There’s a reason rental yield is one of the first figures investors look at when assessing a buy-to-let property. It’s easy to calculate, straightforward to compare and gives an immediate indication of the income a property might generate relative to its purchase price.
But there’s a problem with relying too heavily on that one figure.
A property can have an attractive rental yield and still leave an investor with very little money at the end of the month.
The difference between income and cashflow
Imagine two properties, both advertised at £180,000 and both expected to generate £1,100 per month in rent.
Their gross rental yields are identical, at approximately 7.3%.
Looking at those figures alone, an investor might reasonably assume that their financial performance will be similar.
However, one property might require relatively little maintenance, have modest management costs and attract reliable long-term tenant demand. The other might have higher service charges, more frequent repairs and greater exposure to periods without rental income.
Add different mortgage arrangements into the equation and the gap between their actual monthly cashflow could be considerable.
The rental income is the same, but the amount the investor retains may be very different.
This is why gross yield is a useful starting point, rather than a conclusion.
What are the numbers really telling you?
When I look at a property opportunity, I’m interested in understanding what happens between the advertised rental income and the amount that could realistically remain after costs.
That means considering the obvious expenses, such as insurance, management fees and maintenance, alongside the costs that are easier to underestimate.
What allowance has been made for unexpected repairs? How would a month without a tenant affect the figures? Are there service charges, licensing requirements or other property-specific obligations?
Financing is another important consideration. An investment that appears comfortable at one borrowing rate might look considerably less attractive when the cost of finance changes.
And while an investor might choose to manage the property personally, that doesn’t mean management is free. Their time has a value, even if it doesn’t appear as a direct expense on the spreadsheet.
The purpose of asking these questions isn’t to find reasons to reject every deal. It’s to understand what the investment actually requires to perform as expected.
Cashflow needs room for reality
I think one of the most common mistakes in property investment is treating a projection as though it were a guarantee.
A spreadsheet can show a positive monthly surplus, but that figure depends on the assumptions entered into it.
If the calculation assumes uninterrupted rental income, minimal maintenance and no unexpected expenditure, it may be describing an ideal year rather than a realistic one.
That doesn’t necessarily mean the investment is unsuitable. It means the investor needs to understand how much room there is for things not to go according to plan.
A property generating a modest but resilient surplus may be more appropriate for one investor than a higher-yielding property with greater volatility.
It depends on their financial position, objectives and appetite for risk.
This is also why I don’t believe there is one rental yield that automatically makes a property a good investment.
The question is whether the return is sufficient for the costs, effort and risks involved.
Looking beyond the headline figure
Cashflow is the first pillar of my CORE Framework™, but it doesn’t operate in isolation.
A property may produce attractive cashflow while demanding significant operational involvement. Another may perform well today but depend on an uncertain refinancing or exit strategy.
A proper assessment needs to consider the investment as a whole.
If you’re currently looking at a property opportunity, it may be worth revisiting the figures and asking whether they reflect realistic conditions rather than the most favourable outcome.
I’ve developed a free CORE Deal Scorecard to help investors take that first step, assessing an opportunity across Cashflow, Operations, Risk and Exit.
You can access it here:
https://mlpropertyventure.co.uk/deal-scorecard/
It’s a starting point for identifying what looks promising, what needs further investigation and where your assumptions may need challenging.
Because rental income tells you what might come in.
Cashflow helps you understand what might actually be left.
Melissa Lewis BA (Hons)
Founder & CEO, ML Property Venture
Creator of the CORE Framework™
