What Makes a Good Property Investment: Yields, Returns and Key Factors

Understanding what separates a profitable investment from a costly mistake

Property investment can be one of the most effective ways to build wealth, but not every property makes a good investment. The difference between a profitable buy-to-let and a money pit often comes down to understanding a few key principles before you buy.

This guide covers the yields landlords should realistically target, the metrics that actually matter, and the factors that determine whether an investment will thrive or struggle over the long term.

What yields should landlords target?

Yield is the starting point for any property investment analysis, but which yield matters depends on what you are trying to achieve.

Gross yield is the simplest calculation: annual rent divided by purchase price. While easy to calculate and widely quoted, it tells you very little about actual profitability.

Net yield subtracts running costs from rent before dividing by the purchase price. This is more meaningful but still not the complete picture.

Cash-on-cash return measures the actual cash you receive relative to the cash you invested. This is often the most relevant metric for leveraged investors.

As a general guide for the UK market:

• Gross yield: 5-8% is typical, with higher yields often found in northern cities and lower yields in London and the South East
• Net yield: Aim for at least 3-5% after all operating costs
• Monthly cashflow: Target positive cashflow of at least £200-300 per month after mortgage payments
• Cash-on-cash return: 8-15% is generally considered good for leveraged investments

Remember: a high gross yield can mask a terrible investment if costs are high. Always calculate net figures.

The metrics that actually determine profitability

Beyond headline yield, several metrics determine whether an investment genuinely works.

Monthly cashflow

The most important practical metric. If your property does not generate positive cashflow after all costs and mortgage payments, you are subsidising it from your own pocket. This is only sustainable if you have strong reasons to expect capital growth or rental increases.

Break-even interest rate

This tells you how high mortgage rates can rise before your property stops making money. If your break-even rate is only 1% above your current rate, you have very little safety margin. Aim for at least 2-3% headroom.

Return on equity

As property values rise and you pay down mortgages, you accumulate equity. The question becomes whether that equity is working efficiently. A property worth £300,000 with £200,000 equity earning £6,000 per year is only delivering 3% on your capital—you might do better elsewhere.

Location factors that affect returns

Where you buy has an enormous impact on both yield and capital growth potential.

Tenant demand

High tenant demand means shorter void periods and stronger negotiating position on rent. Look for areas with employment growth, universities, transport links, and amenities. Low demand areas might offer higher yields but struggle with voids and tenant quality.

The yield vs growth trade-off

Generally, areas with high capital growth potential (London, commuter belt towns) offer lower yields. Areas with higher yields (northern cities, some coastal towns) often have slower capital growth. Neither approach is wrong, but you need to understand which you are pursuing.

• London and South East: 3-5% gross yield typical, but historically strong capital growth
• Regional cities (Manchester, Birmingham, Leeds): 5-7% gross yield with moderate growth potential
• Northern towns and cities: 7-10% gross yield possible, but capital growth may be slower

Local market dynamics

Research local factors: is new housing supply increasing? Are major employers moving in or out? Is the area gentrifying or declining? Are there infrastructure projects planned? These factors can dramatically affect both rental demand and property values over your holding period.

Property characteristics that affect profitability

The type and condition of property you buy matters significantly.

Property type

• Houses: Generally lower running costs (no service charges), easier to maintain, often attract longer-term tenants. May require more maintenance budget.
• Flats: Can offer higher yields in city centres, but service charges and ground rent erode returns. Check lease length and any planned major works.
• HMOs: Higher yields possible but more management-intensive, stricter regulations, and higher void risk per room.

Property condition

A cheaper purchase price for a property needing work can boost yield, but only if you accurately estimate refurbishment costs. Many investors underestimate these costs, turning a good deal into a problem. Budget contingency of at least 15-20% on any works.

Leasehold considerations

Service charges are a major factor for leasehold properties. They can increase significantly and are difficult to control. Always check:

• Current service charge and recent increases
• Reserve fund balance
• Any planned major works
• Lease length (below 80 years becomes problematic)
• Ground rent terms

Running costs that erode returns

Many investors underestimate running costs. Industry research suggests landlords can lose up to 45% of rental income to operating costs before mortgage payments.

Typical costs to factor in:

• Management fees: 8-15% of rent if using an agent
• Maintenance: Budget 5-10% of rent annually for repairs
• Void periods: Assume 4-8% of the year empty (2-4 weeks)
• Insurance: Landlord buildings and contents insurance
• Service charges: For leasehold, often £1,500-4,000+ annually
• Ground rent: Check for escalation clauses
• Legal and compliance: Gas certificates, EPC requirements, deposit protection

When analysing a deal, be realistic about costs. Optimistic assumptions lead to disappointed investors.

Mortgage and financing considerations

How you finance the investment significantly affects returns and risk.

Loan-to-Value (LTV)

Higher LTV means more leverage and potentially higher returns on your cash—but also higher risk and usually higher interest rates. Consider what happens if rates rise or the property falls in value.

Interest rate sensitivity

Stress test your deal at rates 2-3% higher than current. If the property becomes cashflow negative, consider whether you could sustain the loss or reduce leverage.

Interest-only vs repayment

Interest-only mortgages maximise cashflow but build no equity through repayment. Repayment mortgages reduce cashflow but increase your equity stake. Consider your exit strategy and overall wealth-building plan.

Tax implications

Tax can significantly affect net returns, particularly for higher-rate taxpayers.

Section 24

If you hold property in your personal name and are a higher or additional rate taxpayer, Section 24 restricts mortgage interest relief to a 20% tax credit. This can create "phantom profit"—taxable income that does not exist in practice. Higher-rate taxpayers may find limited company ownership more tax-efficient.

Stamp Duty

The 3% stamp duty surcharge on additional properties increases upfront costs and affects yield calculations. Factor this into your purchase analysis.

Capital Gains Tax

Consider your exit strategy. CGT on residential property is 18% (basic rate) or 24% (higher rate). Limited companies pay Corporation Tax on gains instead, which may be lower but extracting funds has separate tax implications.

Warning signs of a bad investment

Watch out for these red flags when analysing potential purchases:

• Negative cashflow from day one: Unless you have strong conviction about future rent increases or capital growth
• Break-even rate very close to current rates: Leaves no margin for error
• High service charges relative to rent: Erodes returns and can increase unpredictably
• Declining local area: Population or employment falling, oversupply of rental stock
• Short lease: Below 80 years creates financing difficulties and lease extension costs
• Unrealistic rent expectations: Check actual comparable rents, not agent estimates
• Hidden costs: Major works planned, problematic cladding, subsidence issues

How to analyse a potential investment

Before committing to any purchase, run the numbers properly.

1. Calculate all costs including purchase costs, running costs, and finance costs
2. Model realistic rent based on comparable evidence, not wishful thinking
3. Stress test against higher interest rates and longer void periods
4. Consider tax in your specific circumstances
5. Compare alternatives to see if your capital would work harder elsewhere
6. Plan your exit and understand how you will eventually realise value

Final thought

A good property investment is not simply one that generates rental income. It is one that generates sufficient returns relative to the capital invested, the risks taken, and the alternatives available.

The best investments combine reasonable yields with strong tenant demand, manageable costs, and resilience against rising interest rates. They do not require optimistic assumptions to work—they work even when things do not go perfectly.

Taking time to properly analyse deals before purchasing is the single most important thing any property investor can do. Once bought, changing the fundamentals becomes much harder.