Investment
How to Calculate Rental Yield on Property: Gross vs Net Explained
A step-by-step method for calculating gross and net rental yield, which costs to include, common mistakes, and how to use the result when comparing properties.
By Naimat Khan7 min read
Rental yield is the yearly rent a property earns, shown as a percentage of what the property cost. Gross yield uses rent alone; net yield subtracts the running costs first, and is the figure that tells you what you actually keep. This guide shows how to calculate both correctly, which costs people forget, and how to use the result when comparing properties.
Gross rental yield: the quick first check
The gross yield formula is simple:
Gross yield (%) = annual rent ÷ property price × 100
Annual rent is the monthly rent multiplied by 12. Property price is the purchase price (or the current market value, if you already own it and want to know what it earns today).
Example
A house costs Rs 20,000,000 and could rent for Rs 80,000 a month.
- Annual rent: 80,000 × 12 = Rs 960,000
- Gross yield: 960,000 ÷ 20,000,000 × 100 = 4.8%
Gross yield is useful for screening several properties quickly, but it overstates what an owner earns because no property is rented for free.
Net rental yield: what you actually keep
Net yield (%) = (annual rent − annual running costs) ÷ total cost of the property × 100
Two things change compared with gross yield: costs are deducted from the rent, and the denominator includes what it really cost to acquire the property, not just the headline price.
Running costs to deduct
- Vacancy: the months between tenants when no rent comes in. Even one empty month a year cuts income by about 8%.
- Repairs and maintenance: paint, plumbing, electrical work, geysers, and repairs after a tenant leaves.
- Property tax and society charges: provincial urban immovable property tax where it applies, and any society maintenance or service charges the owner pays.
- Management or dealer fees: if a dealer finds tenants or someone manages the property for you, especially if you live abroad.
- Insurance and utilities paid by the owner, if any.
Acquisition costs to add to the price
- Withholding taxes at purchase (for example under section 236K, explained in our filer vs non-filer guide)
- Provincial stamp duty, registration or society transfer fees
- Dealer commission and legal or documentation costs
- Any renovation needed before the first tenant
Worked example
Using the same hypothetical house:
| Item | Amount (Rs) |
|---|---|
| Annual rent (80,000 × 12) | 960,000 |
| Vacancy (one month) | − 80,000 |
| Repairs and maintenance | − 60,000 |
| Property tax and charges | − 20,000 |
| Net annual income | 800,000 |
| Purchase price | 20,000,000 |
| Taxes, fees and commission at purchase | 1,000,000 |
| Total cost | 21,000,000 |
Net yield: 800,000 ÷ 21,000,000 × 100 = about 3.8%, compared with a gross yield of 4.8%. The one-percentage-point gap is typical of what happens once real costs are counted, and it can be larger for older houses or properties that take longer to rent.
Income tax on rent
Rent from property is taxed in Pakistan as "income from property" under section 15 of the Income Tax Ordinance, 2001. Certain tenants, such as companies and government bodies, are required to withhold tax from rent under section 155. The yields above are before income tax. If you want an after-tax figure, apply the rate that fits your situation from FBR's current withholding tax rate card, or ask a tax adviser, and include rental income in your annual return.
Common mistakes when calculating rental yield
- 1Using the asking rent instead of the achieved rent. Check what similar properties nearby are actually rented for, not what owners advertise.
- 2Assuming 12 months of rent every year. Build in at least some vacancy.
- 3Ignoring purchase costs. Taxes and fees at purchase increase your real cost base.
- 4Comparing gross yield on one property with net yield on another. Use the same method for every option.
- 5Treating yield as total return. Yield measures income only. Any change in the property's value is separate and uncertain, and should not be assumed.
How to use rental yield in a decision
Compare like with like
Calculate net yield for each property you are considering, using the same cost assumptions. A cheaper property with a slightly lower rent can have a better yield than an expensive one, and the reverse is also true.
Compare with alternatives
Many investors compare net rental yield with returns available from bank deposits or government savings, which move with the State Bank of Pakistan's interest rates. Property has extra costs and effort (tenants, repairs, slower sale), so a fair comparison should account for that. Check current rates on the SBP website rather than relying on old figures.
Look beyond the number
Tenant demand, the condition of the building, how easy the property is to resell, and how much management it needs all matter as much as the percentage. Our guide on what to review beyond the price covers these factors.
A simple rental yield worksheet
Before you visit a property or pay any token money, run through these steps on paper or in a spreadsheet:
- 1Write down the asking price and add an estimate of purchase taxes, transfer or registration fees and commission.
- 2Collect three to five achieved rents for similar properties nearby (same size, age and portion type).
- 3Multiply a conservative monthly rent by 11 instead of 12 to allow for one vacant month, or by 10 if the area rents slowly.
- 4Subtract a yearly allowance for repairs, property tax, society charges and any management fee.
- 5Divide the result by the total cost and multiply by 100 to get net yield.
- 6Repeat with a lower rent and higher repair cost to see how sensitive the result is.
Stress-test your numbers
Using the hypothetical house above, if the achieved rent turned out to be Rs 70,000 instead of Rs 80,000, annual rent would be Rs 840,000. After one vacant month (Rs 70,000), repairs (Rs 60,000) and property tax and charges (Rs 20,000), net income would be Rs 690,000, and net yield would fall to about 3.3% (690,000 ÷ 21,000,000 × 100). The exact figure matters less than the habit of checking it. A property that only works on the most optimistic rent and zero vacancy is a weaker investment than one that still produces a reasonable net yield under cautious assumptions.
How NASASI Estate helps
NASASI Estate provides property advisory for buyers and investors in Quetta, including help collecting realistic rent comparisons, reviewing documents and estimating purchase costs before you commit. Overseas Pakistanis can also get support with documentation and local coordination. Visit our investment page or advisory services, browse properties for sale, or contact us.
Frequently asked questions
What is the difference between gross and net rental yield?
Gross yield divides annual rent by the property price. Net yield first subtracts running costs such as vacancy, repairs and property tax, and divides by the total cost including purchase taxes and fees. Net yield is the more realistic measure.
Should I use the purchase price or current value?
Use the purchase price plus acquisition costs when assessing a new purchase. For a property you already own, using current market value shows what your money is earning today compared with selling and investing elsewhere.
Is a higher rental yield always better?
Not necessarily. A high yield can reflect higher risk, an older building, frequent vacancies or weaker resale demand. Treat yield as one input alongside location, condition and liquidity.
Does rental yield include price growth?
No. Rental yield measures income only. Changes in property value are separate, uncertain and should not be assumed when calculating yield.
