How Much Profit Should You Make on A Rental Property? (2024)

Rental properties can be a great way to make passive income, but it’s important to know how much profit you should be expecting from your investment. Knowing how much of a return you can expect from a rental property will help you make informed decisions about your investment.

In this article, we explore the different factors that go into determining how much profit you should make on a rental property. We’ll discuss how to calculate rental income, expenses, and net profit. We’ll also provide guidance on how to achieve a profitable return on your rental property investment.

What is Rental Property Profit?

Rental property profit refers to the tangible cash remaining after each month's expenses are accounted.

It's crucial to differentiate rental property profit from taxable net income. This is because landlords can claim additional non-cash deductions which allow them to reduce their taxable income. One main example of this is depreciation which allows investors to deduct the value of the property (not including the land) against their taxable income over a period of 27.5 years.

The strategic use of real estate tax deductions enables certain rental property investors to minimize tax liabilities significantly and ultimately increase ROI.

Determining If It's A Good Investment

Calculating how much profit you should make on a rental property is one of the first things you need to do to determine if it’s going to be a good investment in the long term. This involves taking into account the expected rental income, any potential expenses, and the associated tax implications.

The property’s cash flow, however, will ultimately depend on a number of factors, including your initial investment, the type of property and its location. For instance, a single-family home in a desirable neighborhood will likely generate higher rental income than a single-family home in a less desirable area.

A few other factors to keep in mind when evaluating an investment opportunity:

  • Initial investment: How much money will you be putting up and for how long? An amazing ROI might not be worth it if you’re spending every penny of your savings to purchase the home, leaving no room for error.
  • Property condition: If the property is going to need significant repairs or updates in the near future, calculate these costs into the purchase price of the home.
  • Rent-to-mortgage ratio: If you’re investing in a rental property, do the math to make sure the numbers have you coming out on top. If the expected rent payment is not going to cover your mortgage, insurance, taxes, and association dues, then it’s not a good investment.
  • Property location: You can change a lot of things about a property, but you can’t change the neighborhood it’s located in. Even the nicest house in the worst neighborhood might not turn out to be a profitable investment.

Related: 2023 Rental Property Analysis Spreadsheet [Free Template]

How To Leverage Expenses To Increase Rental Property Profits

Rental property operating expenses are those necessary costs that come with owning a rental property. These expenses include things like mortgage payments, repairs and maintenance, insurance, taxes, payroll and marketing costs.

Mortgage payments are necessary to pay off the loan used to purchase the property. Taxes and insurance are necessary to ensure the property is legally compliant and protected from any potential liabilities. Repairs and maintenance are essential to keep the property in good condition and up to code. Payroll costs are necessary to cover the wages of any employed staff, and marketing costs are necessary for advertising the rental property and finding new tenants.

In addition, rental property owners may also incur additional operating expenses such as utilities, cleaning and landscaping costs, HOA fees, and other miscellaneous expenses.

Utilities are costs associated with providing electricity, water, and other services to the rental property. Cleaning and landscaping costs may be necessary to keep the property looking nice and well-maintained. HOA fees are applicable if the rental property is located in a community with a Homeowners’ Association, and may include dues and other charges. Miscellaneous expenses may include legal fees, accounting fees, and other costs associated with owning and operating a rental property.

As you may have guessed, while rental profits may be deemed passive income by the IRS, if yo want to run a profitable business there is a lot of work that needs to be done when it comes to managing your investment property and it's finances.

Accurately tracking all of your rental property expenses throughout the year will allow you to report them on your tax return to reduce your tax liabilities and increase profit margins. The easiest way to track and report tax deductions is to use free purpose-built software like Landlord Studio.

Related: A complete breakdown of your schedule e expense categories

How To Set AFair Rent and Maximize Property Profitability

One of the first things landlords need to figure out is how much to charge for rent. Having a cash flow positive business is essential if you want to expand operations, and this means having little to no vacancy. To do this, you have to set a price that is attractive to tenants while still bringing in the most money.

A few tips for working out how much rent to charge include:

  • Do a rental market analysis comparing your property to like properties in the area. You can use software like RentRange, Rentometer, and Zillow Zestimates.
  • Research the demand and supply in the area. High demand and low supply will allow you to charge more.
  • Calculate operating costs. Knowing how much you’re going to need to spend will allow you to work out the minimum you can viably charge whilst still making a profit.
  • See how much interest you get. If your property doesn’t get many enquiries, then think about lowering the rent amount.

How Much Profit Should You Make on A Rental Property? (1)

How to Calculate Profitability of Rental Property Investments

There are several commonly used metrics used to calculate the return on your real estate investment and help you keep your property profitable over time.

Cash Flow

Many real estate investors determine rental property profitability from the cash flow it generates. Cash flow is the amount of positive (or negative) cash that is left over at the end of the year after all expenses (pre-tax) have been paid. There are numerous factors that influence cash flow and investors should get a thorough understanding of all of the operating expenses associated with owning and running the rental property before purchase.

A few influencing factors include:

  • Property purchase price
  • Mortgage payments (both principal and interest)
  • Gross rental income
  • Vacancy rates
  • Property management fees
  • Operating expenses (including repairs, maintenance, CapEx, and landscaping)
  • Property taxes

Return on Investment (ROI)

Investors and experts alike regard return on investment (ROI) as the most important aspect of evaluating the profitability of a real estate investment. It is generally recommended to aim for an ROI of 10-15%. However, the ROI that is considered “good” or “bad” is dependent on an individual’s financial standing and the particular property they choose to invest in.

For example, you spend pay $20,000 in closing fees and maintenance/repair costs and when the property is ready to hit the market, you charge your tenants $2,500 per month. If you divide your income by your expenses, your yearly ROI would be just over 7%

Cash-on-Cash Return

The widely used real estate investment metric of cash-on-cash return (CoC) measures the yearly return on an investment based on the cash invested and net operating income. This return rate may differ greatly depending on the financing method employed, e.g. cash purchase or loan. Generally, it is advised to strive for a CoC yielding between 8% and 12%.

Capitalization Rate

The capitalization rate (also known as cap rate) in real estate is the ratio of net income to the purchase price of the property. To illustrate, a property worth $200,000 that is rented out at $1,500 monthly would give an annual net operating income of $12,000, which is equivalent to a cap rate of 6%. Whether this rate is beneficial or not depends on a variety of factors. For instance, a 6% rate may not be worth it if the neighborhood is not desirable or has a high risk or potential safety concerns. On the other hand, if the area is in high demand and the tenants are trustworthy, 6% can be a great return on investment.

The 1% Rule

The 1% rule is a helpful tool for investors to evaluate the viability of a potential investment property. The rule states that the monthly rent should be at least 1% of the total purchase price. For instance, if a property is bought for $300,000, it should generate a minimum of $3,000 in monthly rent. If market prices are lower than this or seem unreasonable, the investment may not be worth it. Additionally, factors such as size and location should be taken into consideration.

Final Words: Profit On Rental Property

How Much Profit Should You Make on A Rental Property? (2)

Whether you invest in commercial, residential, short term rentals or other assets, understanding the financial implications of owning a rental property is crucial for running a sustainable, profitable and professional rental business. This is why leveraging tools like Landlord Studio to track your rental property finances plays such an important role when it comes to informed decision-making, accurate tax filings, and maximizing end of year deductions.

Landlord Studio is a property management and accounting software designed specifically for real estate investors. Easily track your income and expenses with powerful automation features like bank feeds and smart scan receipts. Plus, streamline every aspect of your property management. Collect rent online, manage property maintenance, screen tenants and reduce vacancies and more. When it comes to tax time you can instantly generate any of over 15 accountant-approved reports, including your P&L and a specially designed Schedule E report.

Ditch your spreadsheets and upgrade your rental accounting and property management with the #1 rated free property management software for a more profitable rental portfolio.

Get started for free

You Might Like

  • Tax On Rental Income: How Much Tax Do You Owe?
  • About Your Rental Property Profit and Loss Statement
  • 11 Ways Landlords Can Increase Cash Flow With Additional Revenue Streams
  • How to Find the Best Yielding Properties and Expand Your Portfolio
How Much Profit Should You Make on A Rental Property? (2024)


How much profit should I make from a rental property? ›

It is generally recommended to aim for an ROI of 10-15%. However, the ROI that is considered “good” or “bad” is dependent on an individual's financial standing and the particular property they choose to invest in.

What's a good return on a rental property? ›

While what constitutes a 'good' rate can vary depending on an individual's investment strategy, location, and market conditions, generally, a return between 6% and 8% is considered decent, while a return of 10% or more is viewed as excellent.

What is a good cash flow on a rental property? ›

A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year. For example, if a property is purchased for $200,000, the annual cash flow should be at least $20,000 ($1,667 per month).

How do you calculate profitable rental property? ›

The simplest way to calculate ROI on a rental property is to subtract annual operating costs from annual rental income and divide the total by the mortgage value. However, there are some other calculations you can use to determine how much of a return you might expect when investing in a specific property.

What is the 50% rule in real estate? ›

The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.

Can you live off of rental income? ›

Strategic Real Estate Investing

Real estate investors who develop their portfolios strategically and with determination can realize their dream of living off rental property income. Location, revenue potential, property management, and long-term financial planning are essential components for success.

What is the 2% rule in real estate? ›

What Is the 2% Rule in Real Estate? The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.

How do I maximize my return on a rental property? ›

To increase your ROI from your rental property, you need to do four things:
  1. Make it a great place to live.
  2. Advertise it, so prospective tenants know it's available.
  3. Develop an effective tenant screening process to acquire the best tenants for your property.
Apr 11, 2024

How do you know if an investment property is profitable? ›

It's called the 2% rule. This applies to any investment, and says that an investor will risk no more than 2% of their available capital on any single investment. In real estate, this means that a property is only a good investment if it will generate at least 2% of the property's purchase price each month in cash flow.

What is the 1 rule in real estate? ›

The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.

Do you pay taxes on cash flow from rental property? ›

Tax sheltered cash flow refers to the profits you generate from a rental property. As long as you don't sell your rental property, you only pay tax on the rental income you're earning–not the value of the property itself.

How much cash flow should a rental make? ›

How much cash flow is good for a rental property depends on the location, property type, investment strategy, and purchase price. Many real estate investors are happy with cash flow of $100-$200 per month per unit, but this should be viewed within the wider context of your portfolio and financial goals.

How long does it take to make a profit on a rental property? ›

Most of the time, you can get positive cash flow right from day one with your rental. Figuring out your profit for the year is a matter of taking how much rent comes in and subtract how much money goes out for expenses like taxes, insurance, and mortgage payments. What you're left with is your profit for the year.

How do landlords make a profit? ›

The main way a rental property can make money is through cash flow. Simply put, this is the difference between the rent collected and all operating expenses.

How do you project rental income? ›

Calculate the adjusted monthly rent.

Subtract the vacancy and maintenance cost from the gross monthly rent. Based on a gross monthly rent of $3,000 and a 25% vacancy and maintenance adjustment, the lender would consider $2,250 as the estimated future rental income for qualifying purposes.

What is a good profit margin for real estate? ›

However, a general rule of thumb is that the ideal profit margin for a property development project should be 15–20 % or more of the project's total cost.

How profitable is a rental business? ›

The profits will vary widely based on factors like location, market demand, type of equipment, competition, and operational efficiency. On average, profit margins for the equipment rental business range from 5 to 20%, but specifics depend on your business model and circ*mstances.

Top Articles
Latest Posts
Article information

Author: Wyatt Volkman LLD

Last Updated:

Views: 6034

Rating: 4.6 / 5 (66 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Wyatt Volkman LLD

Birthday: 1992-02-16

Address: Suite 851 78549 Lubowitz Well, Wardside, TX 98080-8615

Phone: +67618977178100

Job: Manufacturing Director

Hobby: Running, Mountaineering, Inline skating, Writing, Baton twirling, Computer programming, Stone skipping

Introduction: My name is Wyatt Volkman LLD, I am a handsome, rich, comfortable, lively, zealous, graceful, gifted person who loves writing and wants to share my knowledge and understanding with you.