Calculating the profitability of a rental property requires going beyond dividing the annual rent by the purchase price. To determine the real return on your capital, you must subtract operating costs (homeowners' association, IBI, insurance), the impact of mortgage leverage, and net income tax (IRPF) after current reductions.
Gross Yield versus Net Yield
Gross yield is a first-filter metric, useful only for ruling out properties at a glance. If you buy a flat for 180,000 euros and receive 900 euros per month (10,800 euros annually), the gross yield is 6.00%. However, this figure does not reflect acquisition costs or the recurring expenses you will incur each month.
To calculate the real net yield, you must include the total initial investment in the denominator: purchase price plus taxes (ITP or VAT), notary fees, property registration, and valuation or management fees (usually an additional 10% to 12%). In the numerator, you must deduct all maintenance expenses and municipal taxes from the gross annual income.
Deductible Expenses and Fixed Costs that Reduce Your Cash Flow
Cash flow is the money that actually remains in your bank account after paying all property obligations. When projecting your annual balance, you must meticulously budget for the following items:
- Property Tax (IBI) and Rates: The obligatory annual local property tax (IBI) set by the council, plus refuse collection charges where applicable.
- Ordinary Homeowners' Association Fees: Monthly contributions for the maintenance of common areas, cleaning, and building utilities. Remember that extraordinary levies do not count as current expenses, but as a deductible improvement or increased acquisition value.
- Mandatory and Preventive Insurance: Home insurance and rent guarantee insurance, which usually costs between 3% and 5% of the guaranteed annual rent.
- Provision for Maintenance and Vacancy: It is advisable to annually set aside between 5% and 8% of the income for unforeseen repairs (boiler, plumbing) and to anticipate at least half a month per year of technical vacancy between contracts.
The Cost of Financing: How Interest Rates Affect Your Yield
Using external financing allows you to leverage available capital and multiply the return on equity (ROE). However, the cost of the mortgage loan directly influences the monthly cash flow.
According to the Bank of Spain, the 12-month Euribor recorded an official monthly average of 2.954% in August 2026. Meanwhile, the average interest rate for residential mortgages formalised was 2.96% in June 2026, according to the National Institute of Statistics (INE). This credit environment requires precise calibration of the monthly mortgage payment to prevent it from absorbing most of the rent collected.
Ver los datos
| Concepto | % |
|---|---|
| Nov 2025 | 2,97 % |
| Dic 2025 | 2,87 % |
| Ene 2026 | 2,86 % |
| Feb 2026 | 2,88 % |
| Mar 2026 | 2,84 % |
| Abr 2026 | 2,9 % |
| May 2026 | 2,98 % |
| Jun 2026 | 2,96 % |
Fuente: INE · Estadística de Hipotecas
IRPF Taxation: Current Reductions for Net Yield
The net yield from letting a primary residence is integrated into the general tax base for IRPF. Deductible expenses (mortgage interest, IBI, homeowners' association fees, insurance, 3% depreciation of the property's construction value, and conservation costs) are subtracted from the amount collected. The reduction percentages established in state regulations are applied to this resulting net yield:
| Rental Scenario | Applicable IRPF Reduction | Key Requirements |
|---|---|---|
| General regime for new contracts | 50% | Contracts for primary residences signed under current regulations. |
| Young tenants (18 to 35 years old) | 70% | First contract formalisation with tenants in that age bracket. |
| Stressed area with rent reduction | 90% | Properties in areas declared as stressed markets that reduce the previous rent by at least 5%. |
Furthermore, when projecting annual contract revisions, note that the Reference Index for Rental Housing Updates (IRAV) set a maximum update limit of 2.47% in August 2026, according to the INE.
Practical Example: Step-by-Step Calculation for a Real Purchase
Let's look at an illustrative example with round figures to understand the transition from gross yield to effective net return:
1. Initial Investment
- Registered purchase price: 150.000 €
- Purchase expenses (ITP at 8%, notary, registration, administrative fees): 15.000 € (10%)
- Total investment disbursed: 165.000 €
- (Assumption without a mortgage to see the pure asset: capital contributed = 165.000 €)
2. Annual Income and Operating Expenses
- Agreed rent: 800 €/mes = 9.600 € annual
- IBI and refuse collection: 400 €
- Homeowners' association: 600 € (50 €/mes)
- Home and rent guarantee insurance: 450 €
- Maintenance and vacancy reserve (7% of rent): 672 €
- Total operating expenses: 2.122 €
- Net yield before tax: 9.600 € - 2.122 € = 7.478 €
In this scenario, the gross yield is 5.82% (9,600 € / 165,000 €), while the net yield before tax is 4.53% (7,478 € / 165,000 €). If 70% is financed via a mortgage loan, the return on equity (cash-on-cash) will vary depending on the difference between the flat's yield and the loan's interest rate.
Frequently asked questions
Net yield measures the percentage return generated by the property on the total investment made (total price plus expenses). In contrast, cash-on-cash exclusively measures the net annual cash flow divided by the equity actually contributed from your pocket (deducting the amount financed by the mortgage).
