Does renting out a property cover the expenses?

Question

I was wondering how the finances work for buying a property and renting it out. When I do the math on renting out a property, like in Texas, for a 1 bed and bath and compare it to the median rent for the area, the rental income doesn't cover the entire mortgage, property tax, fees, etc., of the property itself. How do people then generate a monthly rental income?

I'm sure the numbers are more favorable if you completely own the property and don't have to do mortgage payments or have some other bond or something to cover the mortgage payment cost. But for someone who is starting out to buy their first property with only money to let's say cover a down payment of 20% for the property, how does the math work out to cover the cost of the property from rental income?

Thank you all for your insights!

Peter Stewart · Answer

Don't we all wish that all rental properties would cover the expenses no matter what.

There are TONS of variables to factor in (price point, area, market, condition, etc), but at least in my market (Indianapolis) the rents on a SFR often do not cover all expenses. For cash flow most of my clients look for residential multifamily (2-4 units). That, or do medium or short term rentals (neighborhood and condition specific though, doesn't work for every property).

This is the "hard" part of RE investing - finding a market and property type where the #'s will work favorably. If it were so simple as just buying a SFR with 20% down and you'd cash flow automatically, everyone would be doing it.

My suggestion is to do your due diligence a bit more and understand all the #'s that go into the underwriting, and find a market that is known for cash flow, and then find an investor friendly agent in that market to help guide you further.

Bjorn Ahlblad · Answer

What you are referring to is called underwiting. Don't buy anything until you know how to underwrite. Unfortunately I can't cover it all here but there are books and podcasts to get you started.

Alecia Loveless · Answer

@Yuqing Xiong If you are finding a SOLID deal it will cash flow around $150-250 per month after all the bills are paid. That includes the mortgage, the insurance, if there is any electricity the landlord is responsible for, if the landlord is responsible for any of the water and sewer, not all of those bills might be every month, some might be quarterly or twice a year like the insurance, and a small percentage set aside each month for vacancies, maintenance, and eventual capital repairs.

Now that interest rates are higher it is much harder to find deals that will meet this requirement.

I have found two last year, one that was an 8 unit building where each unit cash flows about $600/month and a 5 unit building where each unit cash flows about $400/month.

But now my market has dried up and there’s only very expensive single family homes for sale that don’t work as rental properties because they have a negative monthly cash flow of starting at

-$400 and getting worse from there.

I can only recommend you keep looking, expand your search area and try to analyze at least 15-20 new properties per day to get the best feel for your market and the best chance to find a positively cash flowing deal.

Jake Knight · Answer

Explore different markets that support the numbers you're looking for.  If you're focus is cash flow that's much easier to accomplish with small MFH than SFH (as Peter referenced above). A lot of Midwest markets offer more favorable numbers to achieve this.  Find the right time to explore properties and get the underwriting in place and you'll be able to make a well educated decision.

Christie Gahan · Answer

Bjorn is correct!

Another thing to learn is that different markets have different characteristics.  Usually, the markets with the best cash flow have a smaller potential equity gain.  ( Meaning if you sell it in 5 years it will be worth a little bit more.)  The other end of the spectrum, is a small or negative cash flow but potential for large equity gain. ( When you sell it in 5 years you have a six figure gain.)   If you are secure in your personal finance you may choose to go for the lower cash flow / higher equity gain scenario.  But, remember your potential repair costs can wipe out your rental income if you are making just $200 a month.

Yuqing Xiong · Answer

Thank you all for your responses and insights.

Glen Wiley · Answer

Every one of my rentals yields WAY more return above and beyond expenses.

THe trick is that you have to search for the property that will "pencil". You are doing exactly what you need to do. Find a property, sketch out the finances of the deal to see whether it will provide adequate returns and if not move on to the next deal.

We evaluate dozens of  properties every year but typically buy only 1 or 2. It can be tough finding a deal that works. Keep going and you will find that it gets easier as you review more and more properties.

Michael Thach · Answer

All of the above are right. Hard to make positive cashflow with 20% down and high interest. Mortgage payments have risen more compared to rent payments.

I see that you are referring to Texas. I got couple properties in Houston. They were cash-flowing when I bought them, nothing crazy, about 200-300 usd per month for properties around 150k. I bought them in 2018-2019 and they are worth around +240-300k now, so while they are not cashflow monsters they appreciated nicely, nearly tripled the initial investment amount.

If you are looking to cash-flow in this high interest enviroment, I recommend you to do MTR ( medium term rentals ) combined with house-hacked. Means you hack a single family house into 3-4 units and rent them out on MTR. It requires more initial capital, more knowledge and the right team. Or you could also find people who does those and invest with them as a silent partner.

Marcus R. · Answer

If you're just starting out I highly recommend buying a live-in flip.  Capital requirements are much lower and you get to go slow and learn the process.  Fix it up over 1-2 years then evaluate what's the best play (stay, sell, refi, STR rent, LTR rent, etc...)

Andrew Syrios · Answer

It depends on the property, of course. Before rates went up, if you could beat the "1% rule" (i.e. annual rental income was equal or greater to 1% of the total price (purchase and rehab) of the property) it would usually cash flow. Nowadays, it's really hard to find any SFR that will cash flow with a bank loan on it at 80%.

With 60% LTV or a multifamily sure. But with SFR, it's tough. Not impossible, but difficult.

Does renting out a property cover the expenses?

Most Popular Reply