Gross Yield vs. Net Yield vs. Return on Equity
Gross yield, net yield, return on equity -- all three are called "yield" or "return," yet they measure entirely different things. Confusing them or looking at only one risks a serious miscalculation. In this article, we explain all three metrics using the same example property so you can see the differences immediately.
If you want to start calculating right away: the immometrics yield calculator computes all three metrics automatically.
Overview: Three Metrics, Three Perspectives
Each yield metric answers a different question:
| Metric | Question | Considers |
|---|---|---|
| Gross Yield | How much rent relative to the purchase price? | Only rent and purchase price |
| Net Yield | What remains after all costs? | Rent, transaction costs, operating expenses |
| Return on Equity | What do I earn on my invested capital? | Everything + financing (leverage effect) |
The metrics build on each other. Gross yield is the simplest, return on equity is the most informative -- but also the most sensitive to assumptions.
For the following examples, we use the same property throughout so the differences are immediately visible.
Our Example Property:
- Purchase price: CHF 950,000
- Net rental income: CHF 36,000/year (CHF 3,000/month)
- Transaction costs: CHF 18,000 (transfer tax, notary, land registry)
- Operating costs: CHF 8,200/year (maintenance, management, insurance, vacancy)
- Equity: CHF 237,500 (25%)
- Mortgage: CHF 712,500 (75%)
- Mortgage interest: CHF 12,825/year (1.8% average)
- Amortisation 2nd mortgage: CHF 11,833/year
Gross Yield: Quick Comparison, but Deceptive
Formula
Gross Yield = Annual Rental Income / Purchase Price x 100
Calculation
CHF 36,000 / CHF 950,000 x 100 = 3.79%
What It Shows
Gross yield gives you a first estimate in ten seconds. You only need two numbers: annual net rent and purchase price. This makes it the ideal screening tool when comparing properties on real estate portals.
Where It Misleads
Gross yield ignores everything that costs money: transaction costs, maintenance, management, insurance, vacancy. In Switzerland, these items can reduce the yield by 1-2 percentage points. Two properties with the same gross yield can be completely different in profitability -- for example, because one has been recently renovated while the other needs a new heating system costing CHF 80,000.
Agents and real estate portals almost exclusively communicate gross yield. This is no coincidence: it is the highest of the three metrics and makes every property look more attractive at first glance.
Bottom line: Good for a first impression, poor as a basis for decisions.
Net Yield: The More Realistic Picture
Formula
Net Yield = (Annual Rental Income - Operating Costs) / (Purchase Price + Transaction Costs) x 100
Calculation
(CHF 36,000 - CHF 8,200) / (CHF 950,000 + CHF 18,000) x 100 = 2.87%
What It Shows
Net yield shows what the property actually generates after deducting all running costs -- relative to the total investment including transaction costs. It is the honest look at the property's earning power, independent of financing.
Important Details
- Net yield is independent of financing. Whether you contribute 20% or 50% equity does not change it.
- It is perfectly suited for comparing different properties because it neutralises the financing structure.
- The quality of the net yield depends on the accuracy of your cost estimates. Anyone who underestimates maintenance is flattering the net yield.
For a detailed breakdown of all cost items, read the article Calculating the Cashflow of an Investment Property.
Bottom line: The best metric for objectively comparing different properties.
Return on Equity: The Mortgage Leverage
Formula
Return on Equity = (Net Rental Income - Mortgage Costs) / Equity x 100
Where Mortgage Costs = Mortgage Interest + Amortisation
Calculation
(CHF 27,800 - CHF 12,825 - CHF 11,833) / CHF 237,500 x 100 = 1.32%
Note: In this example, the return on equity after amortisation is relatively low. This is due to the high amortisation burden. Without amortisation (which represents wealth accumulation), the calculation would look different:
ROE before amortisation = (CHF 27,800 - CHF 12,825) / CHF 237,500 x 100 = 6.31%
This is why it is important to always state whether the return on equity is calculated before or after amortisation.
The Leverage Effect
Return on equity shows how the use of debt capital affects the return on your own money. You finance only 25% of the purchase price yourself but benefit from the entire rental income. As long as the rental yield is higher than the mortgage interest rate, the leverage works in your favour.
However: Leverage works in both directions. If interest rates rise or rents fall, the return on equity drops disproportionately. An interest rate increase from 1.8% to 3.5% would raise mortgage costs in our example to CHF 24,938 -- the cashflow turns negative.
Whether the financing remains affordable even at higher interest rates is shown by the affordability calculation.
Bottom line: The most relevant metric for investors using debt financing -- but highly dependent on assumptions.
Important: Before or After Amortisation?
There is no uniform convention as to whether return on equity is calculated with or without amortisation. In practice, you will encounter both variants. Always check which basis is being used -- and calculate both variants to be safe. The difference can be substantial, as our example shows (6.31% vs. 1.32%).
Comparison Table: Same Property, Three Perspectives
| Metric | Value | Considers | Ignores |
|---|---|---|---|
| Gross Yield | 3.79% | Rent, purchase price | Costs, financing |
| Net Yield | 2.87% | + Operating costs, transaction costs | Financing |
| ROE (before amort.) | 6.31% | + Mortgage interest | Amortisation |
| ROE (after amort.) | 1.32% | Everything | Nothing |
The same property -- and yet returns between 1.32% and 6.31%. This shows how important it is to use the right metric for the right question.
Which Metric When? Decision Matrix
| Situation | Recommended Metric | Why |
|---|---|---|
| Filtering properties on portals | Gross Yield | Fast, only 2 numbers needed |
| Fairly comparing two properties | Net Yield | Financing-neutral, all costs included |
| Evaluating your investment | ROE | Shows what you earn on your money |
| Speaking with the bank | All three | The bank wants the full picture |
| Long-term planning | Net Yield + ROE | Net yield for stability, ROE for performance |
Pro Tip
Always calculate all three metrics. If the gross yield looks attractive but the net yield is significantly lower, the property has high running costs. If the ROE is very high, you are working with a lot of leverage -- which can become risky when interest rates rise.
For a complete yield calculation covering all Swiss specifics, read the article Yield Calculation for Swiss Real Estate.
Common Misconceptions
"A gross yield of 5% is good"
Not necessarily. A high gross yield can indicate a cheap property in a weak location -- with high vacancy risk and little appreciation potential. Only the net yield shows whether the property is still attractive after all costs.
"Return on equity is always the best metric"
No. Return on equity is sensitive to financing assumptions. If the interest rate or loan-to-value ratio changes, it fluctuates significantly. For an objective comparison of different properties, net yield is better suited.
"Yield is everything"
Yield is important but not the only criterion. The cashflow shows you whether you are losing money each month. Affordability determines whether the bank approves the financing. Location, condition, and development potential of the property are equally important. Yield is one aspect -- not the whole picture.
Calculate All Three Metrics Automatically
Instead of calculating everything by hand: the immometrics calculator computes gross yield, net yield, and return on equity automatically -- including cantonal transaction costs, affordability, and cashflow projections.