single lets. See what counts as a good rental yield in the UK.
Frequently asked questions
What is the difference between ROI and yield?
Yield is rent as a percentage of the property’s price. ROI is your profit as a percentage of what you invested, which takes your mortgage and costs into account.
How do you calculate ROCE in property?
Divide your annual profit by the cash you put in, then multiply by 100.
Is gross or net yield more useful?
Net yield, because it includes running costs. Gross yield is useful for a quick first comparison.
Is ROCE the same as cash-on-cash return?
Usually, yes. Both show your annual profit as a percentage of the cash you put into the deal, such as your deposit, stamp duty, fees and refurbishment.
How do you calculate ROI on a rental property?
Add up your total profit, including rental profit and any increase in value, then divide by your total investment and multiply by 100. Always state the time period and what’s included, as people calculate ROI in different ways.
Find deals investors want
Investors judge every deal on these numbers. Sourced Property Partners learn to analyse deals properly, with Deal Analysts checking the figures before deals reach investors.
