What a Rental Actually Nets: Realistic Income by Price Point

How much do rental properties make? Far less than the rent, and usually less than the number quoted by whoever is selling you on the idea. In the first example below, a $150,000 house collecting $1,500 a month in rent leaves its owner $25 a month after every real cost is counted. The same house, described the way rentals are often described online, "cash flows $502."

Both figures come from the same property. The $477 gap is made of four lines that are easy to leave out. This post builds the full waterfall at two price points using labeled example properties and example financing, so you can see each line and swap in your own numbers.

Gross rent is not income: the waterfall from rent to net

A rental's income statement runs in a fixed order, and each step removes money before the owner sees any.

1. Gross rent. What the lease says.
2. Vacancy and credit loss. Rent you never collect because the unit sits empty between tenants or a tenant stops paying. A 6% allowance is about three weeks a year.
3. Operating expenses. Management, repairs, property tax, insurance, plus any utilities or HOA dues the owner pays.
4. Capital expenditure reserve. Money set aside monthly for the roof, HVAC, water heater, flooring and appliances. These bills are certain. Only their dates are unknown.
5. Net operating income (NOI). What the property earns before financing.
6. Debt service. Principal and interest.
7. Cash flow. What reaches your account, before income tax.

Both examples below use the same assumptions so the comparison is fair: 25% down, a 30 year fixed loan at an example 7.0% rate, 6% vacancy, management at 9% of collected rent, and property tax at 1.2% of price. These are illustrations. Your rate, tax bill and insurance quote will differ, and each one moves the bottom line.

A $150,000 rental: the full monthly waterfall

Example property: a three bedroom house bought for $150,000, renting for $1,500, which is 1.0% of price per month. The loan is $112,500 and the payment is $748.

That is $300 a year. The cash invested was $37,500 down, $4,500 in closing costs and $3,000 of make-ready work, or $45,000 in total. Cash on cash return is $300 divided by $45,000, which is 0.7%.

Two other things are true about this house. The loan balance falls by $1,143 in year one, which is real wealth you cannot spend yet. And an owner who manages the property personally keeps the $127, raising cash flow to $152 a month. That owner has taken a part-time job that pays $1,524 a year.

Vacancy plus operating costs plus capex consume 48% of rent here, close to the old "50% rule." That rule of thumb says half of gross rent goes to everything except the mortgage. It is crude, and on cheaper houses it is often about right.

A $300,000 rental: same waterfall, different shape

Example property: a newer house bought for $300,000, renting for $2,350. Rent is 0.78% of price, because rents do not double when prices do. The loan is $225,000 and the payment is $1,497.

This house loses $3,024 a year in cash on a $75,000 down payment, while paying down $2,286 of principal. The operating side is no worse than the cheaper house. Repairs and capex take a smaller share of rent, because a furnace costs the same in both houses and the rent here is higher. The damage is all in the debt line: the payment eats 64% of rent against 50%.

That is the different shape. A lower-priced house in a high-rent-ratio market produces a little cash and modest equity growth. A higher-priced house at these example terms is a bet on appreciation and loan paydown that you fund out of pocket each month. To break even at this rent, the loan would have to shrink to about $187,000, which means a down payment near $113,000, or 38% of price.

Neither shape is wrong. Buying the second house while expecting the first house's cash flow is the mistake.

Why the internet's cash flow numbers are inflated

Most cash flow claims you see are arithmetic done on a shorter list of lines. Nobody has to be lying for this to happen. People report what they see leave their bank account in a good month, and the omitted costs do not show up monthly.

Here is the $150,000 house both ways.

The four zeros add up to $477, the whole difference. Each one has an ordinary explanation.

• Self-management valued at zero. The owner does the work and does not count the hours. That is a fine choice, but the $127 is pay for labor and belongs in a separate column from the investment's return. It also disappears the day the owner moves, gets busy or burns out.
• No capex line. A newly bought house with a five year old roof really does have low capex for a while. The bill is deferred, and it lands in one piece.
• Zero vacancy. A post written in month eight of a first lease has never seen a turnover.
• Repairs counted only when they happen. A quiet quarter looks like a permanent condition.

A second source of inflation is the loan. Someone who bought years ago, at the price and rate available then, may be reporting real cash flow that a buyer today cannot reproduce on the same street. Ask what rate and what purchase price sit behind any number you hear, and check the rent side yourself using the rent estimates pages for your area.

The months that eat a year's profit

The waterfall smooths costs into monthly lines. Real life delivers them in lumps. Here is one plausible five year run for the $150,000 example house, holding rent, tax and insurance flat to keep the arithmetic clean. Each year starts from $18,000 of rent, $1,620 of management, $1,800 of tax, $1,200 of insurance and $8,976 of loan payments, which leaves $4,404 before repairs.

Year 3 in detail: a vacant month costs $1,500 of rent but saves $135 of management, for a net $1,365. Add $2,200 of paint, cleaning and flooring, a $750 leasing fee and $700 of ordinary repairs, and the total is $5,015. Year 4 is a $1,600 water heater plus $800 of repairs. Year 5 is a $6,500 HVAC system plus $500 of repairs.

The five years total $6,105, which is $1,221 a year, or $102 a month. In years 1 and 2 the owner would have told you, accurately, that the house makes about $300 a month. One turnover and two equipment failures erased most of it. And the roof has not come due yet, which is why the waterfall's $25 is lower than this five year average of $102. The reserve lines are paying for a bill that sits outside the window.

This is also why reserves are a cash requirement and not only a spreadsheet line. Year 5 needs $2,596 from somewhere.

Set the bar: what good looks like at each price

With the full waterfall in hand, you can work backward to the rent a property needs at these example terms. Each extra $100 of rent adds about $86 to cash flow after vacancy and management.

Checking the $150,000 target: $1,646 of rent less $99 vacancy is $1,547 collected. Management is $139, and with $110 repairs, $150 capex, $150 tax and $100 insurance, operating costs are $649. NOI is $898, and after the $748 payment, cash flow is $150. The $300,000 house needs $2,645, which is 0.88% of price, just to reach zero.

So a reasonable bar, using these assumptions:

• At around $150,000, look for rent at or above 1.1% of price. Below 1.0%, a fully loaded deal with 25% down at a 7.0% example rate roughly breaks even.
• At around $300,000, rent near 0.9% of price breaks even. Most houses at that price rent for less, so positive cash flow usually takes a larger down payment, a lower rate or a below-market purchase.
• Lenders who underwrite on the property's income commonly want a debt service coverage ratio of 1.20 to 1.25. The $150,000 example sits at 1.03 ($773 divided by $748) and the $300,000 example at 0.83. Both would need more cash down to qualify on that basis.

These ratios are outputs of the example assumptions, not market rules. A rate one point lower shifts every threshold down.

Next steps are short. Pull a realistic rent from comparable listings, not from the seller. Get an actual insurance quote and the county's tax figure for a new owner. Decide honestly whether you will manage the property, and price your time if you will. Then put the listing through the single family calculator, which produces this same waterfall for a real address with your rate and your expense assumptions. The tables here are illustrations built to show the structure. The version that matters is the one you build from a listing you could buy this month.