There is no reliable average monthly profit on a rental property. The biggest single variable is usually the loan. On the same house, it can move monthly cash flow from $31 to $1,080. What the owner assumes about operating costs, vacancy, and reserves can move it again. Any average that combines those is describing neither.
It is a fair question to ask, though. Somebody thinking about buying a rental, or wondering whether the one they own is normal, wants a benchmark.
The numbers you will often find range from about $100 a month to about $500, and none of them is wrong exactly. They are just averages taken across properties that have nothing in common except that they are a rental property.
The reason the average is useless to you is worth understanding, because the same reason will tell you how to work out your own number.
Two different things are both called profit
Before the math begins, there is a definition problem, and it causes more confusion than the calculation does.
Cash flow is what lands in your account. Rent comes in, everything gets paid, including the full mortgage payment, and what is left over is yours.
Taxable profit is the income or loss calculated for the property on your tax return. It starts from the same rent, but it subtracts only the mortgage interest, rather than the whole payment, and it subtracts depreciation, which is a deduction you take without spending anything.
Those two numbers are rarely shown to you, and they can point in opposite directions. A property can put money in your pocket every month but still report a loss on your taxes. It happens often, and it is usually not an error. When somebody quotes an average monthly profit, they are usually talking about cash flow only. When your accountant talks about the property's profit, they usually are talking about what gets reported on your tax return. It is worth knowing which one you are pursuing, and honestly, both should be on your radar.
What actually decides the number
Take one house as an example. It was purchased for $187,500 with 20 percent down, so it has a $150,000 loan. Also assume it rents for $1,800 a month.
Say operating costs, vacancy, and reserves take 40 percent of the rent, which is a common working assumption and not a rule. For sure, yours will differ. Consider this: it leaves $1,080 a month before any loan payment is made.
That $1,080 is the income the house produces. Now consider what the loan does to it.
- Paid off, no loan: $1,080 a month
- $150,000 at 3.5 percent, 20 years left: payment about $870, leaving $210
- $150,000 at 4.5 percent over 30 years: payment about $760, leaving $320
- $150,000 at 7.5 percent over 30 years: payment about $1,049, leaving $31
Same house. Same street. Same tenant paying the same $1,800. The monthly profit ranges from $31 to $1,080, a difference of more than thirty times, and nothing about the property changed other than the loan structure.
That is why the average does not mean anything. It is not measuring the house. It is mostly measuring somebody else's mortgage.
The 40 percent is doing a lot of work too
The second variable is all the other costs, and these are the ones people set too low.
Forty percent is a planning assumption, not a measurement. What actually comes out of the rent is property taxes, insurance, repairs and ordinary maintenance, vacancy between tenants, and the cost of turning the unit, management if you use it, and money set aside for the roof, the heating and air, the water heater, and the flooring.
In most cases, two of those are where owners go wrong.
Vacancy gets skipped. A unit that turns over every two years and sits empty for a month has lost about four percent of the year's rent before anybody paints anything.
Reserves get skipped. A repair is when the faucet started leaking this year. A reserve is money you save a little at a time because the roof will eventually need to be replaced. Leaving reserves out, the monthly number looks healthy right up until the roof actually needs to be replaced, at which point one year eats several years of profit.
If you move the cost assumption from 40 percent to 50 percent on the house above, the $1,080 becomes $900. On the 7.5 percent loan, that turns $31 a month into negative $149 a month. The property did not change. The honesty of the assumption did.
Working out your own number
Two figures and one subtraction.
First, what the property produces. Take the annual rent you actually collect, not the rent on the lease if the unit sat empty part of the year. Subtract every operating cost: taxes, insurance, maintenance, management, and the reserve you are setting aside. What is left is what the property earns before debt.
Second, what the debt takes. The full annual mortgage payment, including principal, interest, and PMI if applicable. You should include the principal and not just interest because the whole payment leaves your account.
Subtract the second from the first and divide by twelve. That is your monthly profit, and it is the only version of the number that describes your property.
On the house above at 4.5 percent, that is $21,600 of rent, minus $8,640 of costs, minus $9,120 of payments, which is $3,840 a year or $320 a month.
Definitions for net operating income and cash flow are in the glossary if you want the plain English version. If you pay somebody to run the property, that cost comes out of this number too, and it takes more of it than the headline percentages you most often see suggested.
The tax version of the same house
Now run the other definition on the same property. Assume $150,000 of the purchase price was allocated to the building and $37,500 to the land, because land is not depreciable. These figures also hold rent and costs flat and only show the tax impact.
The first thing to sort out is which of those costs are actually deductible, because not all of them are. Of the $8,640, about $864 is vacancy, and vacancy is not a deduction at all. It is rent you never collected. About $2,554 is money moved into reserves, and money you set aside is not deductible until you spend it. That leaves about $5,222 of operating expenses you can actually deduct.
So the tax version starts from $20,736 of rent collected, not $21,600.
In year twelve:
- Rent collected: $20,736
- Minus deductible operating expenses: $5,222
- Minus mortgage interest, which is $5,154 in year twelve and falls every year: $5,154
- Minus depreciation, $150,000 of building over 27.5 years: $5,455
- Taxable profit: about $4,905
The property put $3,840 in the owner's account and reported $4,905 of profit. That is $1,065 more profit than cash, and the owner pays tax on the higher number. Now run the same house in year two and it goes the other way. Interest that year is about $6,589 instead of $5,154 because less of the payment is going toward principal. Taxable profit comes to about $3,470, which is $370 below the cash.
Same house, same rent, same everything. Early in the loan, depreciation shelters part of the cash. Later in the loan, it does not, because principal paydown and money placed in reserves are both non-deductible, and by year twelve they are larger than the depreciation deduction.
That is worth knowing before somebody tells you rentals are tax-free. Depreciation may cause a rental to report less taxable profit than the cash it produced, especially earlier in a loan when more of the payment is interest. It can reverse as the loan gets older. Your own result depends on your loan, depreciation schedule, basis, expenses, and tax position, so have a tax professional confirm your figures rather than assuming either example applies to you.
However, a property you cannot drive to and manage yourself costs more to run than one you can, and the true cost of property management is worth pricing before you buy.
The depreciation gap is the reason rentals are attractive, but you need to understand that it is a deferral and not a gift. If the property is eventually sold at a gain, some or all of the gain tied to depreciation may be treated as unrecaptured Section 1250 gain and taxed at a maximum rate of 25 percent. That is the other half of the trade and it is covered in the article on capital gains on a rental property.
One thing to reiterate. Money that you set aside as a reserve is not deductible until you spend it, so the tax version and the cash version treat reserves differently. This is a good example of why the two numbers cannot be reconciled until they are actually evaluated.
Why the average keeps getting quoted anyway
Because people want a benchmark, and a benchmark feels like a way to check yourself.
The problem is that a benchmark only works when the things being compared are alike, and most rental properties and rental property portfolios are not. Two houses on the same street with the same rent can differ by rate, by term, by how much was put down, by whether one is managed and one is not, by insurance, by the age of the systems, and by whether the owner counts reserves.
If you want a comparison that means something, compare the house to itself under different assumptions. What does it produce paid off? What does it produce if vacancy runs two months instead of one? What does it produce if the insurance renewal goes up 30 percent, which has happened to a lot of owners recently?
That tells you something. An average across multiple property owners does not.
The number that actually matters is the portfolio one
Per-property monthly profit is a useful diagnostic and a poor decision tool, for the same reason door count is really just a number.
One property clearing $320 a month tells you almost nothing on its own. Whether that is good depends on how much cash is tied up in it, what else that money could be doing, and what the rest of the portfolio looks like. A property at $31 a month inside a portfolio with strong coverage elsewhere is survivable, but that same property may be the thing that stops the next loan if your portfolio is already tight.
The key is to consider the total you actually live on. Four properties at $320 is $1,280 a month. Whether that is progress depends on what the portfolio is supposed to do and by when.
That is also how you find out the more useful thing, which is not the average but the spread. Which property is carrying the portfolio, and which one is quietly dragging it down. That comparison only exists once you know where the whole portfolio stands on the same set of assumptions.
If one property is the problem, the question stops being what it earns and becomes whether to keep it, refinance it, or sell it. But the key is to know your own figures and not rely on benchmarks that may or may not apply to you.
Novarif is being built to show rental property owners what each property actually produces after every real cost, and what the whole portfolio produces together, measured against a goal and a date. Join early access to see your own numbers instead of somebody else's average.