1. Work out your full cash invested
Start with the deposit and add purchase-related costs such as registration or transfer charges, agency fees, valuation, mortgage arrangement fees and conveyancing or legal costs where applicable. Add any fit-out, furnishing or renovation expenditure. For an off-plan purchase, include instalments paid from your own funds and any final payment due at handover.
2. Calculate the annual net operating income
Start with rent actually received, not just the advertised rent. Deduct vacancy periods, letting or management fees, service charges, maintenance, insurance, utilities paid by the owner and other recurring operating costs. The result is net operating income before finance costs and tax.
3. Include mortgage interest separately
For a mortgaged property, calculate the interest paid during the period, plus bank fees and other finance costs. Do not treat the entire mortgage instalment as an expense in the same way: the principal repayment reduces the outstanding loan and builds equity, while interest is a financing cost. For cash-on-cash return, compare the cash flow after debt service with the cash you invested.
4. Use two complementary measures
Net rental yield = annual net operating income ÷ total acquisition cost × 100. Cash-on-cash return = annual cash flow after mortgage payments and owner-paid costs ÷ cash invested × 100. For a full investment appraisal, calculate total return over your holding period, including net sale proceeds after outstanding mortgage, selling fees and other costs.
5. Example (illustrative only)
Assume annual rent collected is AED 120,000. Operating costs and vacancy total AED 25,000, leaving AED 95,000 net operating income. If annual mortgage interest is AED 35,000 and principal repayment is AED 20,000, cash flow after those debt payments is AED 40,000 before any other personal tax or one-off costs. Compare that cash flow with your actual cash invested—not just the property price. The figures are illustrative and not a market quotation.
Avoid double counting
If you use cash flow after the full mortgage instalment, do not deduct principal again as a separate expense. If you use net operating income before financing, deduct interest and debt service only when moving to an equity cash-flow measure. Keep a spreadsheet of dates and payments so off-plan instalments, handover costs and ongoing ownership expenses are not missed.