How Much Profit Should You Make on a Rental Property? [Full guide]

What kind of profit on your rental property can you expect? You're about to find out.

I have a seven-figure portfolio myself and today, I'll explain everything you need to know about getting a high-profit margin. So, if you want to replace your 9-5 income with your rental property portfolio, keep reading.

Quick Overview

• Understanding and measuring profit: Profit from rental property is the income left after all expenses, including the mortgage and maintenance. You need key metrics like cash flow, ROI, cash-on-cash return, and cap rate to evaluate profitability.
• Strategies for high rental property profit margins: Factors such as leveraging profitable models like student housing can significantly increase your profit margins.
• Tips for long-term success: To maximize profitability, focus on smart property management, minimize vacancies with targeted marketing, and invest in upgrades that boost long-term value.

What is Rental Property Profit?

Rental property profit is your total rental income minus all expenses and debt payments. Think of it as the actual money you can put in your pocket from your investment.

Your rental income can consist of:

• Base rental payments from tenants
• Service fees (laundry, vending, etc.)
• Other fees like pet rent or parking fees

Your expense categories can consist of:

• Mortgage payments
• Property taxes
• Insurance premiums
• HOA fees (if applicable)
• Maintenance costs
• Property management fees
• Vacancy reserves
• Marketing costs
• Property improvements and major replacements

So, how can you measure profit? There are a few different calculations you can use, like:

• Cash flow: The money left over each month after subtracting all rental property expenses (mortgage, taxes, maintenance, etc.).
• Return on investment (ROI): Measures the profitability of your investment by comparing the total profit to the initial investment cost.
• Cash-on-cash return: Calculates the return on the actual cash invested (for example, down payment and upfront costs).
• Cap rate: Estimates the return on an investment property by dividing its annual net operating income (NOI) by the property's purchase price or current market value.

What is a Good Rental Property Profit?

While a good rental profit varies by market, most successful investors aim for at least $200-400 monthly cash flow per unit after all expenses. In general, 5-10% is considered a good ROI on rental properties. But you can make much more!

However, the specific profit you should aim for depends on different factors, like:

• The type of real estate you choose (commercial, residential, etc.)
• What market you're investing in
• The condition your investment property is in
• And so on

In general, a healthy rental property should show:

• Positive monthly cash flow
• 1-2% of purchase price in monthly rent
• Operating expenses under 50% of rental income
• Clear potential for appreciation

High-Profit Rental Properties

Now, some rental property strategies have the potential to make more than others. To show you what I mean, let's take an example.

If you rent a single-family home to one tenant, a good profit might look something like this:

• Purchase Price: $200,000
• Down Payment: $40,000 (20%)
• Monthly Rent: $2,000
• Monthly Expenses: $1,600
• Monthly Profit: $400
• Annual ROI: 12%

But I specialize in renting to college students, so instead of renting a whole property to one person, I rent by the room to maximize my returns.

Per Rentometer, my rentals should be averaging $1,500 per month in rental income. Instead, I'm making $2,500-$3,100 per month in rental income on my single-family homes. So I'm making five figures per month in mostly passive income.

Other Types of Properties

Curious to see what profit might look like for different types of properties? Here are a few examples:

*Based on typical $200-300K property price
**Highly seasonal

What Affects Your Rental Profit Margin?

There are a few things that can affect your rental profit margin, like:

• Your financial goals: Are you focused on monthly cash flow, long-term appreciation, or both?
• Market conditions: Rental demand, property prices, and economic trends in your area play a huge role in determining how much you can earn
• The type of property you invest in: Single-family homes, multi-family units, or commercial properties—each has its own potential for income and expenses. Choose the one that aligns with your financial goals and market trends.
• Short-term vs long-term rentals: Short-term rentals (like vacation properties) can offer higher returns but are often seasonal and come with more maintenance and management costs. Long-term rentals provide steadier income but may have lower margins.
• Property management: Are you self-managing or hiring out?

Ultimately, plenty of things can affect profit margin, so start by understanding your goals.

How Do You Calculate Profit from a Rental Property?

Here are four calculations that can help you figure that out.

Cash Flow

To calculate your cash flow from your rental property, add up your yearly rental income and subtract all your expenses, including your mortgage.

If you have any cash left over after you've paid everything, you have positive cash flow. Otherwise, you have negative cash flow.

Pro tip: I highly recommend buying a property that can give you positive cash flow immediately. And that's what makes the student housing model so valuable: by renting on a per-room basis instead of the whole house to one person, you'll earn more for the same property.

Return on Investment (ROI)

Here's how to calculate ROI for a rental property:

Let's look at an example.

Imagine you buy a property that costs $200,000 in cash. You spend an extra $40,000 on necessary repairs, so your total investment is $240,000.

A year after your investment, you've collected $24,000 in rental income and spent $6,000.

In cash, your annual return is $24,000 – $6,000 = $18,000.

Using the calculation above, you get a percentage return of 7.5%. ($18,000/$240,000 = 0.075 = 7.5%)

Cash-on-Cash Return

Cash-on-cash return in real estate measures how much cash you're getting on the cash you've invested in a property.

As an investor, choose properties that will give you a strong cash-on-cash return. Typically, that means at least 6%.

Cap Rate

The cap rate for rental properties helps you estimate how much you could earn from an investment property.

If you estimate that you could get between 5% and 10%, that's a good return.

How Do You Maximize Your Profit Margin?

As an investor myself, here's what I recommend:

• Do thorough research before buying: Know what the local real estate market is like, and always have properties inspected before investing, even if they seem like a great deal.
• Align your strategy with your goals and market: For example, if you want to invest in student housing, focus on college towns.
• Lower costs with smart property management: To reduce costs, you can self-manage your rentals – I use what I call "tenant empowerment" to make it easier. Basically, this means my tenants have more responsibility and don't call me every time a common home issue comes up, like faulty internet.
• Minimize vacancies with smart marketing: One way to minimize vacancies is to be smart about marketing your rentals. For example, since I target college students, I use Facebook housing groups and advertise on housing sites.
• Track expenses and invest wisely: Keep track of your expenses, and invest in home upgrades that will help you earn a return in the long run.

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