A property has no single return. Gross yield measures rent against price. Net yield subtracts the cost of holding it. Cash-on-cash shows what a borrower actually earns on the money they put in. IRR is the only measure that accounts for when cash arrives. Compare two properties only on the same measure.
Key facts
- Gross yield is annual rent divided by all-in cost. It flatters every property, because it ignores every cost of ownership.
- Net yield subtracts maintenance, property tax, vacancy, repairs and management, which in Indian residential stock take a meaningful slice of gross rent.
- Cap rate is net operating income divided by market value, with no loan in it.
- Cash-on-cash return turns negative whenever the loan rate sits above the net yield, which is common in Indian residential property.
- IRR lets you compare a flat with a mutual fund, because it accounts for timing and for the exit.
- Property is the only common asset class where ordinary investors can borrow most of the purchase price at a secured rate.
- Transaction costs run into several per cent each way, so short holds rarely work.
- Capital gains treatment depends on the holding period, and rates and exemption limits must be checked for the current assessment year.
Why one number is not enough
When somebody says a flat returns eight per cent, the sentence means little until you ask which eight per cent. Rent against price? Rent after costs? Rent plus price growth? Rent plus price growth against the cash actually invested, with the bank funding the rest? Each is defensible, and on the same flat they can sit ten percentage points apart.
This is not pedantry. A broker quotes gross yield because it is the largest number available. A seller quotes a decade of appreciation because it is the most flattering. A sceptic quotes net yield alone and calls property hopeless, ignoring that the owner put down a fifth of the price. Learn the measures in order; each adds what the last left out.
Gross rental yield
Gross rental yield is annual rent divided by the cost of the property. The only judgement in it is the denominator, and it should be the all-in cost rather than the headline price: agreement value, stamp duty and registration, GST where it applies on an under-construction purchase, brokerage, the floor-rise and parking and clubhouse charges the builder adds, and whatever you spend to make the flat lettable. That is real money you will not see again, and leaving it out overstates yield.
| Item | Illustrative amount |
|---|---|
| Agreement value | ₹50,00,000 |
| Stamp duty, registration, brokerage, fit-out | ₹5,00,000 |
| All-in cost | ₹55,00,000 |
| Monthly rent | ₹20,000 |
| Annual rent | ₹2,40,000 |
| Gross yield on all-in cost | 4.4 per cent |
| Gross yield on headline price only | 4.8 per cent |
The last two rows are the point. The same flat looks four-tenths of a percentage point better on the wrong denominator, and a seller has every reason to use it; our rental yield calculator asks for the all-in figure.
Gross yield is still the quickest way to rank properties within one city and segment, because costs scale roughly with value, so the ranking survives even though the level is wrong. It is poor for comparing segments and useless across asset classes.
Net rental yield
Net rental yield subtracts the cost of owning the thing. The deductions fall into five groups and almost every first-time landlord underestimates all five.
- Society maintenance — charged per square foot per month. Who bears it depends on the agreement, but amenity-heavy projects carry heavier charges, which is how a clubhouse and a pool quietly reduce your yield.
- Property tax — an annual municipal charge based on the local valuation method, not on what you paid.
- Vacancy — the weeks between tenants. One empty month a year is more than eight per cent of your rent gone.
- Repairs and replacement — painting between tenancies, plumbing, a geyser, an air conditioner, eventually a kitchen. Set aside a fixed annual sum rather than treating the good years as normal.
- Management and letting — brokerage on each new tenancy, and a management fee if you are not local. Both are real even when you pay in your own time.
| Line | Annual amount | Note |
|---|---|---|
| Gross rent | ₹2,40,000 | ₹20,000 a month, fully let |
| Less vacancy allowance | ₹20,000 | One month in twelve |
| Less society maintenance | ₹24,000 | Owner-borne portion |
| Less property tax | ₹9,000 | Municipal charge |
| Less repairs reserve | ₹15,000 | Averaged, not year-by-year |
| Less letting and management | ₹7,000 | Brokerage amortised |
| Net operating income | ₹1,65,000 | Before any loan |
| Net yield on ₹55,00,000 all-in | 3.0 per cent | Down from 4.4 per cent gross |
Roughly a third of the gross rent disappeared, and nothing unusual happened. That gap is the most common error in Indian property arithmetic, and it is large enough to flip a decision. Before you set a rent, work through renting out your property.
Cap rate, and how it differs
The capitalisation rate is net operating income divided by the market value of the asset. Arithmetically it looks like net yield, and on the day you buy at market value the two are the same number. They separate afterwards, and for two reasons.
First, net yield is usually measured against what you paid, which is history. Cap rate is measured against what the asset is worth now. Five years in, a flat bought well can show a healthy net yield on cost and a thin cap rate at today's value, and only the cap rate tells you what the asset is currently yielding to a buyer.
Second, cap rate is used in the opposite direction. In commercial property, buyers quote the cap rate the market demands for that class of asset, and value follows from income divided by that rate. If your building's net income rises, value rises mechanically. That is why commercial valuation is argued in income terms while residential valuation is argued in rupees per square foot.
Cap rate also excludes financing by design, so two buyers with different loans see the same cap rate. That makes it useful as a market signal and useless as a measure of your own return.
Cash-on-cash return with a loan
Cash-on-cash return is the cash left after the loan, divided by the cash you actually put in. It answers a different question from yield: not how good is this asset, but how good is this deal for me, given how I funded it.
| Funding | Cash invested | Annual loan payments | Cash after loan | Cash-on-cash |
|---|---|---|---|---|
| No loan | ₹55,00,000 | Nil | ₹1,65,000 | 3.0 per cent |
| Half funded | ₹30,00,000 | ₹2,69,900 | –₹1,04,900 | –3.5 per cent |
| Eighty per cent loan | ₹15,00,000 | ₹4,31,900 | –₹2,66,900 | –17.8 per cent |
Read that table carefully; it is the most useful thing on this page. When the loan rate exceeds the net yield, borrowing does not magnify your income, it destroys it, and every rupee of extra leverage worsens the monthly position. Indian residential property has spent most of recent history in exactly that configuration.
That does not make leveraged property a mistake. It makes it a particular kind of bet: a wager that appreciation will more than cover the gap you fund out of salary every month. It can be a good wager, but you should know you are making it and know what it costs you annually to hold open. Our EMI versus investment comparison sets the same money against a financial alternative.
Cash-on-cash also understates total return, because part of each EMI is principal repayment, which is forced saving rather than expense; the equity tracker shows how that balance moves. But principal is cash you cannot spend, so a landlord who is cash-flow negative and equity-positive is still in trouble if the salary funding the gap stops.
IRR: the only measure with timing in it
Every measure so far describes a single year, and property returns are not a single year. Money goes out in one lump, dribbles back monthly, then arrives in a second lump at sale. The internal rate of return is the annualised rate at which the present value of all those flows equals zero. It is the only common measure that cares when money moves, and so the only one you can fairly compare with a mutual fund.
| Scenario | Cash out at start | Net rent each year | Net proceeds at year 10 | IRR |
|---|---|---|---|---|
| Price unchanged | ₹55,00,000 | ₹1,65,000 | ₹55,00,000 | 3.0 per cent |
| Moderate rise | ₹55,00,000 | ₹1,65,000 | ₹65,00,000 | 4.5 per cent |
| Strong rise | ₹55,00,000 | ₹1,65,000 | ₹85,00,000 | 7.0 per cent |
Three things follow. The spread between scenarios is wide, which tells you that for a thin-yield asset the exit price dominates: you are buying a resale more than an income stream. The flat-price row shows the floor, and it is roughly the net yield, as it must be. And the proceeds column is net on purpose, after brokerage and after tax, which is what the net proceeds calculator and the capital gains calculator are for. An IRR computed on a gross sale price is a sales pitch.
Add a loan and you get a levered IRR, which can be well above or well below the unlevered figure depending on whether appreciation beat the borrowing rate. That is the honest statement of what a home loan does to an investment property: it stretches the distribution rather than improving the expected return.
Appreciation, and what drives it
Since the exit price dominates, it deserves more than hand-waving. Price growth in a micro-market comes from a few identifiable forces, all of which you can assess before you buy without forecasting anything.
- Income growth in the catchment. Prices follow what nearby buyers can borrow, which follows salaries. A corridor adding high-paying employment has a mechanism behind its price growth; one adding only flats does not.
- Supply. The force most often ignored and the most easily checked. Count launched and approved units within a few kilometres. Heavy supply caps rent and price growth until it is absorbed, however good the location looks on paper.
- Infrastructure that shortens commutes. A metro line changes the effective distance to employment and prices re-rate once, usually between announcement and commissioning. Buying after the line opens is buying after the event.
- Scarcity of land. Established areas with little developable land grow more slowly but hold value in a downturn. Peripheral land grows faster and falls harder.
Where to buy property in India covers how to assess these for a specific micro-market. The point here is simpler: never plug a double-digit appreciation assumption into a spreadsheet and call the output a return. Run the flat-price case first.
Residential versus commercial
Commercial property is often pitched to residential investors as the same thing with a better yield. The yield is usually better. Everything else is different.
| Feature | Residential | Commercial |
|---|---|---|
| Lease length | Typically eleven months, renewed informally | Multi-year, with lock-in periods and contracted escalations |
| Tenant risk | Many small tenants; losing one costs a month of rent | Few large tenants; losing one can empty the asset for a long stretch |
| Fit-out | Light; the next tenant takes it broadly as-is | Heavy and often tenant-specific; re-letting can need capital |
| Ticket size | Entry possible at a single flat | Much larger for anything institutionally lettable |
| Loan availability | Standardised home loan products, higher loan-to-value | Commercial terms, lower loan-to-value, shorter tenures |
| Liquidity | Thin but real; a flat has many possible buyers | Thinner; the buyer pool for a let office is small |
| What drives value | Rupees per square foot for comparable flats | Income capitalised at the market cap rate |
Commercial property pays you more for taking concentrated tenant risk and giving up liquidity. For an investor with one asset, that concentration is the problem: a single vacant floor can wipe out several years of the yield advantage. Small retail units sold with a rental guarantee deserve particular scepticism — the guarantee is only as good as the company giving it, and it expires exactly when you most want it.
REITs versus owning a flat
A real estate investment trust holds income-producing property, is listed, and distributes most of its rental income to unitholders — a way to own commercial property without buying a building.
| Dimension | Listed REIT | A flat you own |
|---|---|---|
| Minimum commitment | The price of one unit on the exchange | The whole property |
| Divisibility | Sell any fraction of the holding | All or nothing |
| Liquidity | Exchange-traded, settles in days | Months, and worse in a weak market |
| Management | Professional; you do nothing | Yours, including tenants and repairs |
| Diversification | Many buildings and tenants | One building, one tenant |
| Leverage available to you | Effectively none | Most of the purchase price |
| Price behaviour | Marked to market daily, moves with rates | Unobserved between transactions |
| Control | None over assets or strategy | Complete |
On taxation, the structure matters: a distribution is typically a mix of components taxed differently in the unitholder's hands, and part of it may be treated as a return of capital rather than income. The split varies by trust and by year and the rules have changed more than once, so take the breakdown from the trust's statement and confirm the treatment for the current assessment year rather than assuming one rate.
The genuine trade-off is leverage and control against liquidity and diversification. If your reason for owning property is that you can borrow most of it, a REIT does not replace that. If your reason is rental income without being a landlord, a flat is a poor way to get it.
Property, gold and equity
Comparisons between asset classes are usually rigged by the choice of start date. Rather than quote historical returns, which would be a forecast dressed as a fact, compare the characteristics of the assets, which do not shift with the start date.
| Dimension | Residential property | Gold | Listed equity |
|---|---|---|---|
| Income while held | Rent, modest and net of costs | None | Dividends, modest |
| Cost to buy and sell | Several per cent each way | Making charges or fund expense | Very low |
| Carrying cost | Maintenance, tax, repairs, vacancy | Storage or fund expense | Effectively nil |
| Divisibility | None | Good | Excellent |
| Liquidity | Weeks to months | Days | Same day |
| Borrowing against it to buy | Most of the price, long tenure, secured rate | Possible but short and dearer | Limited and margin-called |
| Price transparency | Poor; every unit differs | High | Continuous |
| Effort to own | Substantial and ongoing | Negligible | Negligible |
| Usable | You can live in it | No | No |
Two rows explain most of the argument. Property's unique advantage is the loan: no other asset lets a salaried investor control that much capital at a long-tenure secured rate. Its unique disadvantages are the transaction costs and the indivisibility — you cannot sell a bedroom to fund a medical bill, and you cannot rebalance.
The behavioural point cuts the other way and deserves admitting. Property is hard to sell, which stops people selling in a panic, and an EMI is a commitment, which makes people save. Investors who would have redeemed a fund in a bad month hold a flat for a decade. That is a feature of the friction rather than the asset, but the money it saves is real.
BRRRR, and why it is constrained here
BRRRR stands for buy, refurbish, rent, refinance, repeat. The idea, from the American market, is to buy a run-down property below market, renovate, let it, refinance against the higher post-renovation valuation, pull most of the original cash back out and use it for the next one. Repeated, a small amount of capital builds a portfolio. Our BRRRR calculator models the sequence.
Every step is harder in India, and the fourth breaks it.
- Buy below market is possible but slow. There is no deep, indexed market in distressed residential stock, so sourcing depends on local relationships.
- Refurbish works, but gains in apartment stock are capped. You can modernise a flat; you cannot change the building, the society or the parking, and a valuer prices the building as much as the flat.
- Rent is fine, though the rent uplift from renovation is usually smaller than owners expect relative to the money spent.
- Refinance is the constraint. Lenders cap loan-to-value against a valuation and are conservative about revaluing upwards shortly after a purchase, since the transaction price anchors the view. A top-up or loan against property is possible, but the amounts, rates and tenures are generally less attractive than the original home loan, which erodes the mechanism.
- Repeat then stalls, because the cash did not come back out.
Add stamp duty on each purchase and it is harder still. The version that does work here is slower and less leveraged: buy, improve, let, hold, and fund the next purchase from savings and rent rather than from a refinancing. That is a reasonable strategy. It is not a capital-recycling machine, and anybody selling it as one is skipping step four.
Capital gains when you sell
Tax is part of the return, so an after-tax figure is the only one worth comparing. The structure is stable even though the numbers change: learn the structure, confirm the numbers.
Holding period decides the category. Sell within the short-term threshold and the gain is short term, generally added to income and taxed at your slab rate. Hold beyond it and the gain is long term under a separate regime. For immovable property the threshold is set in years, and the exact period must be confirmed for the current assessment year because it has been changed before.
What indexation does. Indexation raises your purchase cost for inflation using a published cost inflation index, so you are taxed on the real gain rather than on the part that is only currency depreciation. On a long-held property the effect is large. Whether indexation is available, and at what rate the resulting gain is taxed, has been amended, and more than one option has existed for properties bought before a cut-off date. Check the current position, and if the purchase is old, check whether a choice between methods applies to you. The capital gains calculator compares the computation under different method assumptions.
What counts as cost. Acquisition cost includes stamp duty, registration and brokerage paid on purchase. The cost of improvement, meaning capital additions rather than repairs, is deductible, as is the brokerage you pay on sale. Keep the invoices; without them the deduction is hard to sustain.
Reinvestment exemptions. The Act provides routes to defer or avoid long-term gains tax by reinvesting. Broadly, one exempts the gain where proceeds go into residential property within specified time limits, with conditions on how many houses you may hold and on keeping the new one for a minimum period. A second exempts gains on other long-term assets where the net consideration buys a residential house. A third allows investment in specified bonds within a short window after sale. Each carries monetary caps, deadlines and conditions, several tightened in recent Finance Acts, so work through them with a tax adviser and confirm every limit for the current year — a missed deadline usually cannot be cured. Where the gain cannot be reinvested before the return falls due, a capital gains account scheme parks the money and preserves the claim.
TDS where the seller is an NRI. If the seller is a non-resident, the buyer must deduct tax at source on the whole sale consideration, not merely the gain. The rate depends on whether the gain is long or short term and is far higher than the small deduction applying to a resident seller, so a large sum is withheld up front. The seller recovers the excess by applying to the assessing officer for a lower deduction certificate before the sale, or by claiming a refund afterwards. The deduction and reporting mechanism also differs from the resident one. Confirm rates, thresholds and forms for the current year; the detail is in the NRI property guide.
How to use all this
A workable order for assessing any rental property. Work out the all-in cost including every charge. Take gross rent from comparable let units nearby, not from a builder's projection. Subtract the five cost groups honestly for net operating income, including a vacancy allowance even if you think you will not need it. Divide for net yield, and set it against what a safe fixed-income instrument pays for no work and no bad tenants.
Then layer the loan on and compute cash-on-cash, so you know the monthly cost of the position. Then build a ten-year IRR using the flat-price case and net-of-tax proceeds first, and only afterwards the appreciation you actually believe. If the deal needs strong growth to beat your alternative, write that down, because it changes what you should pay and how much you should borrow.
And compare like with like: a net yield against an equity return is not a comparison, an after-tax IRR against an after-tax IRR is. The calculators are free on the tools page, and the companion guides on what buying a home really costs and renting out your property cover the cost and letting sides.
Frequently asked questions
What is a good rental yield in India?
There is no fixed number, and any figure quoted as current will go stale. The useful test is comparative: work out your net yield after maintenance, property tax, vacancy and repairs, then compare it with what a safe fixed-income instrument pays you for no effort. Residential net yields in Indian cities are generally well below gross yields, so always do the subtraction before judging.
What is the difference between gross and net rental yield?
Gross yield is annual rent divided by the cost of the property. Net yield subtracts the cost of owning it: society maintenance, property tax, a vacancy allowance, repairs and letting or management costs. In the worked example on this page those deductions removed about a third of the gross rent, which is typical rather than pessimistic.
Is cap rate the same thing as rental yield?
On the day you buy at market value they are the same arithmetic. They diverge afterwards, because net yield is usually measured against what you paid while cap rate is measured against current market value. Cap rate is also used in reverse in commercial property, to derive value from income, which is not how residential flats are valued.
Why would cash-on-cash return be negative?
Because the loan costs more than the property earns. If the interest rate on the home loan is higher than the net rental yield, the rent does not cover the EMI and you fund the gap from income. That is common in Indian residential property and it makes a leveraged purchase a bet on capital appreciation rather than an income investment.
Why use IRR instead of yield?
Yield describes one year. IRR accounts for the whole sequence: the cash you put in, the rent arriving over the years, and the net proceeds at sale. Because it handles timing, it is the only measure you can fairly set against the return on a mutual fund or a fixed deposit. Build it on proceeds after selling costs and after tax.
Is commercial property better than residential?
It usually yields more and it carries different risks: longer leases with escalations, but concentrated tenant risk, heavier fit-out costs, a larger ticket size, lower loan-to-value and a much smaller pool of buyers when you want out. For an investor with a single asset, one long vacancy can erase several years of the yield advantage.
Should I buy a REIT or a rental flat?
They solve different problems. A REIT gives divisible, liquid, professionally managed exposure to commercial rent with no work. A flat gives you control and, crucially, the ability to borrow most of the purchase price at a long-tenure secured rate. If leverage is your reason for owning property, a REIT is not a substitute.
How is a REIT distribution taxed?
A distribution is typically a mix of components that are taxed differently in the unitholder's hands, and part of it may be treated as a return of capital rather than income. The split varies by trust and by year, and the rules have been amended more than once, so take the breakdown from the trust's statement and confirm the treatment for the current assessment year.
Does BRRRR work in India?
Not in its original form. The refinancing step is the obstacle: lenders cap loan-to-value against a conservative valuation and are reluctant to revalue upwards soon after a purchase, so the cash does not come back out. Stamp duty on every purchase makes it harder still. A slower buy, improve, let and hold version is workable, but it is not a capital-recycling machine.
How is capital gains tax on property calculated?
Start with the sale consideration, subtract the acquisition cost including stamp duty, registration and brokerage, subtract the cost of capital improvements and the brokerage on sale. The holding period then decides whether the gain is short term, generally taxed at your slab rate, or long term under a separate regime where indexation may apply. Confirm thresholds and rates for the current assessment year.
What does indexation actually do?
It raises your purchase cost in line with a published cost inflation index, so the tax falls on the real gain rather than on the part that is only inflation. On a long-held property the effect can be large. Whether indexation is available, and at what rate the gain is then taxed, has been amended, so check the position that applies to your purchase date.
What tax is deducted when I buy from an NRI seller?
The buyer must deduct tax at source on the whole sale consideration, not just the gain, at a rate that depends on whether the seller's gain is long or short term, and it is substantially higher than the small deduction on a purchase from a resident. The seller can apply for a lower deduction certificate before the sale or claim a refund later. Confirm the current rates and forms.
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