Want to know how to make money on rental properties? You’ve come to the right place.
In this article, we’re going to cover how to use real estate so you can do things like:
- Work fewer hours (or quit, like I did)
- Pay off debt faster
- Build long-term financial security and a legacy
Want to learn more? Let’s dive in.
How do you make money on rental properties?
More than 44 million households in the US are renters and the US apartment rental market is worth $259.4 billion. At the same time, landlords typically earn $10,000 or more annually per property they manage – however, there are ways to increase your cash flow.
Because no matter what rental property niche you choose, here are the basic steps to making money on rental properties:
- Find a property
- Calculate your ROI
- Find tenants
- Keep your tenants
Let’s get into the details.
Find a property
When you’re on the market for a new property, you need to research the right location for your property.
I personally know how important it is to go through this step.
My first investment flopped and I lost $30,000 in extra costs because I hadn’t properly vetted the property.
My tenant called me in the middle of the night because both the sewage overflowd into the kitchen and bathroom.
As a result, I was negative in cash flow for over 2 years!
Here’s what some of the damage looked like:
How do you avoid this mistake, though?
For example, let’s say you want to invest in residential housing. In that case, think about what your ideal tenants will be looking for in a home.
Do you want to rent to families? Then invest in a property that’s in a safe neighborhood close to good schools.
Prefer renting to healthcare workers or students? It’s the same deal: they’ll need to be close to their workplace or university, so invest with their needs in mind.
You’ll also want to consider the amenities available in the area.
For example, easy access to things like public transportation, parks, and shopping centers can make your rental a lot more attractive to potential renters.
And, look at areas where there’s a demand for rentals. For example, rents have risen the most in the Midwest and Northeast.
With that said, investing in the best neighborhoods might come with higher property taxes. Always research these rates before making a purchasing decision.
Another thing to think about is what the average rent in a particular area is and whether it’s expected to increase based on demand.
For example, I invest in rental properties for college students.
The questions I ask include:
- What are the college options in the area?
- What are the enrollment trends?
- What percentage of students live off-campus?
- What do they look for in a rental (proximity to campus, parking, walkable neighborhood, etc.)?
You’ll also want to look at your competition to see if there’s a hole in the market or not.
For example, are the on-campus housing occupancy rates high? If so, do some research to see what off-campus options students have access to.
If there isn’t a lot of off-campus housing for those who can’t rent on campus, that’s a good sign for you as an investor.
Calculate your ROI
If your goal is to make money on your rental properties, calculating your expected return on investment (ROI) is essential.
Remember: you want a property that will be a long-term asset, not a financial burden.
So, to calculate your ROI, add up all the expenses associated with owning the property, like your mortgage, property taxes, insurance, maintenance, repairs, and mortgage payments with interest.
Then, calculate your expected rental income. Then, subtract whatever is left after you’ve paid your bills with the cost of your investment.
Typically, a good ROI on your rental property is 5%-10%.
Keep in mind that early on, property-related expenses like a mortgage can significantly reduce your ROI in the short term. But ideally, you’ll want to at least break even.
If you’re consistently losing money every month because your mortgage is too high and your property’s rent potential is too low, that’s a bad investment.
Find tenants
As I mentioned above, finding great tenants starts with identifying who your dream renters are.
Once you know who you’re trying to attract, you’ll be able to figure out what they’re looking for in a place to stay – and offer that.
The next thing to do is to advertise where your ideal tenants are looking for housing. For this step, I recommend using housing Facebook groups, Craigslist, and sites like Zillow.
Once you have consistent leads, you’ll want to filter them and figure out who you want to rent to.
How?
Look out for red flags early on, like people who make unreasonable demands or who aren’t responsive or polite.
You’ll also want to make sure that your potential renters have enough income to rent from you.
To check this, always ask for proof of income.
If your renters are college students or other groups with lower income, you should require that they find a co-signer who has a stable revenue.
Ultimately, it can be tempting to rent to the first leads you get, but having reasonable standards will help you avoid problems down the road.
Keep your tenants
Once you have great tenants, you’ll want to retain them.
Remember: if you choose the long-term rental option, it’s a lot easier (and less time-consuming) to keep the quality tenants you have – rather than constantly having to find new ones.
One way to do this?
Foster a good tenant-landlord relationship. This doesn’t mean saying yes to unreasonable requests or constantly being available.
But it does mean treating them with the respect and courtesy you’d have for a colleague or friend.
If your tenants feel that you value them and are attentive to their housing-related needs, they’ll be less likely to move.
Of course, some people leave for work or school – reasons that don’t relate to how good their rental is.
But in some situations, your tenants may decide to move because their reasonable expectations aren’t being met (like having strong internet or appliances that work).
Put yourself in their shoes and be the kind of landlord who makes people want to stay long-term – and recommend you to their friends.
What are different ways to make money on rental properties?
So far, we’ve talked about how to make money on rental properties through rental income. But did you know that real estate can offer a variety of revenue opportunities – and even tax breaks?
That’s what we’ll look at next.
Cash flow from rental income
The most obvious way to make money on rental properties is from rental income.
That’s what I do, too. And that’s how I’ve built a portfolio that generates six figures per month.
To build that type of portfolio, you need to start with your first rental – and figure out your cash flow.
To calculate how much positive cash flow you could expect from an investment property, you add up your rental income and subtract your operating expenses.
Whatever is left over is your positive cash flow.
Okay, but what are operating expenses exactly?
As the name suggests, operating expenses are all the expenses that are related to running your rental properties.
So, these can include things like property taxes, running ads to get new tenants, and routine maintenance.
For example, if the refrigerator in your rental property needs to be replaced, that would count as an operating expense.
Property appreciation
Property appreciation happens when a property’s value increases over time. So, for example, I bought my first investment property for $262,000. And a few years later, it was worth $315,000.
That’s the power of appreciation.
And keep in mind that there are a few things that can contribute to appreciation.
Unsurprisingly, renovations can impact how much a rental is worth. But that’s not the only contributing factor.
For example, if you invest in a prime location with top universities or hospitals and a great quality of life, that can affect property value – even if the rental itself doesn’t get any upgrades.
Keep in mind that market growth alone can make it a lot easier to get quality renters.
That’s why it’s important to look at things like the neighborhood and what kind of employment opportunities exist in the area when you’re looking at potential investment properties.
Don’t just buy a property because it’s cheap.
To make money on rental properties long-term, have a long-term vision of what kinds of people will want to rent from you given what you offer.
Case in point: if you’re trying to attract high-income earners, investing in an area that has abundant professional opportunities for this target market is a smart move.
Amortization
Put simply, amortization is the process of repaying a loan over a fixed period by paying down both the principal and the interest.
Let’s look at an example to see how this works using an amortization calculator: imagine you decided to buy a rental property that had a sale price of $300,000, and you borrowed the entire amount.
If you took out a 20-year mortgage at a 6% interest rate, you’d be paying a little over $2,100 per month for the duration of your loan.
Early on, most of your monthly payments would go toward paying down interest. But over time, your payments would mainly go toward your loan’s principal, which is the loan itself.
Once you know how much your monthly mortgage would be, you can compare your mortgage to your expected rental income to see if an investment would be worth it or not.
Tax benefits
One of the great things about owning rental property is that when tax season rolls around, you can benefit from your status as a landlord to keep more money in your pocket.
Here are a few examples of ways you can do that:
1. Mortgage interest.
If you have a mortgage on your rental property, the interest on your payments is tax-deductible. So, even though you’ll still be responsible for paying the principal on your loan, you’ll be able to save on interest, which adds up.
2. Property-related travel expenses.
Need to travel to check in on a rental property? Good news: that’s an expense you can write off your taxes. So, if you need to drive several hours or even take flights to be physically on-site every so often, this is a great deduction to know about.
3. Depreciation.
Over time, properties undergo regular wear and tear that can negatively impact how much they’re worth. Thankfully, the IRS counts this as a legitimate tax deduction. You can also write off the depreciation of tools you use to keep your rentals running, like your work computer if you have one.
4. Operating expenses.
Let’s say there’s a leak in the bathroom and you call a plumber to replace a pipe. In that case, you’d be able to write off the repairs themselves and the costs associated with hiring someone to fix the leak.
I talk more about deductions here:
Ultimately, tax benefits like these are good to know about because they can save you thousands of dollars every year.
How much profit should you make on a rental property?
Depending on what kind of rental you choose, the current market, and so on, your profits can vary. But here’s an example to give you an idea:
I recently invested in a $211,000 property that brings in $3,800 in monthly rental income. After factoring in my mortgage and other expenses, my cash flow is nearly $2,000 per month.
To calculate my ROI, I looked at my cash flow divided by my cash invested, which gave me a ROI of 28%. (For rentals, a ROI of above 10% is ideal).
Ultimately, as we’ve seen, rentals can be a lucrative investment option beyond just cash flow – from property appreciation to tax breaks.
What type of rental property is most profitable?
The most profitable types of rental properties include multi-family, single-family, and short-term rentals, with single-family properties growing the fastest.
With that said, a property’s profitability doesn’t just depend on what type of property it is.
Here’s an example to explain what I mean by that:
I personally buy big houses, maximize the number of bedrooms, and rent to college students on a per-room basis.
Thanks to this investment model, I end up earning a lot more than I would if I rented an entire property to one person – even though the property is the same.
So, if you’re looking to increase your ROI, I recommend buying large properties and renting them out to students.
Next steps
There you have it!
Now you know how to make money on rental properties.
If you’re tired of working a typical 9-to-5 or just want more financial freedom, investing in real estate is a great way to go.
Want more guidance?
I started investing in real estate as a total newbie, and today I have a seven-figure portfolio.
If you want to avoid common pitfalls and make money from your investments a lot faster, find out how you can work with me here.
Read more:
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