Rental Property ROI: Why Most Landlords Lose Money (And How to Avoid It)

“Real estate always makes money.” You’ve heard it a hundred times. Your uncle swears by it. Social media is full of “passive income” landlords flashing rental checks.

Here’s what they’re not showing you: most rental properties lose money when you account for all costs. Many landlords would’ve built more wealth in a boring index fund.

Let’s break down why—and how to avoid becoming another cautionary tale.

The Math Landlords Get Wrong

When evaluating rental property, most investors calculate:

Rent - Mortgage = Profit

This is catastrophically wrong.

The actual equation:

Rent - Mortgage - Taxes - Insurance - Maintenance - Vacancy - CapEx - Management = Actual Cash Flow

That long list of subtractions is why “profitable” properties become money pits.

Let’s run real numbers on a typical rental property. Use our Rental Property ROI Calculator to check your own deals.

A “Good Deal” That Loses Money

Here’s a real example from a Midwest market:

Purchase:

• Price: $200,000
• Down payment (20%): $40,000
• Closing costs: $6,000
• Total cash invested: $46,000

Monthly income:

• Rent: $1,600

Monthly expenses:

• Mortgage (6.5%, 30yr): $1,011
• Property taxes: $250
• Insurance: $125
• Maintenance (1%/year): $167
• Vacancy (8%): $128
• CapEx reserve: $150
• Property management (8%): $128

Total expenses: $1,959

Monthly cash flow: -$359

This “cash flowing” rental property loses $4,300 per year.

But What About Appreciation?

“You’re building equity! The house will appreciate!”

Let’s add those in:

Year 1 equity gains:

• Principal paydown: $3,200
• Appreciation (3%): $6,000
• Total: $9,200

Year 1 losses:

• Negative cash flow: $4,300

Net gain: $4,900

On $46,000 invested, that’s a 10.6% return. Decent—but…

That same $46,000 in an S&P 500 index fund historically returns 10% with zero work, zero risk of bad tenants, and no 3 AM plumbing calls.

The rental property barely matches the stock market while demanding hours of work and substantial risk.

The Hidden Costs That Kill Returns

Vacancy: The Silent Killer

Most landlords assume 5% vacancy. Reality is often 8-12%.

One month vacant = 8.3% vacancy. Tenant turnover typically means:

• 2-4 weeks to find new tenant
• Cleaning and repairs between tenants
• Lost rent during turnover

Two turnovers per year easily pushes vacancy to 15-20%.

Maintenance: The Bottomless Pit

Budget 1% of property value annually for maintenance. On a $200,000 property, that’s $2,000/year.

But maintenance is lumpy:

• Year 1: $800 (minor stuff)
• Year 2: $500 (lucky year)
• Year 3: $8,000 (HVAC dies)

The HVAC doesn’t care about your cash flow projections.

CapEx: The Expense Nobody Plans For

Capital expenditures are major replacements:

• Roof: $8,000-15,000 every 20-25 years
• HVAC: $5,000-10,000 every 15-20 years
• Water heater: $1,000-2,000 every 10-12 years
• Appliances: $2,000-5,000 every 10-15 years

Spread across their lifespans, you should reserve $150-250/month. Most landlords reserve $0 and act surprised when bills arrive.

The Time Cost Nobody Calculates

How much is your time worth?

Even “passive” rental income requires:

• Finding tenants: 5-20 hours per turnover
• Maintenance coordination: 2-5 hours monthly
• Bookkeeping and taxes: 2-3 hours monthly
• Dealing with issues: Unpredictable

At $50/hour, 10 hours monthly = $6,000/year in implicit labor costs.

Add that to our earlier example, and the “investment” has a negative return.

When Rental Properties Actually Work

Rental properties can be profitable. Here’s when:

1. The 1% Rule Properties

Monthly rent should be at least 1% of purchase price. $200,000 property? Needs $2,000 rent minimum.

Our earlier example at $1,600 rent failed this test. It was doomed from the start.

2. Below-Market Purchases

Buying at 10-20% below market value creates instant equity and improves cash flow. These deals require:

• Off-market sourcing
• Distressed seller situations
• Properties needing cosmetic work
• Patience (lots of it)

3. Value-Add Opportunities

Buy a property below potential, improve it, raise rents:

• Outdated kitchen? Renovate, add $200/month rent
• Unfinished basement? Finish it, add bedroom
• Below-market rents? Raise them at lease renewal

The profit is in the improvement, not the holding.

4. Self-Management (If Your Time Is Cheap)

Property management fees (8-10%) destroy marginal deals. Self-management saves $150-200/month but costs significant time.

If you’re early career with more time than money, self-management makes sense. If you’re established, your time is worth more than the savings.

Run your specific numbers with our Rental Property ROI Calculator before committing.

The Right Way to Analyze Deals

Before buying any rental property:

1. Calculate Cash-on-Cash Return

(Annual Cash Flow ÷ Total Cash Invested) × 100

Target: 8%+ minimum (after ALL expenses)

2. Run 10-Year Projections

Account for:

• Rent increases (2-3% annually)
• Expense inflation (2-3% annually)
• Principal paydown (accelerates over time)
• Appreciation (conservative: 2-3% annually)

3. Compare to Index Fund Alternative

Whatever cash you’d invest in rental property, model it in the S&P 500 instead. If the rental doesn’t clearly beat this, why take on the extra work and risk?

Our Rental Property ROI Calculator runs all these numbers and shows your 10-year projection.

The Bottom Line

Most rental properties lose money or barely break even when properly analyzed. The landlords who profit either:

1. Bought years ago when prices were lower
2. Found genuine deals (not just “discounts”)
3. Self-manage in high-rent markets
4. Add value through renovation
5. Got lucky with appreciation

None of these guarantee your success.

Before buying rental property, run the complete numbers—not the rosy projections from the seller’s agent. Include every expense, account for vacancy, and compare to simply investing the same money in index funds.

Real estate can build wealth. But only if the math actually works.

Check your numbers with our Rental Property ROI Calculator before writing any checks.