How Much Do Rental Homes Earn_ - How Much I Made My First 18 Months

This Is How Much Profit You Should Make On a Rental Property

Have you ever wondered how much profit should you make on a rental property? If you have some extra cash to invest and you’re thinking of putting it into a rental property, you should first consider how much you can expect to spend versus how much you can expect to make before you invest your money.

In this post, I’ll do a complete analysis and breakdown of the expenses, cash flow profit, and amount of equity for each of my three rental properties, which I’ve owned for three to four years.

What to Know When Investing in Real Estate

When you’re learning how much profit should you make on a rental property, there are several different things you should keep in mind to help you make informed decisions about your investment.

Cash-Out Refinance

You can take out a cash-out refinance when your home’s value or the amount of equity you have in it goes up. This allows you to take out a new mortgage loan for a larger amount than your original loan. Then, you can take out the difference between both these loans in cash. Essentially, you are turning some of your equity into cash. You can then use this cash for anything you want, such as renovating the home or additional investments in other properties.

Traditional Financing

Traditional financing is what most people think of when buying a property. For this type of financing, you take out a mortgage from a financial institution to help fund your purchase and pay it back over time. This type of financing tends to be more affordable and has better lending terms for the buyer. 

Hard Money Loan

Hard money loans are funded by private businesses or individuals. They tend to have higher interest rates, more fees, and shorter terms. It works best for properties that need extensive rehabbing. But if you know the property’s value will drastically increase once the renovations are complete, it can be worth it.

Hire a Property Manager

I pay a property management company to manage all three of my properties. You can hire a management company so that you don’t need to worry about tenants, collecting rent, evictions, scheduling contractors, and other related issues.

Hiring a manager to take care of this allows you to be hands-off and oversee all your properties without expending much time. Of course, if you’re wondering how much profit should you make on a rental property, hiring a property manager will cut in to some of your earnings.

Background On My Rental Properties

I picked up all three of my rental properties between 2016 and 2017. All three are below the average price point for my city, but they’re all great quality properties in good locations. The average price point in San Antonio is around $225,000, and each property is currently valued between $130,000 and $190,000. To demonstrate how much profit should you make on a rental property, I’ve broken down the expenses and costs of each one below.

Sunrise Creek

  • Size: 1,086 square feet
  • Purchase Date: 03/17/2017
  • Purchased Price: $66,887
  • Amount Financed: $80,000
  • Down Payment: -$13,113
  • Closing Costs/Commission: $2,007
  • Rehab: $31,769
  • Total Cash Investment: $20,663
  • Today’s Value: $130,000

This property was a distressed sale that needed extensive renovation work. I purchased it for $66,887 and spent $31,769 on repairs, which adds up to around $100,000 total after you subtract the $2,007 I made in closing costs. If you’re wondering how much profit should you make on a rental property, the amount of repairs needed will play a role in how much you earn.

This home came from one of my family member’s who was preparing to move out of state. The property was in no condition to sell to a retail buyer, so I decided to purchase it myself and work out a deal with the seller.  

The structure of this deal was that the seller would continue to be on the title of the home and make the mortgage payment. However, I would pay the mortgage for them until I had completed the rehab on the home. I only made this deal because I was working with a family member, so I knew I could trust the outcome.

Once I completed the rehab, I would purchase the home as a traditional investment property at a 20% down on the after-rehab value (ARV). This structure would help me avoid having to go with a hard money loan and refinancing the property once it was completed. The seller would then have to pay me the difference between what I originally purchased the home for, $66,887, and the after-rehab value after the deal was closed, which was $100,000.

I paid a down payment of $20,000 (20% of the $100,000 ARV) out of pocket. With the $30,000 in repairs, this is a total out-of-pocket cost of $50,000. However, because I received a check for nearly $30,000 from the seller after closing, my real out-of-pocket cash was reduced to $20,000. The loan on the property was $80,000

However, the property’s actual market value has gone up over time and is now $130,000. As of today, minus the cost of the loan, I have around $55,000 in equity.

Thatch Drive

  • Size: 1,360 square feet
  • Purchase Date: 08/12/2016
  • Purchased Price: $119,200
  • Amount Financed: $95,360
  • Down Payment: $23,840
  • Closing Costs/Commission: $3,576
  • Rehab: $6,393
  • Total Cash Investment: $33,809
  • Today’s Value: $187,360

I purchased Thatch Drive from one of my clients for $119,200, because they did not want to deal with showings and preferred a quick close.  

I negotiated $6,000 in seller-paid closing costs and earned $7,000 in real estate commission. I put 20% of the $119,200 down out of pocket, which was $23,840. This amount combined with $3,576 in remaining closing costs and $6,393 in rehab costs, meant that I was out of pocket $33,809.  

Thatch Drive has gone up in value over the years and is now worth around $187,360. My initial loan for it was $95,360. When you subtract the amount of my loan from the property’s current value, I have approximately $100,000 in equity in the home.

Windward Way

  • Size: 1,360 square feet
  • Purchase Date: 03/27/17
  • Purchased Price: $63,000
  • Amount Financed: $100,000
  • Down Payment: $-37,000
  • Closing Costs/Commission: $1,890
  • Rehab: $38,931
  • Total Cash Investment: $3,821
  • Today’s Value: $139,000

This property needed many repairs. I purchased it for $63,000 and spent $38,931 on repairs. 

On this property, I secured a private loan for $100,000 at a 5.5% interest rate. This loan wasn’t hard money or traditional financing, but rather a personal loan from someone I know who needed to put some of their cash to work for them in a relatively safe investment.

Because the loan was larger than the property’s purchase price, it covered most of the rehab and closing costs, which were minimal because it was a cash purchase. This scenario meant that my out-of-pocket expense for the property was only $3,821. 

Today the property is worth around $139,000. My original $100,000 loan is now down to $95,482, meaning that I have approximately $43,517 in equity.  

Total Rehab + Appreciation Return For All Three Properties

  • Total Equity: $197,953.19
  • Total Out of Pocket: $57,536.64

Overall, these properties are an excellent investment because I paid around $57,536.64 in cash out-of-pocket and now have just shy of $200,000 in equity in roughly four years since my initial investment. 

Two of these properties needed significant rehab. I would estimate 50% of my total return is based on the properties’ rehab, and appreciation accounts for the other 50%.

Aside from rehab and appreciation, there’s an additional income stream that you should account for when learning how much profit should you make on a rental property: the cash flow.

How Much Profit Should You Make On a Rental Property

While I could have flipped these properties, I decided to keep them and rent them out. As a result, I’ve been making consistent cash flow on all of them. I also get more equity as the value of the properties’ appreciates over time.

I use Quickbooks to track all my expenses and income related to all three properties. The table below shows how much profit should you make on a rental property in terms of cash flow. Specifically, I analyze the cash flow between the years 2018 to 2020.

Analyzing 2018 – 2020 Cash Flow From My Properties

I began renting the homes out in 2017, so full-year data started in 2018. Since that time through the end of 2020, I’ve gone through three tenant changeovers: one in Windward Way and two in Sunrise Creek. Thatch had no tenant changeovers.

A table depicting the profit and loss on three rental properties

Keep in mind that all three of these properties are under property management, so I’m entirely hands-off. I’m aware of things such as necessary maintenance or whenever a tenant is not going to renew their lease through email notifications. Other than that, I simply receive a direct deposit each month with the rental income, minus property management fees and any maintenance costs incurred that month. 

Additional charges that I pay include insurance, annual taxes, and any capital expenditures that the property needs. Capital expenditures are significant expenses that fall outside typical maintenance. For example, in 2018 I had to replace the roof on Thatch Drive and part of the electrical system inside Windward Way.

In the three full years in which I’ve owned these three investment properties, they’ve cash flowed a total of $21,708.33. Annually, this amounts to $7,236 for the three properties combined, or $2,412 separately. This means that each property is bringing in around $200 per month in cash flow.  

If you look at the properties individually, you’ll notice that some have performed better than others. This is because of the capital expenditures I paid on Windward Way and Thatch Drive.

Four Expenses to Consider

While investing in real estate is typically an excellent investment, you need to keep in mind that there will be many expenses. If you can’t afford to take these into account, it may not be the right time for you to invest in real estate.


Realistically, you likely won’t be making rent for the entire year. Even if the property gets rented out right away, the renter still has to get approved, so there might not be immediate rent payments. 

And if it’s not rented out right away, it has to be marketed and staged while you wait for a renter. For this reason, it’s wise to factor out 10% of your earnings for vacancy. For example, say you had a $1,800 mortgage payment and charge $2,000 on the rental property. If you factor 10% of that amount for vacancy, which is $200, you would just be breaking even with your $1,800 mortgage.

Vacancy is not an expense that shows up on my profit and loss statement above. However, based on the price my properties rent for, if there were 100% occupancy my gross rent received over the three years would have been closer to $127,000. This means that I’ve lost around $5,000 to vacancy, which is just under 5%. But I also haven’t had to deal with an eviction because the rental market in my city has been growing. For this reason, I still recommend you factor 10% for vacancy. 


I set aside 5% to 10% of my earnings for maintenance. If it’s a newer property that’s been well-cared for or recently remodeled, it’s safe to go down to 5%. Otherwise, for older homes that need regular maintenance, 10% is better.

I’ve paid $6,655 in maintenance across my properties over the three years. This amount is approximately 5% of the $122,282 in gross rents I’ve received over the same time frame.  

Capital Expenditures

It’s a good idea to keep 5% to 10% of your earnings for capital expenditures. This expense is usually a significant repair the property will need throughout its life, such as a new roof or replacement AC.

For this reason, it’s wise to plan ahead and save some money so that you can afford them when the time comes. I’ve spent $10,287 in capital expenditures, which is just under 10% of my total gross rents.

Property Management Fees

I also set aside 10% of my earnings for property management fees. If you plan to manage the property on your own, you won’t need to worry about this. But if you want to be more hands-off with your investment, then this might be a worthwhile expense.

I have a fantastic deal with my property management company. I’ve paid $10,617 in property management fees over the three years, which is just under 10% of my gross rents over the years. 

Properly Forecasting Cash Flow

If you factor 10% for vacancy, 10% for property management, 10% for capital expenditures, and 10% for maintenance, that’s 40% that you have to take out of the rent that you earn from that property. For example, if you would have made $1,000, you’re actually earning $600.

So if your mortgage is more than $600, you likely won’t be cash-flow positive. But if it’s less, then you’ll have a cash-flowing asset. 

Analyzing Total Return on Investment

To calculate your total return on investment, you need to consider forced appreciation through rehab, passive appreciation through the value of real estate increasing over time, and cash flow earned (or lost) over the years.  

I use a free tool called Dealcheck to run numbers on all my deals before purchasing them. This tool is also great to use for investor clients who want to see their potential returns for a given property. In addition, you can use this tool to tell you whether holding onto an investment is more beneficial than selling it and putting the equity to use in a different asset.

All you have to do is put some raw numbers into the system, including the purchase price, rehab costs, loan details, and forecasted expenses.  

Buy and Hold Projections

DealCheck can create a report called the “Buy and Hold Projections,” which shows your expected returns after different lengths of ownership. Below are examples of what the report looks like for each of my three rental properties.

Sunrise Creek

A summary of profit and loss for Sunrise Creek

Thatch Drive

A profit and loss summary for Thatch Drive

Windward Way

A profit and loss summary for Windward Way

This report breaks down your returns based on whether you hold your property for one year through 30 years. It includes equity accumulation and cash flow, and compares that against your initial investment to show what the return rates would look like if you sell the property at a specific time.

There are two metrics I recommend looking at to determine how much profit should you make on a rental property:

Return on Equity

This is the return I earn in cash flow based on how much equity I have on the property. Ideally, this number should be above 4%. If it’s less, you should consider refinancing the property and pulling cash out, or selling it and reinvesting the funds.  

I aim for 4% because I believe that real estate appreciates at about 3% over time. If you add the 4% in cash flow with the 3% in appreciation, that equates to a 7% total return on your equity. Anything less than this, and you’d be better off using that equity in a higher-yielding investment.

Internal Rate of Return

This figure tells me the annualized percentage return I stand to gain on my investment over the entire holding duration. For example, if you look at Windward Way, you’ll see that after year five, I will have earned an annualized return of 108.6% on my initial investment of $3,821.  

The Internal Rate of Return takes into account compounding. As you can see, the total return over those same five years would have amounted to 2,095.3%. Talk about an excellent investment!

Is Investing in Real Estate is Right For You?

To determine how much profit should you make on a rental property, factor in the four expenses we covered above, in addition to your mortgage, to determine what your cash flow would be. It’s essential to do these calculations before you invest your money. This way, you can decide if the property is a worthwhile investment.

In general, a good rule of thumb is if you can rent a property for 1% of the purchase cost, then it may be a worthwhile investment. And if you can do more than that, even just 2%, that is an excellent opportunity to add a cash flow positive investment to your portfolio.

When you’re considering how much profit should you make on a rental property, remember that a property can still be a worthwhile investment, even if the cash flow is neutral or negative. This would be the case if you speculate that the appreciation in that area will increase above average.  

Typically, I’ve seen that rental properties in lower-income areas tend to cash flow better but appreciate less, while rental properties in higher-income areas tend to appreciate more but cash flow less.

Aside from cash flow, another reason to invest in real estate is that you get tax benefits. You’ll be able to write off some expenses, such as maintenance, property management, and even depreciation. Depreciation is a significant benefit because you can earn income on the property and write off much of it due to depreciation.

Final Thoughts on Becoming a Real Estate Investor

If you can afford it, investing in real estate can certainly be a valuable method to grow your money. Hopefully, this case study of my own three properties demonstrated how much profit should you make on a rental property. Follow the tips in this post to help you invest in real estate the right way and make intelligent decisions with your money. For more advice, check out my post on 10 financial independence tips for real estate agents.

Have you invested in real estate before? If so, what was your experience? Let me know in the comments below. I’d love to hear from you!

Kyle Handy

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