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.