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Summary
Rental yield measures the annual return from renting out a property, expressed as a percentage of its value. US investors use both gross yield (rent / price) and cap rate (net operating income / price), which is equivalent to net yield. Average US gross rental yields range from 4-8% depending on market, with Midwest and Southern cities generally offering higher yields than coastal metros.
How it works
Gross yield vs cap rate (net yield)
Gross Yield (%) = (Annual Rent / Property Price) x 100
Cap Rate (%) = (Annual Rent - Operating Expenses) / Property Price x 100
The cap rate (capitalization rate) is the standard US metric for investment property, equivalent to net yield. It excludes mortgage costs and focuses on the property’s income-generating ability.
US-specific operating expenses
| Expense | Typical range | Notes |
|---|---|---|
| Property taxes | 0.5-2.5% of value | Varies dramatically by state (TX ~1.8%, NJ ~2.2%, HI ~0.3%) |
| Property management | 8-12% of rent | Full service; self-management saves this cost |
| Insurance | $1,200-$3,000/year | Homeowners + landlord liability; flood zones add $700-$2,000 |
| Maintenance | 1% of property value | Rule of thumb; older properties may need more |
| Vacancy | 5-10% of annual rent | National average ~6%; varies by market |
| HOA fees | $0-$500/month | Condos and planned communities only |
Property taxes are the largest US-specific expense and vary by orders of magnitude across states. A $400,000 home might have $1,200/year in property tax in Hawaii but $8,800 in New Jersey.
Tax benefits for US landlords
The IRS allows landlords to depreciate residential property over 27.5 years (IRS Publication 527), creating a non-cash deduction. On a $396,800 property (excluding land value of ~25%), the annual depreciation deduction would be approximately $10,822, which can offset rental income for tax purposes.
Worked example
$396,800 property, $2,200/month rent, 20% down:
- Annual rent: $2,200 x 12 = $26,400
- Gross yield: ($26,400 / $396,800) x 100 = 6.65%
- Property tax (1.1%): $396,800 x 0.011 = $4,365
- Management (10%): $26,400 x 0.10 = $2,640
- Insurance: $1,800
- Maintenance (1%): $3,968
- Vacancy (6%): $26,400 x 0.06 = $1,584
- Total expenses: $4,365 + $2,640 + $1,800 + $3,968 + $1,584 = $14,357
- Net operating income: $26,400 - $14,357 = $12,043
- Cap rate: ($12,043 / $396,800) x 100 = 3.03%
Key differences from other markets
- Property taxes are a major operating cost in the US (averaging 1.1% of value annually), with no equivalent in the UK where council tax is paid by tenants. This significantly reduces net yields compared to UK buy-to-let.
- Depreciation deductions (27.5-year schedule) give US landlords a tax benefit that does not exist in the UK or Australia in the same form. Australian investors use negative gearing, while UK landlords lost mortgage interest relief in 2020.
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