Rental yield vs cash-on-cash return: the metric investors keep confusing

Gross yield is annual rent divided by property price. It ignores vacancy, maintenance, property tax and financing, so it is only useful for a first screen between markets.

Net yield uses net operating income — rent after vacancy and operating expenses — divided by total acquisition cost including stamp duty and brokerage. This is the number to compare against a fixed-deposit or bond alternative.

Cash-on-cash return divides post-EMI cash flow by the actual cash you put in. A leveraged property with 3% net yield can still show a strong cash-on-cash figure when rent comfortably covers the EMI, and a deeply negative one when it does not.

Always model at least one month of annual vacancy. Portfolios underwritten at 100% occupancy are the ones that disappoint in year two.