Rental yield tells you what you earn annually. Capital gain tells you what you made when you sell. Neither figure alone tells you whether the investment was actually good. Total return — combining rental income, capital appreciation, and mortgage equity — is the only meaningful measure.
Use the Property ROI Calculator to calculate total return, annualised CAGR, and equity built across any holding period.
The Three Components of Property Return
A buy-to-let property generates returns from three sources:
1. Rental income The net cash flow you receive over the holding period, after all costs and taxes.
2. Capital gain The increase in property value from purchase to sale. This is the most powerful driver of wealth in high-demand areas.
3. Equity built (leveraged buyers) If you used a mortgage, your equity grows as the mortgage balance reduces. On a £200,000 mortgage over 10 years at 5%, you repay roughly £44,000 in capital — this is equity you own, independent of capital appreciation.
Calculating Total ROI
Total ROI = (Total net profit ÷ Initial cash invested) × 100
Where total net profit = net rental income + capital gain + equity built (mortgage repayments) And initial cash invested = deposit + stamp duty + legal fees + any refurbishment costs
Worked example:
- Property purchased: £300,000
- Deposit: £75,000 (25%)
- Purchase costs (SDLT, legal): £15,000
- Total cash invested: £90,000
- Held for 10 years
- Property value at sale: £420,000 → capital gain: £120,000
- Net rental income over 10 years: £60,000
- Mortgage capital repaid over 10 years: £40,000 (counts as equity)
Total profit = £120,000 + £60,000 + £40,000 = £220,000 Total ROI = (£220,000 ÷ £90,000) × 100 = 244%
That is your total return over the investment period. But it tells you nothing about how this compares to other investments held for the same time.
Annualised Return: CAGR
To compare property with stocks, savings accounts, or other assets, you need the Compound Annual Growth Rate (CAGR) — the annualised equivalent return.
CAGR = ((Final value ÷ Initial investment) ^ (1 ÷ years)) − 1
Using the example above:
- Final value = £90,000 + £220,000 = £310,000
- Initial investment = £90,000
- Years = 10
CAGR = ((£310,000 ÷ £90,000) ^ (1 ÷ 10)) − 1 = 13.2% per year
This allows direct comparison with index fund returns (historically 7–10% annualised for global equities) or other investments.
The Power of Leverage on Returns
The property example above generated a capital gain of £120,000 on a £300,000 property — a 40% property value increase. But measured against the cash invested (£90,000 deposit + costs), the capital gain alone represents 133% return on cash.
This is the leverage effect: a 40% increase in property value generates a 133% return on your deposited capital.
The flip side: a 30% property value fall wipes out the entire deposit.
What Counts as a Good Property ROI?
Benchmarks vary by investment strategy:
| Investment approach | Typical annualised return target |
|---|---|
| Income-focused (net yield) | 4–7% per year |
| Balanced (yield + capital growth) | 8–12% per year |
| Capital growth focus (London, Edinburgh) | Varies widely; 10%+ CAGR in strong markets |
| Comparison: global equities (historical) | 7–10% per year |
| Comparison: UK house price index (long-term) | 4–6% per year |
Property often beats pure capital return benchmarks when leverage is applied in a rising market — but underperforms in flat or declining markets when running costs, transaction costs, and taxes are accounted for.
Transaction Costs Significantly Affect ROI
Property transaction costs are high relative to financial assets:
- Buying: Stamp duty (up to 15%), legal fees (£1,500–£3,000), survey (£500–£1,500), mortgage arrangement fee
- Selling: Estate agent fees (1–3%), legal fees (£1,000–£2,000), Capital Gains Tax
On a £300,000 property, total round-trip transaction costs might be £25,000–£40,000. This means short holding periods generate poor or negative returns even if property values rise modestly.
The general rule: a minimum 5–7 year holding period is needed to amortise transaction costs and allow compound growth to work.
Don't Forget Tax on the Sale
Capital Gains Tax (CGT) applies to the profit on sale:
- 18% (basic-rate taxpayers)
- 24% (higher/additional rate taxpayers)
On a £120,000 capital gain with the £3,000 annual exemption, a higher-rate taxpayer pays approximately £28,000 in CGT — a significant drag on total ROI.
Use the Property ROI Calculator to model total return scenarios including capital growth assumptions, rental income, mortgage equity, and holding periods.