Thinking about becoming a Landlord? Let's start with the numbers.

Wesley Stolsek

Sep 25

3 min read

Owning rental property can be a great way to build long-term wealth, create an additional income stream, and add real estate to your investment portfolio. But there is one mistake I see potential investors make over and over again:

They fall in love with the idea of being a landlord before they run the numbers.

A property that looks like a great investment on the surface may not be a great investment once you account for the actual cost of owning it.

Rent Is Not the Same as Profit

Suppose you're looking at a property that could rent for $2,000 per month.

It's tempting to look at the mortgage payment, subtract it from $2,000, and call what's left your monthly profit.

Unfortunately, rental property doesn't work that way.

A realistic analysis should consider expenses such as property taxes, landlord insurance, HOA fees when applicable, maintenance and repairs, vacancy, property management, utilities paid by the owner, and reserves for larger future expenses such as an HVAC system, water heater or roof.

The question isn't, "How much rent can I collect?"

The better question is:

"How much money is left after I account for the true cost of owning this property?"

Start With the Income

First, we need to determine what the property can realistically rent for.

Not what the seller says it could rent for.

Not what another landlord is asking down the street.

And not what we hope somebody will pay.

We want to look at the rental market and determine what comparable properties are actually commanding.

Then we need to consider vacancy. Even a good rental property isn't necessarily going to remain occupied every day for the next 10 or 20 years. Tenants move, properties need cleaning and repairs between tenants, and sometimes it simply takes time to find the next qualified renter.

Vacancy should therefore be included when analyzing potential rental income.

Then Look at the Expenses

Before purchasing an investment property, I want to start putting real numbers beside as many expenses as possible.

That includes:

Mortgage principal and interest
Property taxes
Landlord insurance
HOA fees, if applicable
Property management
Repairs and routine maintenance
Vacancy allowance
Capital improvement reserves
Owner-paid utilities or services
Landscaping, pest control or pool service when applicable

One important distinction for investors: mortgage payments are not included when calculating Net Operating Income (NOI). NOI looks at the property's income minus its operating expenses before financing. Debt service is then deducted afterward when determining the investor's actual cash flow.

Don't Forget the Expenses That Don't Happen Every Month

This is where an investment can fool you.

Maybe the air conditioner doesn't break this year. Maybe the water heater lasts another five years. Maybe you don't have a major plumbing repair for three years.

That doesn't mean those expenses don't exist.

Eventually, something will need to be repaired or replaced.

A rental producing $300 per month in apparent cash flow can look considerably different when you've properly budgeted for vacancy, maintenance and future capital expenses.

That's why I would rather analyze a property conservatively before you buy it than discover the real numbers afterward.

Cash Flow Isn't the Only Number

Monthly cash flow is important, but it isn't the entire investment picture.

Depending on your goals, we may also want to examine Net Operating Income (NOI), cap rate, cash-on-cash return, financing costs, potential appreciation, expected holding period and your exit strategy.

And there's another question that doesn't get asked often enough:

What happens if the numbers don't go exactly according to plan?

If the property sits vacant longer than expected, needs a $7,000 repair or rents for $150 less per month than projected, does the investment still make sense for you?

That's where conservative numbers can become very valuable.

Buy the Investment, Not Just the House

When you're buying your personal residence, emotion is naturally part of the decision.

Investment property is different.

You may not personally like the kitchen. You may not care for the floor plan. You may never want to live in that particular neighborhood.

That's not necessarily the point.

The property has a job to do.

It needs to attract tenants, generate appropriate rental income, control expenses and fit your overall investment objectives.

If the numbers work, we take a closer look.

If the numbers don't work, we keep looking.