Gross yield divides a property's annual rent by its purchase price. Net yield subtracts operating costs before dividing. Cap rate uses net operating income against current market value rather than purchase price, which is why the three numbers rarely match for the same property. This is information about how the math works, not investment advice.
The distinction matters more when financing costs are moving. The average rate on a 30-year fixed mortgage was 6.65 percent for the week of August 20, 2026, down slightly from 6.67 percent the week before, according to Freddie Mac's Primary Mortgage Market Survey. A year earlier the rate stood at 6.58 percent. None of that changes a property's cap rate, which is calculated independent of any loan. It changes what a leveraged buyer keeps after debt service, which is a different number entirely.
What Is Gross Rental Yield?
Gross rental yield is the ratio of a property's annual rent to its purchase price, expressed as a percentage. A property bought for $250,000 that rents for $24,000 a year has a gross yield of 9.6 percent: $24,000 divided by $250,000. It is the fastest way to screen listings because it needs only two numbers, and it is also the least reliable, because it ignores every dollar the owner has to spend to keep the unit rented.
Gross yield answers a narrow question: how large is the rent check relative to the sticker price. It says nothing about vacancy, repairs, insurance, property tax, management fees, or the cost of a mortgage. Two properties with identical gross yields can produce very different cash in an owner's pocket once those costs are subtracted.
What Is Net Rental Yield?
Net rental yield starts from the same rent figure but subtracts operating expenses before dividing by purchase price. A landlord on the same $250,000 property collecting $24,000 in rent, paying $4,000 in property tax and insurance, $2,500 in maintenance and reserves, and $1,200 in a vacancy allowance, is left with $16,300 in net operating income. Divided by the $250,000 purchase price, that is a net yield of 6.5 percent, three points lower than the gross figure. These dollar amounts are an illustration built on assumed expense ratios, not a forecast for any specific property or market.
Net yield still excludes debt service. A mortgage payment is a financing decision, not an operating cost, so most yield definitions used by appraisers and analysts keep it out of the numerator. That convention lets two buyers compare a property's underlying performance even if one pays cash and the other borrows.
What Is a Cap Rate, and How Does It Differ From Yield?
Cap rate, short for capitalization rate, is the ratio of a property's net operating income to its current market value, not its original purchase price. On the day a property is bought, cap rate and net yield are usually the same number, because market value and purchase price are assumed to match. After that, the two figures split apart as the property appreciates or depreciates while net operating income moves on its own track.
Take the property above at its $16,300 net operating income. If its market value later rises to $290,000 while net operating income holds steady, the cap rate on that new value falls to 5.6 percent, even though the yield the original buyer earns on their original $250,000 purchase price stays at 6.5 percent. Cap rate is a snapshot of current value against current income; yield on cost is anchored to what the owner actually paid. Appraisers and brokers quote cap rate because it lets them compare properties at today's prices; owners often track yield on cost because it reflects their own basis.
How Does Financing Change the Yield a Landlord Actually Sees?
Neither gross yield, net yield, nor cap rate accounts for a mortgage. Cash-on-cash return does: it divides the cash that lands in an owner's pocket after debt service by the actual cash invested, typically a down payment plus closing costs. That is the number most sensitive to a rate change like the one Freddie Mac reported for the week of August 20, 2026.
Using the same illustration, a buyer who puts 25 percent down on the $250,000 property finances $187,500. At an illustrative 6.65 percent rate on a 30-year fixed loan, principal and interest run to roughly $1,203 a month, or about $14,436 a year, before taxes and insurance escrow. Subtracting that from the $16,300 net operating income leaves about $1,864 in annual cash flow on a $62,500 cash investment, a cash-on-cash return near 3 percent. That figure moves with every basis point of interest-rate change even though the property's cap rate does not move at all. These numbers are again an illustration built on stated assumptions, not a projection of what any real loan or property will produce.
What Rent Figure Should Go Into the Calculation?
Every version of yield starts with an accurate rent number, and that is where estimates go wrong most often. Owners who plug in an optimistic asking rent instead of an achievable one overstate every yield figure downstream. One government benchmark for a defensible starting point is the Fair Market Rent, published annually by the Department of Housing and Urban Development. HUD's Fair Market Rents are built from Census Bureau American Community Survey data and represent the 40th percentile of gross rents for standard-quality units in a metropolitan area or county, covering fiscal year 2026 as of this writing.
Fair Market Rent was designed to set voucher payment standards, not to price a market-rate lease, so it works better as a floor check than a target. A landlord whose planned asking rent sits far above the local Fair Market Rent for a comparable unit size should treat that gap as a flag to verify against actual local listings before using it in a yield calculation.
Why Does Vacancy Belong in the Net Yield Calculation?
A rent figure only produces income when a unit is occupied, which is why net yield calculations should build in a vacancy allowance rather than assume twelve months of paid rent every year. The national rental vacancy rate was 7.3 percent in the second quarter of 2026, according to the Census Bureau's Housing Vacancy Survey, compared with a 1.2 percent vacancy rate for owner-occupied housing over the same period. That figure is a national average; local vacancy varies by metro and property type, and the survey does not break out small-landlord single-family rentals separately from larger multifamily stock.
A landlord modeling net yield with zero vacancy assumption is modeling a best case, not a typical one. Building even a conservative allowance, drawn from local vacancy data where available, into the operating-expense side of the net yield formula keeps the resulting figure closer to what an owner is likely to collect over a full year.
What Is a Good Cap Rate for a Rental Property?
There is no single cap rate that qualifies as good across markets, property types, and risk tolerances; the honest answer is that it depends on measurable, comparable factors. A lower cap rate generally signals a market where buyers accept less current income relative to price because they expect more price appreciation, lower risk, or both, which is why cap rates in high-demand coastal metros typically sit below cap rates in slower-growth secondary markets. A higher cap rate signals more current income relative to price, which can mean a bargain or can mean the market is pricing in more risk, more deferred maintenance, or slower rent growth.
Comparing a cap rate in isolation, without checking it against recent sales of similar properties in the same submarket, tells an owner little. The number only becomes useful in relative terms: this property's cap rate against comparable properties that traded recently in the same area, at the same property class, at the same tenant quality.
How the Numbers Fit Together
| Metric | Formula | Illustration Result | What It Excludes |
|---|---|---|---|
| Gross yield | Annual rent / purchase price | 9.6% | Expenses, vacancy, financing |
| Net yield | (Annual rent - operating expenses) / purchase price | 6.5% | Financing costs |
| Cap rate | Net operating income / current market value | 6.5% at purchase; 5.6% after value rises to $290,000 | Financing costs; anchored to current value, not cost basis |
| Cash-on-cash return | Annual cash flow after debt service / cash invested | ~3.0% | Nothing, but sensitive to mortgage rate |
All figures in the table use the same illustrative $250,000 property with stated assumptions above; they are not a forecast, a recommendation, or a guarantee of return for any actual property.
The Bottom Line
Gross yield, net yield, cap rate, and cash-on-cash return answer four different questions with four different formulas, and none of them is wrong, they are simply not interchangeable. Gross yield screens quickly but ignores costs. Net yield and cap rate both account for operating expenses but diverge once market value moves away from purchase price. Cash-on-cash return is the only one of the four that responds to the mortgage rate a buyer locks in, which is why it moved along with the rate environment Freddie Mac reported for the week of August 20, 2026, while the underlying property's cap rate held still. Matching the right metric to the right question is the first step in any rental-property math, before any judgment about whether a specific deal makes sense, which this piece does not offer.
For a related analysis perspective, read New Federal Law Curbs Big Investors As Rental Vacancy Holds At 7.3%.
For more context, read How Newark's Rent Control Board Limits Annual Rent Increases.
For more context, read How a 1031 Exchange Lets Landlords Defer Capital Gains Tax.
For more context, read The 45-Day and 180-Day Rules That Govern a 1031 Exchange.