Topic 02 · 6 min read
How a Rental Makes Money
Rent in, costs out, and the number that is left.
Start with the rent. Subtract the months the place sits empty, then the operating costs: taxes, insurance, repairs, management, utilities you pay. What remains is operating income. Subtract the loan payment and you have the cash that actually lands in your pocket.
What to know
- Vacancy is a real cost
- Even a good rental sits empty between tenants. Experienced owners assume something like one month a year rather than twelve months of perfect rent.
- Operating expenses versus the loan
- Operating costs belong to the building. The loan belongs to how you bought it. Keeping them separate is how you compare two deals fairly.
- Repairs are not optional
- Water heaters, roofs, and appliances all die on a schedule. Setting money aside monthly turns a crisis into a line item.
- Cash flow is the survival number
- A property that loses money every month has to be fed from your job income. That is the most common reason beginners sell early.
The tax benefit
Ordinary operating costs of a rental — repairs, insurance, management, interest — are generally deductible against the rent, so the taxable profit is smaller than the rent collected.
Worked example
Running the numbers
Rent of $18,000 a year, minus $1,500 vacancy, minus $6,000 of taxes, insurance, and repairs, leaves $10,500 of operating income. A $9,000 loan payment leaves $1,500 of cash for the year.
Watch out for
- Rent quoted by a seller is often the best month, not the average.
- Self-managing is not free; it is your time.
- A cheap property in a weak area can have great numbers on paper and terrible ones in practice.
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