Rental yield and cash flow: how to judge a rental flat

Rental yield tells you how hard a flat works for its price; cash flow tells you whether it pays its own way each month. They answer different questions, and a flat can look acceptable on one and uncomfortable on the other. This guide sets out the formulas, the costs that are easy to forget, an illustrative worked example and a sensitivity table, so that you can test a flat's numbers before you buy it, or decide what to do with one you already own.

Gross yield and net yield

Gross yield is a year's rent as a percentage of the price:

Gross yield = monthly rent × 12 ÷ purchase price × 100

It is quick to work out and useful for a first comparison between flats, but it ignores everything the owner pays.

Net yield takes those costs into account:

Net yield = (annual rent − annual costs of owning and letting) ÷ total cost of buying × 100

The total cost of buying is the price plus stamp duty, registration, legal fees and any furnishing you add before letting; stamp duty and registration in Karnataka explains the first two. Net yield is the more honest figure. When someone quotes you a yield, ask which one it is and what was left out.

Leave the home loan out of both. Yield measures the property; how you pay for it is a separate question, and cash flow answers it.

The costs that are easy to forget

Loan interest belongs in the cash flow rather than the yield, but it is often the largest cost of all.

Cash flow is a different question

Cash flow is what is left each month after everything has been paid, including the loan:

Monthly cash flow = monthly rent − monthly running costs − EMI

An EMI repays part of the loan as well as paying interest, so not all of it is a cost: the principal portion builds your equity in the flat. But all of it leaves your account, and if the rent does not cover it, you top up the difference every month. Home loan EMIs explains how the repayment is calculated and how the tenure changes it.

A flat can have a reasonable net yield and a negative cash flow at the same time. Yield is measured against the whole price; the loan repayment is not, and it falls due every month whatever the rent does.

An illustrative worked example

The figures below are illustrative, chosen to make the arithmetic easy to follow. They are not a statement about prices, rents or interest rates in any part of Bengaluru.

Suppose a flat costs ₹80 lakh, with a further ₹8 lakh for stamp duty, registration, legal fees and basic furnishing: ₹88 lakh in all. It lets for ₹25,000 a month, or ₹3,00,000 a year. Its gross yield is ₹3,00,000 ÷ ₹80,00,000 = 3.75%.

Net income before the loan and tax is ₹3,00,000 − ₹87,000 = ₹2,13,000, so the net yield is ₹2,13,000 ÷ ₹88,00,000 = 2.42%. The flat is self-managed in this example. If you use a manager, subtract the annual fee you are quoted: here, every ₹10,000 of yearly cost lowers the net yield by about 0.11 percentage points.

Now the cash flow. Suppose ₹60 lakh of the price is borrowed over 20 years at an illustrative 7.5% a year. The EMI is about ₹48,336 a month, or ₹5,80,027 a year. The net income of ₹2,13,000 covers well under half of that, leaving a shortfall of ₹3,67,027 a year, about ₹30,586 a month, which the owner pays from other income. In the first year, about ₹1,34,591 of the repayments reduce the loan; the other ₹4,45,436 is interest.

Bought without a loan, the same flat would produce about ₹17,750 a month (₹2,13,000 ÷ 12) before tax. Neither picture is wrong. The yield says the flat earns about 2.4% a year on what it cost, before tax and before any change in its value; the cash flow says that, financed this way, it needs about ₹30,600 a month from elsewhere. And the ₹28 lakh of your own money in the purchase, the down payment plus the buying costs, could have earned a return elsewhere, which is worth counting when you compare.

How sensitive the numbers are

Small changes in rent, vacancy or interest move the result more than you might expect. Each row below changes one assumption from the example and keeps the rest; a minus sign means the owner tops up the difference each month. The figures remain illustrative.

The rent changes move both measures; the interest rate moves only the cash flow; and in every financed scenario the owner is still topping up. Test any flat you are considering in the same way, with your own figures, before you commit.

Appreciation is never certain

Many buyers accept a thin yield or a negative cash flow because they expect the flat's value to rise. It may. But price growth is not assured, it is uneven between neighbourhoods and between buildings, and a flat's value can stand still for years. Past price rises in an area say nothing certain about the next decade.

If you are counting on appreciation, test the purchase without it:

• Could you carry the monthly shortfall for years, through a job change or a rate rise, without being forced to sell?
• Would the purchase still make sense if the flat were worth no more in real terms in ten years?
• Have you allowed for the costs of selling, and for the time a sale can take?
• Is too much of your wealth tied up in one building, in one city?

A flat is also illiquid. You cannot sell part of it to raise cash, and selling the whole can take months.

Total return and the holding period

Yield is only half of what a flat earns. The other half is the change in its value, and you only find that out when you sell:

Total return = net rent received + sale price − total cost of buying − costs of selling

The table below is illustrative. It takes the flat from the example, bought without a loan for ₹88 lakh all in, holds it for ten years with the net rent kept flat at ₹2,13,000 a year (₹21.3 lakh over the decade) to keep the arithmetic simple, and assumes ₹2 lakh of selling costs. Figures are before tax and take no account of inflation.

The holding period matters as much as the price path. Buying and selling costs are paid once, so they weigh heavily on a short hold: in this illustration they add up to ₹10 lakh, which takes almost five years of net rent to recover even if the price never moves. Sell after two years at the price you paid and you would be about ₹5.7 lakh down. With a loan, the interest paid over the years comes off these totals as well.

Buying to let: what to weigh

• Who will rent it. Think about the tenant before the flat: the commute, schools, metro access and the kind of home people in that area look for. The Whitefield guide for owners and tenants is one example of reading a neighbourhood this way.
• Ready or under construction. An under-construction flat earns nothing until it is handed over, while loan interest may already be running; ready-to-move vs under-construction homes compares the two.
• The building and its association. A well-run association with healthy maintenance funds keeps the building in a state tenants want to live in; a neglected one makes every letting harder.
• The documents. A flat bought to let is still a purchase, and its title and approvals deserve the same checks as a home of your own; the documents to check on a resale flat lists them.
• A cash buffer. Keep enough aside for several months of EMIs and maintenance, so that a vacancy or a large repair does not become a crisis.

Buying your first home in Bengaluru covers the buying process step by step.

Tax on rental income, in brief

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026, without changing the underlying tax policy. As checked on 5 October 2026, rent from a let-out home is taxed as income from house property, and in outline:

• municipal taxes you actually paid during the year are deducted from the property's annual value;
• a standard deduction of 30% of that annual value is then allowed;
• interest on a loan taken to buy, build, repair or renew the property is deductible;
• if the deductions exceed the rent, the resulting loss cannot be set off against salary or other income under the default tax regime; under the older regime, which you can opt for instead, up to ₹2 lakh a year can be set off and the rest carried forward for up to eight years against future income from house property.

In the illustration above, the first year's interest alone is larger than the rent, so on those figures the flat would show a loss for tax purposes, and which regime you are in decides what that loss is worth. If you are non-resident for tax purposes, your tenant generally has to deduct tax from the rent before paying it; TDS on rent for NRI landlords covers the basics. Tax depends on your whole situation, so speak to a chartered accountant before you rely on any of this.

When to hire a manager

A manager's fee is a cost like any other, so put it in the net yield before you decide. It tends to be worth paying when you live in another city or abroad, own more than one flat, or when the numbers depend on short vacancies and a well-kept home. No manager can promise a rent, but good management can shorten vacancies, catch repairs while they are small and keep the records that settle a deposit cleanly. How much property management costs explains how to compare fees, and the owners page shows how Nest Partners runs a home from tenant placement to move-out.

Run the numbers before you fall for the flat, and run them again with a lower rent, a longer vacancy and a higher interest rate. A purchase that still works under all three is one you can hold through an ordinary bad year.