Return on Investment (ROI) and Deal Calculations

The formulas at a glance

The Example Used on This Page

These are the sums investors, lenders and buyers run on every deal. Most landlords know them well; the detail is simply easy to lose track of when you only run the numbers every few years. To keep everything comparable, each calculation below uses the same buy-to-let house, bought by an individual landlord in England in 2026. The figures are for illustration only: your own rent, costs, mortgage rate and tax position will differ.

The Stamp Duty figure uses the higher rates for additional homes: 5% on the first £125,000 and 7% on the next £75,000. See Stamp Duty Land Tax for the current bands.

Gross Yield and Net Yield

Gross yield is the quickest comparison between properties: annual rent ÷ price × 100. Here, £12,000 ÷ £200,000 × 100 = 6.0%.

Net yield takes off the running costs first. Allowing two weeks of void each year, the rent actually collected is £11,538 rather than £12,000.

Net yield normally leaves out mortgage interest and tax, so it compares properties regardless of how each one is financed. Some investors divide by the total cost including Stamp Duty and fees rather than the price, which gives a lower and more realistic figure for a new purchase. Either works, as long as two deals are compared on the same basis. There is more on this in Rental Yield and Void Periods.

Gross Profit and Net Profit

In a letting business, gross profit is the rent you actually collect less the costs of the property itself. Net profit is what remains once overheads and mortgage interest have been taken off as well. Accountants sometimes draw these lines slightly differently, so it is worth checking what is included when comparing figures from different sources.

As margins, gross profit is 73% of the rent collected (£8,453 ÷ £11,538) and net profit before tax is 10.4% (£1,203 ÷ £11,538). Which costs count against rent for tax is covered in Allowable Expenses for Landlords.

Net Profit After Tax and Section 24

Individual landlords cannot deduct mortgage interest from rent. Tax is worked out on the profit before interest, and the interest then earns a tax credit at the basic rate, 20% in the 2026 to 2027 tax year. This is Section 24, and it is why the same property can give two landlords very different results.

On these figures a higher-rate taxpayer pays more tax than the property makes, even though it shows a profit before tax. Property income tax rates are due to rise by two percentage points from April 2027, with the finance cost credit rising to 22%, so the sums are worth re-running each year. Limited companies deduct interest in full and pay Corporation Tax instead; see Limited Company (SPV) Portfolio.

Return on Investment (ROI) and Cash-on-Cash Return

ROI asks what the money you personally put in is earning. For a single year of letting this is often called the cash-on-cash return: net profit ÷ cash put in × 100.

Here, £1,203 ÷ £65,000 × 100 = 1.9% before tax, or 1.5% after tax for a basic-rate landlord (£962 ÷ £65,000).

That can look low next to a 6% gross yield, and the gap often surprises people. It comes from the buying costs, the running costs and, above all, the mortgage interest. A cash buyer of the same house would put in £215,000 and keep the whole £7,953 operating profit, a return of 3.7% before tax.

ROI over the whole life of an investment also takes in capital growth and the cost of selling, which is covered under total return below.

Return on Capital Employed (ROCE)

ROCE measures how hard all the money tied up in the property is working, whether it is yours or the lender’s. It uses profit before interest and tax, so the way the deal is financed does not distort it.

ROCE = operating profit ÷ capital employed × 100. Capital employed is everything invested, here £215,000 (the £150,000 mortgage plus your £65,000). So £7,953 ÷ £215,000 × 100 = 3.7%.

The useful comparison is ROCE against the mortgage rate. The property earns 3.7% on every pound, but the borrowed pounds cost 4.5%, so on income alone the mortgage lowers your return (1.9% rather than 3.7%). When ROCE is higher than the borrowing rate, gearing raises the return instead. Capital growth can change the picture, which is why landlords look at both.

For a portfolio held for many years, capital employed is often measured at today’s value, or from the balance sheet as total assets less current liabilities. Today’s value gives a fairer view of what the equity could earn elsewhere, and is one of the measures landlords use when weighing up refinancing versus selling.

Total Return Including Growth and a Sale

Suppose the house is sold after five years for £230,000, with £4,000 of selling costs, the rent unchanged and the landlord a basic-rate taxpayer throughout.

For Capital Gains Tax, the gain is the £230,000 sale price less the £4,000 selling costs, the £200,000 price and the £15,000 buying costs, which comes to £11,000. After the £3,000 annual exempt amount, the remaining £8,000 is taxed here at 24%, although part may be at 18% if you have basic-rate band left. See Capital Gains Tax (CGT).

Dividing 21.4% by five gives 4.3% a year, but that simple average flatters the result slightly because the money is tied up for the whole period. The annualised (compound) figure, (£78,890 ÷ £65,000) to the power of 1/5, minus 1, is the one to compare with a savings rate or a pension.

Other Checks Worth Running

• Break-even rent: the rent that covers every cost including interest. Here it is roughly £10,335 a year, or about £860 a month, so a fall in rent or a longer void can remove the profit quickly.
• Interest cover ratio: lenders compare the rent with the interest at a stressed rate. At 5.5%, £12,000 ÷ £8,250 = 145%. See Interest Cover Ratio.
• Loan to value: £150,000 ÷ £200,000 = 75% at purchase, falling to about 65% if the value reaches £230,000. See Loan to Value.
• Cash flow versus profit: on a repayment mortgage, the capital part of each payment is not a cost for profit or tax, but it still leaves your account. Cash flow can be negative while the accounts show a profit.
• Payback period: cash put in ÷ annual profit after tax. On income alone it is very long in this example, which shows how much a typical buy-to-let relies on growth.

Points That Are Easy to Mix Up

• A gross yield on the asking price and a net yield on the total cost are both valid, but they cannot be compared with each other.
• Leaving out voids, or the cost of replacing furniture and white goods, flatters a net yield.
• The capital repaid on a repayment mortgage is not a cost for profit, though it does affect cash flow.
• Since Section 24, mortgage interest is not fully deductible for an individual landlord.
• A one-year cash-on-cash return and an ROI that includes five years of growth measure different things.
• When deciding whether to keep a property, today’s value usually tells you more than the price you paid.

How Buyers Use These Numbers

Investor buyers run the same sums from the other side. They usually start from the net yield they need and work back to a price, so rent levels, running costs and the length of the tenancies all feed into what they offer. A clear rent schedule and cost history lets a buyer price on facts rather than cautious assumptions. Our landlord exit calculator shows how the numbers change if you sell, and a desktop market appraisal gives a current value to use in the ROCE and loan to value figures above.

Official Sources and Further Reading

• GOV.UK: Stamp Duty Land Tax residential property rates
• GOV.UK: renting out a property: paying tax
• GOV.UK: tax relief for residential landlords: how it is worked out
• GOV.UK: tax when you sell property
• HMRC Property Income Manual

General information for landlords in England, checked against official sources in October 2026. It is not tax, legal or financial advice: speak to a qualified accountant or solicitor about your own circumstances.