Rental Yield on an Income Property: How to Calculate Gross vs Net Yield (Formula and Example)

Rental yield on an income property is the percentage ratio between the annual income the property generates and the total investment in it, and it is the key metric that determines whether an investment apartment truly pays off. Many investors look only at the price of the apartment and the expected rent, but without an orderly yield calculation it is impossible to know whether a deal is good or merely mediocre. This guide explains the difference between gross yield and net yield, gives the exact formula with a shekel example, details which costs you must include, and what counts as a good yield in Israel.

What Is Rental Yield on an Income Property

Yield is the way to measure "how hard your money is working." Instead of comparing apartments by price or by rent alone, yield translates those two numbers into a single percentage you can use to compare different properties, and even to compare real estate against other investment channels.

There are two types of yield worth knowing: current yield (from rent) and yield from capital appreciation. This guide focuses mainly on current yield, because it is the one under your control and can be calculated in advance. It is a foundational layer of any smart real estate investment.

Gross Yield: The Simple Formula

Gross yield is the basic, quick calculation, the one that appears in almost every listing. It ignores expenses and taxes, which makes it an excellent tool for initial screening but not for a final decision.

The Formula

Gross yield = (annual rent / property price) x 100

A Shekel Example

Suppose an apartment bought for 1,500,000 NIS and rented for 5,000 NIS a month:

• Annual rent: 5,000 x 12 = 60,000 NIS
• Gross yield: 60,000 / 1,500,000 = 0.04, that is 4%

4% sounds nice, but this is the "before everything" number. Now let us see what happens once we subtract the real costs.

Net Yield: The Real Number

Net yield is the yield after all expenses, and this is the number that truly matters to a serious investor. It accounts for both the costs associated with the purchase and the ongoing expenses that eat into the rent.

The Formula

Net yield = (annual net income / total investment) x 100

• Annual net income = annual rent minus all ongoing expenses and tax.
• Total investment = property price plus all purchase costs (purchase tax, lawyer, brokerage, initial renovation).

A Shekel Example (continued)

Back to the apartment from the example. We add the purchase costs:

• Purchase tax (investment apartment, generally around 8% on the first portion): about 120,000 NIS
• Lawyer and brokerage fees: about 35,000 NIS
• Initial renovation and preparation: about 30,000 NIS
• Total investment: 1,500,000 + 185,000 = 1,685,000 NIS

Now we calculate the annual net income:

• Annual rent: 60,000 NIS
• Allowance for vacant periods (about one month a year): minus 5,000 NIS
• Ongoing maintenance and repairs: minus 3,600 NIS
• Building insurance: minus 1,200 NIS
• Annual net income: about 50,000 NIS

Net yield: 50,000 / 1,685,000 = about 3.0%.

Notice what happened: the gross yield of 4% shrank to a net yield of only about 3%. That gap, of a quarter of the yield and more, is exactly what separates an amateur investor from one who understands the numbers.

Comparison Table: Gross Yield vs Net Yield

Parameter	Gross yield	Net yield
What goes in the numerator	Annual rent only	Rent minus expenses and tax
What goes in the denominator	Property price only	Price + all purchase costs
Accuracy	Low, for initial screening	High, for decision-making
In our example	4%	About 3%
When to use	Quick comparison between properties	Real feasibility analysis

Which Costs You Must Include

This is where the gap between an impressive calculation on paper and reality lies. These are the costs many investors "forget":

One-time purchase costs

• Purchase tax: on a second apartment or more, the tax rate is significantly higher than on a single home, and it is updated every year.
• Lawyer, brokerage and appraiser: together they generally range between 2% and 4% of the property price.
• Initial renovation and improvement: to bring the property to a state that can be rented at the desired price.

Ongoing annual costs

• Vacant periods (Vacancy): there will almost always be a month or more a year in which the apartment sits empty between tenants.
• Maintenance and repairs: a broken water heater, a leak, painting. A rule of thumb is to set aside a certain percentage of the rent into a repairs reserve.
• Building insurance and sometimes the house committee: usually the tenant pays municipal tax and the committee, but not always.
• Tax on rental income: in Israel there is an exemption path up to a monthly ceiling that is updated every year, and above it there is a reduced 10% path and a regular path. It is important to check which path you fall into, because it directly affects the net yield.

The cost of financing

If the apartment was bought with a mortgage, the monthly payment is a significant cash-flow expense. This is why building the right mortgage consulting, with a mix coordinated to the rent, can be the difference between a property that holds itself and one that pushes you into negative cash flow.

What Counts as a Good Yield in Israel

There is no single magic number, because yield varies greatly by region and property type. That said, here are some general ranges common in the Israeli market:

• Residential real estate in central Israel: usually a relatively low current yield, often in the range of 2.5% to 3.5%. The investor here is betting mainly on capital appreciation.
• Residential real estate in the periphery: a higher current yield, sometimes 4% to 6%, but the appreciation potential is usually more moderate.
• Commercial real estate (offices, shops): the highest yield, generally 6% to 8%, but the risk and complexity are also higher.

The important rule: an especially high yield is almost always a sign of higher risk. Yield must always be weighed against the level of risk, the stability of the area, and the expected quality of tenants.

Current Yield vs Capital Appreciation

This is one of the most important distinctions, and many confuse it. The total return of a real estate investment is made up of two engines:

1. Current yield: the money that comes in every month from rent. This is what we calculated so far.
2. Capital appreciation: the growth in the value of the property itself over time. It is a "paper" gain until you sell, but it is usually the larger part of the total return in Israel.

A central property with a current yield of only 3% may be an excellent investment if it sits in an area with high appreciation potential. In contrast, a peripheral property with a 6% yield may "stand still" in terms of value. A smart investor examines both engines together and does not fall in love with a single number.

Cash on Cash Yield: When There Is Leverage

Until now we calculated yield on the full value of the property. But when you use a mortgage, you invest only part of the money from your pocket, and the yield on your actual money can look very different. This is called cash-on-cash yield:

Cash-on-cash yield = (annual net cash flow after the mortgage payment / the equity you invested) x 100

In the current interest-rate environment, in a leveraged deal many discover that the running cash flow after the mortgage is close to zero or even negative, and the real profit comes from a combination of reducing the mortgage principal and appreciation. This is where the power of proper leverage in real estate investment comes in, which can dramatically increase the yield on equity but also increases the risk. It is a powerful tool that requires a professional hand.

If you are considering buying an income property, it is worth doing so with professional guidance. Gil Finance's real estate investment guidance examines the numbers coldly before you sign.

Frequently Asked Questions About Rental Yield on an Income Property

What is the difference between gross yield and net yield? Gross yield calculates only the annual rent divided by the property price, and ignores expenses. Net yield subtracts all expenses (purchase tax, maintenance, vacancy, income tax) and divides by the total investment. The net is the real number on which a decision is made.

What is a good yield on an investment apartment in Israel? There is no single number. In residential property in central Israel, a current yield of 3% is considered reasonable; in the periphery you can reach 4% to 6%, and in commercial real estate even higher. You must always weigh the yield against the risk and against the appreciation potential.

Do I need to include the mortgage in the yield calculation? When calculating the yield of the property itself (gross and net) you do not include the mortgage, in order to compare properties on a uniform basis. But to understand the yield on your actual money, you calculate cash-on-cash yield, which does take the mortgage payment into account.

Is a higher yield always better? No. An especially high yield usually signals higher risk: a less stable area, less reliable tenants, or low appreciation potential. The goal is the right balance between yield, risk, and growth potential, in line with your objectives.

The First Step - A Free Diagnostic Call

Calculating the correct yield on an income property, one that includes all the hidden costs and the financing structure, is the difference between a winning investment and an expensive mistake. The first step is a free initial diagnostic call, with no obligation. Booking a diagnostic call will give you a cold, professional analysis of the feasibility before you sign.

Gil Finance guides real estate investors in yield analysis and in building the financing structure: consulting by Gil Asher Levy, a consultant licensed by the Ministry of Finance, a former senior banking manager at Bank Leumi with over 19 years of experience, holder of an M.A. in Economics and an MBA, and a 4.9-star rating across 81 Google reviews. A strategic approach, full transparency, and personal guidance. The first consultation is free.