By James Crawford • Published 23 February 2026 • Last reviewed 8 March 2026
By James Crawford • Updated March 2026
I had a mate who bought a "7% yield" property in Nottingham in 2022. He was buzzing — thought he'd found the secret to passive income. Eighteen months later he was haemorrhaging cash every month. What went wrong? He'd looked at the gross yield on the Rightmove listing and assumed that was his return. It wasn't. Not even close. This guide shows you the real picture — what you actually take home after mortgage interest, voids, maintenance, tax, and the £15,000 stamp duty surcharge you forgot about.
Gross rental yield is simple: annual rent divided by property price, expressed as a percentage. A property worth £250,000 renting for £1,200/month has a gross yield of 5.76% (£14,400 ÷ £250,000). Use our Rental Yield Calculator for instant figures.
Net rental yield deducts operating costs — letting agent fees, landlord insurance, maintenance — from the annual rent before dividing by purchase price. A realistic net yield is typically 1–2 percentage points below gross.
Cash-on-cash ROI goes further: it measures the return on the actual cash you put into the deal, not the total property value. This is what matters to leveraged investors.
The distinction matters enormously. A 5% gross yield can translate to a 7–12% cash-on-cash ROI with leverage — or a negative return after tax and mortgage costs if you're on the wrong side of Section 24.
Let's use a concrete property: a 2-bed terraced house in Headingley, Leeds, purchased for £250,000. Market rent: £1,100/month (£13,200/year).
| Item | Amount |
|---|---|
| Deposit (25%) | £62,500 |
| Stamp Duty (standard rates + 5% surcharge) | £15,000 |
| Solicitor / Conveyancing | £1,800 |
| Mortgage Arrangement Fee | £1,000 |
| Survey | £600 |
| Initial refurb / repairs | £2,500 |
| Total Cash In | £83,400 |
The stamp duty calculation: £250,000 standard rates (0% on £125k, 2% on next £125k = £2,500) plus 5% surcharge on the full price (£12,500) = £15,000 total. Use our Stamp Duty Calculator with "additional property" selected to verify your figure.
| Item | Amount |
|---|---|
| Gross rent (£1,100 × 12) | £13,200 |
| Void allowance (~6 weeks/year) | −£1,527 |
| Letting agent fees (12% of rent collected) | −£1,404 |
| Landlord insurance | −£400 |
| Maintenance & repairs allowance (1% of value) | −£2,500 |
| Gas safety, EICR, misc compliance | −£300 |
| Mortgage interest (£187,500 @ 4.5%) | −£8,438 |
| Net Cash Flow (before tax) | −£1,369 |
Wait — it's loss-making before tax? On paper, yes. But this doesn't account for capital growth or equity paydown. The question is whether the total return (capital + income) justifies the cash invested and the hassle. Many landlords in this position have historically relied on capital appreciation to make the numbers work — a riskier proposition than it was pre-2016.
Section 24 of the Finance Act 2015 is, frankly, the reason thousands of small landlords have sold up since 2020. Before Section 24 was phased in between 2017 and 2020, landlords could deduct 100% of their mortgage interest from rental income before calculating tax. After Section 24, they can only claim a 20% tax credit on mortgage interest — regardless of their actual tax rate.
This means a higher-rate (40%) taxpayer who previously paid 40% tax on the profit (rent minus mortgage interest) now pays 40% tax on the rent, then claims back only 20% of the mortgage interest as a credit. The effective tax rate on the underlying profit can exceed 100% in some cases.
Returning to the Leeds example (assuming a 40% taxpayer):
Basic-rate (20%) taxpayers are less affected but still disadvantaged versus the pre-2017 regime. Holding property in a limited company avoids Section 24 entirely (companies can still deduct mortgage interest), but comes with additional costs (corporation tax, different mortgage products, higher rates).
The October 2024 Autumn Budget increased the additional property stamp duty surcharge from 3% to 5%. This significantly raised the entry cost for buy-to-let investors. On our £250k Leeds example, the surcharge alone costs £12,500 — money you need to earn back through rental income before you see any real return.
Combined with the April 2025 threshold reversion (which increased standard SDLT rates), an investor buying at £250k in 2026 pays £2,500 more in stamp duty than they would have paid in March 2025. These successive changes have meaningfully shifted the ROI calculus against new property investors.
Despite negative cash flow, the overall return picture improves when you factor in equity growth (capital appreciation + mortgage paydown).
| Return Component | Year 1 Value | Notes |
|---|---|---|
| Net cash flow (after tax, 40% payer) | −£3,069 | Cash cost to hold |
| Mortgage capital repaid | +£3,200 | Approx. on 25yr repayment |
| Capital appreciation (3.5%) | +£8,750 | Unrealised until sale |
| Total Return | +£8,881 | |
| Cash-on-Cash ROI | 10.6% | £8,881 ÷ £83,400 |
This looks decent — but it relies entirely on capital growth materialising. Strip out the appreciation assumption and the return is 0.2% (just the equity paydown net of the cash loss). The risk/reward trade-off for a leveraged property investment is fundamentally different from what it was a decade ago.
| Investment | Approx. Long-Run Return | Effort | Tax Complexity |
|---|---|---|---|
| UK Buy-to-Let (leveraged, 40% taxpayer) | 8–12% (capital-driven) | High | Very High (Section 24, CGT, stamp duty) |
| S&P 500 Index Fund (ISA) | ~10% (historical) | Very Low | None (in ISA) |
| FTSE All-Share Index Fund (ISA) | ~7–8% (historical) | Very Low | None (in ISA) |
| UK Buy-to-Let (cash purchase, basic rate) | 5–7% (income + growth) | High | Moderate |
| REITs (Real Estate Investment Trusts) | ~7–9% | Very Low | Low (in ISA) |
The S&P 500 comparison is frequently cited and increasingly compelling. Since 1990, the US index has returned approximately 10.5% per year in total return terms, with no void periods, no boiler replacement bills, and no tenant disputes. A basic-rate taxpayer can shelter the full return inside a Stocks and Shares ISA (up to £20,000/year). The counterargument from property investors: leverage amplifies returns in a way that isn't easily replicated in stock markets at the retail level. That's true — but leverage also amplifies losses, and the risk is concentrated in a single illiquid asset.
A realistic target for buy-to-let in 2026 depends heavily on your tax position and the market you're investing in:
Properties in London rarely hit 4% gross yield in 2026, let alone net positive cash flow on a leveraged basis. This is why experienced investors increasingly focus on Northern cities where yields are higher — and why our Manchester, Birmingham, and Liverpool location guides are among our most-read content.
It depends on your tax position, market choice, and investment horizon. For basic-rate taxpayers buying in high-yield markets with a 10+ year view, it can still make sense. For higher-rate taxpayers in low-yield markets, the numbers often don't stack up after Section 24 and the stamp duty surcharge.
If you're a higher-rate taxpayer, Section 24 means you can no longer deduct mortgage interest from rental income before calculating tax. Instead, you get a 20% tax credit. This can turn a nominally profitable rental into a loss-making investment on a cash basis. Consider taking specialist tax advice before purchasing, or explore whether a limited company structure is more appropriate.
Since October 2024, the additional property surcharge is 5% on top of standard stamp duty rates. On a £250k investment property, you'd pay £2,500 in standard SDLT (0% on first £125k, 2% on next £125k) plus £12,500 surcharge = £15,000 total. See our Stamp Duty Calculator — select "Additional property" to get your exact figure.
A limited company can deduct 100% of mortgage interest (avoiding Section 24), and pays corporation tax at 25% rather than income tax at 40–45%. However, company buy-to-let mortgages typically carry higher rates, you'll pay additional tax when extracting profits as dividends, and there's no capital gains tax annual exempt amount. Take advice from an accountant who specialises in property investment before deciding.
Calculate gross and net rental yield for any property:
Rental Yield Calculator →Sources: HMRC Stamp Duty Land Tax guidance, HMRC Section 24 mortgage interest restriction guidance, ARLA Propertymark letting agent fee data, MSCI Real Estate annual returns. This article is for information only and does not constitute financial advice. See our Disclaimer.