What is rental yield?
It is the percentage that the money you invest in a buy-to-let property gives you back each year. It lets you compare one property with another and with other investments.
The catch is that it can be worked out in many ways. Listings usually quote gross yield, the highest and least realistic figure: it ignores purchase taxes, yearly costs and income tax. To decide, look at net yield and, if you buy with a mortgage, at the return on the cash you put in.
The four figures and their formulas
- Gross yield = one year's rent ÷ purchase price. Quick for comparing, but optimistic.
- Net yield = (yearly rent − yearly costs) ÷ everything invested (price, purchase costs and refurbishment). It is the figure that really describes the property.
- Return on the cash you put in (ROI or cash on cash) = what you keep in the year after the mortgage and taxes ÷ the money out of your pocket (deposit, purchase costs and refurbishment). It is the one that matters if you buy with a mortgage.
- Cash flow = what comes in each month − everything that goes out (costs, mortgage payment and taxes). If it is negative, you top it up every month.
Which costs to include
- When buying: property transfer tax (or VAT and stamp duty on a new build), the notary, the land registry, the conveyancing agent, the bank valuation and, if needed, refurbishment and furniture. Transfer tax ranges from 3% to 13% depending on the region: check yours.
- Every year: service charges, property tax, home insurance (and rent-default insurance if you take it), upkeep, a reserve for refurbishments and the months the property is empty.
- With a mortgage: the interest and any insurance the bank asks for. The part of the payment that repays the loan is not a cost, but it does come out of your pocket every month.
- Taxes on the rent: income tax on what you keep (see below).
How rental income is taxed
In Spain, what you earn from letting is taxed under income tax. You start from the rent collected and subtract deductible costs: mortgage interest, property tax, service charges, insurance, repairs and depreciation (3% a year of the value of the building, not the land). What is left is the net income.
For a long-term residential let, that income gets a reduction: 50% in general and up to 90% for some contracts in high-demand areas signed from 26 May 2023. The result is added to your other income and taxed at your income tax rate. Holiday and seasonal lets get no reduction.
The calculator does this with your actual rate or with the income tax scale based on your other income.
What is a good yield?
It depends on the city and the risk. With official data from the Spanish Ministry of Housing, the median gross yield of the 52 provincial capitals is 4.1%: from 5.8% in Lleida to 3.1% in A Coruña. Check your city.
As a guide: with a gross yield below 5% the net yield rarely goes above 3%, and with an 80% mortgage the cash flow usually turns negative. Always compare the net yield with what that money would earn risk-free, and bear in mind appreciation, which in many cities contributes the most over the long term.
The effect of the mortgage
The same flat from the example, bought outright, leaves you €675 a month: 4.8% on the €168,850 you put in. With the mortgage you put in only €56,850; the cash flow drops to €169 a month and the cash you put in returns 3.6% a year, because each payment repays part of the loan.
The advantage of the mortgage shows over the years: with much less money you own the same flat, what you repay on the loan becomes your wealth and the appreciation is on the whole property. That is why the IRR, which counts all of that plus the sale, is 11.5% over 10 years with the mortgage against 6.6% buying outright. In exchange, the risk rises if the rent falls or interest rates go up.
Common mistakes when working out the yield
- Taking the gross yield from the listing as if it were the net yield.
- Forgetting purchase costs: transfer tax alone can be more than a year's rent.
- Not allowing for empty months, unpaid rent or one-off building levies.
- Forgetting income tax on the rent.
- Using the rent of the priciest listing in the area instead of what is actually paid.
- Comparing a mortgaged property and a cash purchase with the same figure.
What this calculator does
Free and without signing up: the verdict, monthly cash flow, gross yield and return on the cash you put in, with the transfer tax and taxes of the region. With a free account, every input: costs, empty months, income tax, appreciation…
With a plan, the full study: detailed taxes, IRR, sale scenarios, 10-year projection, sensitivity, PDF report and the yield map, which finds properties for sale that pay. See an example full study.
Calculators for each type of let