The headline yield you see in a listing is rarely the number that matters. Here's how to work out what a rental property actually returns — and the current rules that shape it.
"8% yield!" is a common line in property listings, and it's almost always the least useful number in the whole analysis. Yield calculations vary wildly depending on what's included, and even a genuinely accurate yield figure says nothing about whether the property will put money in your pocket or take it out each month. Here's how to think about the numbers properly.
Gross yield is simply annual rent divided by purchase price — easy to calculate, and the number most often quoted in marketing. It ignores every cost of actually owning the property: rates, insurance, maintenance, and property management fees if you use an agent. Net yield subtracts those operating costs from the rent before dividing by the purchase price, giving a far more honest picture of the property's actual earning power. A property advertised at 6% gross yield can easily sit closer to 4% net once realistic costs are factored in — the gap tends to be biggest on older properties with higher maintenance needs.
This is the part that catches new investors out. Both gross and net yield are calculated before any mortgage costs — they describe the property's performance as if you'd bought it outright in cash. Once you add real-world financing into the picture, the number that actually matters is cash flow: rent, minus operating costs, minus your mortgage payments. A property with a perfectly respectable net yield can still be cash-flow negative — costing you money every month — once the mortgage is factored in, particularly at higher interest rates or higher loan-to-value ratios.
How you structure the mortgage on an investment property changes the cash flow picture substantially. Interest-only payments only cover the interest charged, which keeps monthly costs lower and cash flow closer to (or above) breakeven — a common short-to-medium-term strategy for investors prioritising cash flow over paying down debt. Principal & interest payments are higher because they also reduce the loan balance, which builds equity faster but pushes cash flow further negative in the meantime. Comparing both side by side against the same rent and expenses is the only way to see the real trade-off for your specific numbers.
Cash-on-cash return measures annual cash flow against the cash you actually put in — your deposit and purchase costs — rather than against the full purchase price. This matters because leverage cuts both ways: a modest net yield on a highly leveraged property can still produce a strong cash-on-cash return if the numbers work, while the same yield on a large cash deposit might look far less attractive. It's the closest single number to "what am I actually getting for the money I put in."
Mortgage interest on residential rental property is now 100% tax-deductible again, effective from 1 April 2025 — the interest limitation rules that previously restricted deductions to a percentage of interest have expired. This is a meaningful change from 2021-2024, when deductibility was progressively phased out and then back in.
However, loss ring-fencing rules are unchanged: if your rental property's deductible expenses exceed its income, that loss can generally only be carried forward and offset against future rental income — not against your salary or other income in the same year, unless a specific exemption applies (such as certain new builds).
The bright-line test currently applies a 2-year window: if you buy and sell a residential property within 2 years, any capital gain is typically taxable, for property where both the acquisition and sale occur on or after 1 July 2024. Outside that window, the bright-line test generally doesn't apply, though other tax rules can still be relevant depending on your intent when purchasing.
Two Reserve Bank restrictions affect how much you can borrow. Debt-to-income (DTI) rules cap most new lending at 7 times gross income for investors (6 times for owner-occupiers), with banks able to write a small proportion of loans above that limit at their discretion. Loan-to-value ratio (LVR) rules separately restrict low-deposit lending — investors typically need a deposit of around 30% or more to access the bulk of available lending, compared to around 20% for owner-occupiers, though banks can allocate a limited share of new lending outside these thresholds.
Because gross yield, net yield, cash flow and cash-on-cash return each answer a different question, quoting just one of them — especially gross yield — gives an incomplete and often misleading picture. A property that looks mediocre on gross yield can be a strong cash-on-cash performer with the right financing structure, and vice versa.
If you're comparing how much you could borrow against DTI limits before you get this far, check our DTI calculator, or see the mortgage split loan strategy guide for how to structure the financing itself.