You've got some spare cash and the idea of "letting the rent cover the mortgage" sounds tempting. Hold on and run the numbers first. Whether buying to rent makes sense comes down to one figure — rental yield. It tells you how much a 1,000,000 property pays back each year, and directly shows whether buy-to-let beats a fund. Let's calculate it properly.
How to Calculate Rental Yield: The Basic Formula and Quick Estimates
The most common formula is simple: annual rental yield = annual rental income ÷ property price × 100%. For a 1,000,000 home renting at 3,000 a month, annual rent is 36,000, so yield = 36,000 ÷ 1,000,000 = 3.6%. This is the "gross yield," which ignores all holding costs — perfect for quickly comparing properties against each other.
By city tier, core districts in first-tier cities have high prices and typically yield only 1.5%-2.5%; many hot second-tier cities run 2.5%-3.5%; some third- and fourth-tier cities reach 4%-5%. A high yield isn't automatically good — vacancy, resale difficulty, and weak price growth in smaller cities can drag everything down. Use the percentage calculator to quickly find the annual rent share, and the mortgage calculator to work out the monthly payment on a leveraged purchase before comparing it with rent.
| Property Price | Monthly Rent | Annual Rent | Gross Yield |
|---|---|---|---|
| 1,000,000 | 2,500 | 30,000 | 3.0% |
| 1,000,000 | 3,000 | 36,000 | 3.6% |
| 1,500,000 | 4,000 | 48,000 | 3.2% |
| 800,000 | 2,800 | 33,600 | 4.2% |
The Adjusted Yield: Don't Skip Fees, Vacancy, and Renovation
The gross yield looks good, but the net yield must subtract every holding cost. Adjusted formula: net annual yield = (annual rent - management fee - annualized maintenance - annualized vacancy loss - property tax) ÷ (price + transaction tax + renovation). Every item bites into profit.
A complete example: a 1,000,000 home with 50,000 in taxes and renovation, monthly rent 3,000, annual rent 36,000. Management fee 2,400 a year, maintenance 1,000, vacancy loss at 10% = 3,600, property tax (if any) 2,000. Net annual income = 36,000 - 2,400 - 1,000 - 3,600 - 2,000 = 27,000. Total invested = 1,050,000. Net yield = 27,000 ÷ 1,050,000 ≈ 2.57% — a full percentage point below the 3.6% gross figure. The higher the vacancy and the more frequent the repairs, the uglier the real yield.
If you bought on a mortgage, factor in the interest too: 300,000 down, 700,000 borrowed at 3.5%, monthly payment about 3,142 — while rent is only 3,000. Rent doesn't cover the mortgage, and you're topping up 142 a month plus the management fee. In that case "rent covers the mortgage" is a nice idea on paper, but the cash-flow hole has to come from your income. To model how different down payments, rates, and rents change the payment-vs-rent gap, run the loan calculator and the mortgage calculator together.
Buy-to-Let vs. Investing in Funds: Compare Real Yields
To judge value, compare the property's net yield with similar-risk investments. In the example above, a 1,000,000 property nets about 2.57% while shouldering price volatility, vacancy, maintenance, and policy risk — yet a 10-year government bond yields about 2.5%-3%, a pure bond fund 3%-4%, and a large-denomination CD around 2.5%. Without clear price-appreciation expectations, property doesn't clearly win.
But property has its own unique value: leverage (300,000 controls a 1,000,000 asset, so a 10% price rise is a 33% return on your down payment), inflation resistance (rents rise with inflation), and psychological security. So the rational conclusion isn't "buy-to-let is good" or "bad" — it's three questions: ① does the net yield beat similar-risk investments; ② what's your long-term view on this city's prices; ③ are you willing to be a landlord with vacancy and repairs? To quantify "how much must prices rise to make it worthwhile," use the percentage calculator to back out the required appreciation, and the loan calculator to price the leverage cost — the answer will surface on its own.
FAQ
Q1: What rental yield counts as worthwhile?
There's no absolute standard. Roughly, above 4% is excellent (beats most low-risk investments), around 3% is ordinary, and below 2.5% without appreciation expectations is probably not worth it. Judge it together with the city, vacancy, and price outlook.
Q2: What's the difference between gross and net yield?
Gross yield is just "annual rent ÷ price," ignoring costs. Net yield subtracts management fees, maintenance, vacancy, taxes, and renovation. Make decisions on the net figure; use gross only for quick screening.
Q3: Can I still buy to rent if rent doesn't cover the mortgage?
You can, but recognize that "rent covers the mortgage" basically fails in low-yield cities. The gap comes from your salary or other income — in effect you're swapping monthly payments for an asset plus price appreciation. It suits people bullish on long-term appreciation, not people expecting rent to cover everything.
Q4: Which numbers must I check before buying to rent?
Four: the net yield, the mortgage-vs-rent gap, the realistic vacancy and maintenance levels, and the holding cost if prices don't rise. If all four still look reasonable, then it's worth considering.