How Much Profit Should You Make On A Rental Property?
Making profit on your rental property is the reason landlords buy rental property. You should try to make as much profit on your rental property as reasonably possible.
I added “reasonably possible” to the end of the last sentence for a reason.
Growing up, I lived in 2-4 unit multi-family properties with my mom. Over the years, I was able to experience what it’s like to live in a property owned by landlords who omit the “reasonably possible” portion. And the experiences were not great.
Here’s are a couple examples of those experiences:
- I developed asthma and spent plenty nights in ICU (thanks mold/mildew)
- I was electrocuted and would have died if my hand didn’t let go of the light’s string after a few seconds (thanks faulty wiring). The breaker never tripped and the light was still on.
So, while making as much profit as possible is the goal, never cut corners to make a dollar. Always make sure you provide a safe and comfortable property for your tenant to live in.
Want an exact number on how much profit you should make?
If you want an exact number on how much profit you should make, I'll tell you based on what would be acceptable for me.
If the property/unit I’m looking at or own will profit $100 per month, it’s good for me.
But there are a few exceptions to that number. If I’m purchasing a property with 3.5-5% down payment, I have no problem profiting less than $100. With a low down payment, there’s room for me to reduce my expenses in the future to get my profit up (remove PMI, refinance, etc.). But it’s much smarter for me to buy the rental property today than wait until I have a 20%-25% down payment.
Now, I’ve given you the numbers that work for me, but it’s important to understand that this is after all “expenses”.
- Mortgage, taxes, insurance, PMI
- Property management (even If I self manage)
- Saving for repairs
- Saving for capital expenditures
- Saving for vacancies
When calculating how much profit you want to make on your rental property, make sure it is after all your expenses/ savings. Some landlords won’t include saving for repairs or vacancies in their profit calculations. This will make a property look more attractive than it actually is.
Since you’re going to have to maintain your rental property, and will have a vacancy at some point, it’s much better to know what your profit now versus getting surprised.
You can also stop saving and profit that money once your total savings reach a point where you feel comfortable that you’ll be able to handle most or all problems that would arise.