What cashflow return on equity makes a rental property worth keeping?
At what cashflow return on equity does being a landlord stop being worth the hassle?
It is not a question many landlords ask themselves because, traditionally, property investment has never really worked that way. Most of us were taught to concentrate on rental yields, rising property values and the long-term accumulation of wealth. As long as the rent covered the mortgage and the property increased in value over time, the assumption was that holding on was almost always the right decision.
The landscape has changed considerably since then. Owning rental property has become far more demanding than it was twenty or thirty years ago. Compliance obligations continue to grow, taxation has become less favourable, financing costs remain significantly higher than many landlords became accustomed to, and there seems to be a constant stream of new legislation requiring yet more time and attention. None of this means that residential property has become a poor investment. It does, however, raise a perfectly reasonable question about the level of return required to compensate for the increasing burden of ownership.
This is where I think many landlords are looking at the wrong figures.
Rental profit tells you whether a property is generating surplus income. Gross and net yields help compare one property with another. Neither, however, tells you whether the capital tied up in that property is still working hard enough to justify remaining invested.
To answer that question, I believe the more meaningful figure is cashflow return on equity.
Imagine a property worth £500,000 with an outstanding mortgage of £150,000. The landlord therefore has £350,000 of equity tied up in that investment. If, after allowing for mortgage interest, repairs, insurance, compliance costs, maintenance, voids and every other expense, that property generates £17,500 of annual cashflow, the return on that £350,000 of equity is just 5% per annum.
5% may sound perfectly respectable until you ask yourself a different question. If you did not already own that property today, would you willingly invest £350,000 to achieve a 5% annual cashflow return whilst accepting all the responsibilities, risks and regulatory burdens that accompany residential letting?
That is a very different question, and one that many landlords have never properly considered, or may not even be aware that it’s possible to receive an 8% fixed annual coupon on a listed 6-year passive investment bond, or a 10% fixed annual coupon from a similar two-year fixed rate bond from an unlisted triple A rated company.
The answer will naturally vary from one investor to another. Someone approaching retirement may be perfectly content with a relatively modest return if they value the security and familiarity of bricks and mortar. Others may conclude that once their equity reaches a certain level, they would expect a substantially higher annual cashflow before continuing to accept the time commitment and responsibility that comes with being a landlord.
There is no universally correct answer. The important point is having a benchmark. Without one, it becomes remarkably easy to continue owning properties simply because you have always owned them, rather than because they continue to represent the best use of your capital.
Selling is, of course, not without cost. Capital Gains Tax, estate agency fees, legal expenses and mortgage redemption charges all reduce the amount available for reinvestment, and those costs should never be ignored. Equally, they are generally one-off costs. Continuing to hold an investment that no longer meets your own minimum return requirement can become far more expensive over the following ten or twenty years than crystallising those costs today.
For me, this is one of the most valuable exercises any landlord can undertake. Rather than looking at a portfolio as a whole, calculate the cashflow return on equity for every individual property. The results are often surprising. Some properties continue to earn their place within the portfolio, while others consume a disproportionate amount of equity for relatively modest returns.
I suspect every landlord has a different answer to the question I posed at the beginning. Some may be perfectly satisfied with a 5% annual return on equity because they are still banking on capital appreciation and don’t need the extra income. Others might require 10%, 15%, 20% or or considerably more before deciding that continuing to own the property is worthwhile.
I’d genuinely be interested to know where you would draw the line.
FURTHER THOUGHTS
If you’ve never calculated the cashflow return on equity, that’s one of the first things we do during a Property118 consultation. The results often surprise even very experienced landlords.
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Member Since April 2018 - Comments: 47
7:35 AM, 28th June 2026, About 3 weeks ago
Does the consultation cost?
Member Since December 2023 - Comments: 34
1:51 PM, 28th June 2026, About 3 weeks ago
That property should be making more like £22k a year rental profit after mortgages and maintenance. That’s more like 6.3%
The article fails entirely to include capital growth. If the property increases in value by 3% a year, that is a pre tax gain of £15k which is another 4.3% of the capital invested, giving a 10.6% return.
And of course, if the landlord remortgages at 75% LTV leaving just £125k of equity in the property, rather than £350k, then the property should be generating a total return of 15-20% on capital invested, which would be higher, but more skewed to capital growth rather than cash earning.
Member Since May 2014 - Comments: 93
4:32 PM, 28th June 2026, About 3 weeks ago
Reply to the comment left by Phil rosenberg at 28/06/2026 – 13:51
I was about to make the exact same comment! Capital appreciation ignored, when that’s the real beauty of long term BTLs (well, has been in the past). And the example uses only 30% LTV…that’s poor.
Member Since April 2017 - Comments: 25
5:12 PM, 28th June 2026, About 3 weeks ago
Perhaps, there should also be more detailed information and examples about these:
“8% fixed annual coupon on a listed 6-year passive investment bond, or a 10% fixed annual coupon from a similar two-year fixed rate bond from an unlisted triple A rated company”
Member Since October 2023 - Comments: 78
8:27 PM, 28th June 2026, About 3 weeks ago
I’m not sure this criticism is fair. I read the article more in the context of…do your own numbers because you may not have thought of this, rather than absolutes
I think the tax issue is particularly important though. You might get capital growth, but you will be paying CGT on it and if your property has DOUBLED in value in 10 years, you will have to pay 24% tax on that gain even though in real terms your money will not have kept pace with inflation.
The article also doesn’t mention void periods, agent fees or repairs and renewals which all eat into the ROI.
And wait till those £7k fines start kicking in 🙄
Member Since January 2011 - Comments: 12230 - Articles: 1441
9:09 PM, 2nd July 2026, About 2 weeks ago
Reply to the comment left by Phil rosenberg at 28/06/2026 – 13:51
Thanks Phil. I think we’re actually talking about two different investment metrics rather than disagreeing.
The article deliberately focuses on cashflow return on equity, not total investment return. I wasn’t suggesting that capital growth has no value. Quite the opposite. Long-term capital appreciation has been one of the main reasons property has been such a successful investment over the past few decades.
The question I was encouraging landlords to ask is this:
“If this property were converted into cash today, would I choose to invest that amount back into this particular property?”
That question is about the return being generated by the equity currently tied up in the asset, irrespective of how much the property originally cost or how much it may appreciate in the future.
Future capital growth is, by its nature, uncertain. It may average 3% over a long period, it may be higher, lower or even negative for several years. The cashflow being generated today is measurable and provides a useful way of comparing one investment opportunity with another.
On your remortgaging point, increasing leverage can certainly improve the return on equity if the additional borrowing is invested productively. Equally, it increases financing costs and risk, which is why I deliberately kept the article focused on the amount of equity already sitting in the property rather than the effects of changing the capital structure.
I don’t think we’re actually far apart. My objective was simply to encourage landlords to look beyond “the property has done well historically” and ask whether the equity locked into it is still working as hard as it could be.
Member Since January 2011 - Comments: 12230 - Articles: 1441
10:29 PM, 2nd July 2026, About 2 weeks ago
Thanks everyone for taking the time to comment. It’s been a genuinely interesting discussion and there are some excellent points being made.
I just wanted to clarify one aspect of the article. My references to institutional fixed-income investments were included simply to illustrate that there is always an opportunity cost to having substantial equity tied up in any asset. They were not intended as recommendations and certainly shouldn’t be interpreted as regulated financial advice. Decisions about regulated investments should always be made with the assistance of an FCA-authorised financial adviser.
For complete transparency, this isn’t just a theoretical concept for me. Personally, I don’t keep all of my wealth tied up in property. I choose to diversify some of my liquid funds into other investments because that suits my own objectives, income requirements and attitude to risk. That is a personal decision and may not be appropriate for someone else.
One point that perhaps deserves more emphasis is liquidity. A landlord can have several million pounds of equity locked inside property whilst having relatively little accessible cash. Equity is valuable, but it is also illiquid. Until it is released by refinancing or selling, it cannot readily be used to fund retirement, reduce borrowing, help family members or simply provide peace of mind.
None of this diminishes the importance of capital growth. Property has created significant wealth for many landlords over the years, including me. My article wasn’t suggesting that landlords should sell their properties or exchange them for other investments. It was simply encouraging readers to ask whether the equity they have accumulated is producing a level of cashflow that still aligns with their own objectives. There is no universally right answer because every landlord’s circumstances, appetite for risk and long-term goals are different.
Doing nothing is itself an investment decision. My hope was simply to encourage landlords to make that decision consciously, armed with better information about the return currently being generated by the equity they already have tied up in each property.
Member Since January 2015 - Comments: 1526 - Articles: 1
11:04 AM, 3rd July 2026, About 2 weeks ago
Will be worth repeating this exercise again if, or when, Burnham the Dictator brings in his proposed property/land value tax and if he disallows it to be treated as an allowable expense against rental income or to be added to tenants rent or brings in rent caps.
Member Since January 2017 - Comments: 127
5:21 PM, 3rd July 2026, About 2 weeks ago
“it’s possible to receive an 8% fixed annual coupon on a listed 6-year passive investment bond, or a 10% fixed annual coupon from a similar two-year fixed rate bond from an unlisted triple A rated company”
But these are classed as high risk (though maybe no more so than BTL now to be fair)
However, if you buy the right dividend stocks at the right time, then 10% is achievable IMO with less risk.
The big killer is the CGT when selling a BTL. With Labour in charge it’s likely to go to 42% now, so thats a big hit to take. However, I’m considering taking it now as the costs of owning a BTL going forward when you know you will need to spend on new roofs, windows, kitchens, etc mean that money would be better spent paying off mortgages on other properties to get the same return with less risk/hassle.
Member Since October 2023 - Comments: 78
5:31 PM, 3rd July 2026, About 2 weeks ago
I would have no issue with CGT if there was indexing of inflation.
If your property doubles in value over 20 years it has probably really fallen in value in real terms yet you still have to pay CGT on the paper gain.
Contrast that with the serial movers who changed property every 12 months and pay no tax at all by continually renovating their primary residences.