Can you make money renting out?

If you have ever scrolled past a “my rental pays for itself” post and wondered whether it is actually that simple, you are not alone. Short answer to the question can you make money renting out. Yes, but only if the numbers clear a few boring tests. The long answer is that rent is the loud part. Everything else is the part that decides whether you keep the property for five years or list it in year two because the water heater and your bank account both blew up. Let us walk through the real math and the parts most people skip.

Start with a clean definition of what “making money” means. Some people call it success if the rent covers the mortgage. That is not making money. That is reducing your out of pocket cost while taking on landlord risk. Making money means you pull a surplus after every expense that repeats monthly, you have a reserve for the surprises that do not respect your calendar, and the return on your actual cash invested beats a simple index fund over a realistic time frame. If appreciation saves the day, that is luck. You should not plan a business that only works if the market bails you out.

Here is a simple framework in plain English. First, figure out your effective rent, which is the rent you can get in your area multiplied by one minus vacancy. If your unit sits empty two or three weeks between tenants, you did not collect rent during that time. A five percent vacancy haircut is a good starting point in a normal market. Second, list every operating expense that does not include your loan. Property tax, insurance, homeowner association fees, maintenance, repairs, lawn or pool service, property management, and utilities you cover in your lease. Third, subtract those operating costs from your effective rent to get net operating income, also called NOI. Only now do you subtract your mortgage payment to see cash flow. Cap rate is NOI divided by purchase price. Cash on cash return is annual cash flow divided by your initial cash invested, which usually means the down payment plus closing costs and initial make-ready. These two ratios tell you if the deal is a wealth builder or a second job in disguise.

Let us do the math with a realistic case. Imagine a condo bought at 300,000 with a 20 percent down payment and a 30 year loan at five percent. The loan payment is about 1,288 per month. Assume annual property tax around 1.2 percent of value, which is 3,600 or 300 a month. A basic insurance policy at 100 a month. HOA at 250 a month. A maintenance reserve at 200 a month because stuff breaks even if you do not see it yet. If you hire a property manager at eight percent, that fee comes out of rent collected. Now try a market rent of 2,500. Take five percent vacancy and you get 2,375 in effective rent. Operating expenses before the loan add up as follows. Property tax 300, insurance 100, HOA 250, maintenance 200, and management eight percent of effective rent which is 190. That totals 1,040. Subtract from 2,375 and your NOI is 1,335. Subtract the 1,288 loan and the monthly cash flow is about 47. That is a technical positive, but a single appliance failure can wipe six months of “profit” in one hit. Annualize this and you are clearing about 560 a year on 60,000 down. That is under one percent cash on cash. The cap rate in this scenario is roughly 5.34 percent. The property is fine if you want exposure to housing over time, but you are not living off this unit.

Now push the rent up to 2,800 and keep everything else the same. Effective rent after five percent vacancy becomes 2,660. Management rises to about 213. NOI climbs to roughly 1,597. Cash flow after the loan becomes about 309 a month, which is about 6.18 percent cash on cash on the down payment. At 3,000 rent, cash flow approaches 484 a month, or about 9.67 percent cash on cash. At 2,400 rent you are slightly negative after debt service, and at 2,200 you are losing over 200 each month before any surprise repairs. This sensitivity is the part many listings hide. A 200 rent miss turns a “neutral” deal into a slow leak. A 200 bump can push a break even into something that actually compounds.

So what is cool about rentals and what is sketchy. The cool part is leverage when it works in your favor. The tenant helps you retire the debt over time, you get some tax benefits in many countries, and you can force value with upgrades that make real life better for tenants and improve your rent roll. The sketchy part is that leverage works both ways. Interest rates can move up at renewal, local regulations can cap increases or limit short term rentals, and insurance or HOA assessments can jump without your consent. Cash flow that looks fine on a napkin can turn fragile when your boiler and roof pick the same month to ask for attention.

Depreciation gets hyped as free money. It is not. It is a tax deduction that lowers your taxable rental income on paper for a while. In some systems you do pay it back in part when you sell through recapture, though gains and timing rules vary by country. Do not buy a rental only because a spreadsheet says the tax bill will be small this year. Taxes change, and you still need actual cash to fix things now.

There is also the split between long term versus short term rentals. Short term can produce higher gross rent if you are in a location with strong, legal demand and you operate it like a hospitality business. The fees are real. You will absorb platform fees, frequent cleaning, more utilities, more wear and tear, and potentially local licensing, tourism taxes, and occupancy rules. The revenue looks spicy in peak season, and then the shoulder months remind you that volatility is not just a chart term. Long term tenants bring stability if you screen well and maintain the unit. The yield may be lower, but the time cost is usually lower too.

Financing terms change the story more than upgrades do. A five percent loan is a different universe from seven percent. The loan payment grows faster than rent in that move, which compresses cash flow unless you negotiate the purchase price or bring more cash. Adjustable loans can feel cheaper in year one and then eat your lunch later. Be careful with teaser offers that balloon. You are building a slow compounding asset, not a cliff jump.

People also forget how maintenance actually shows up. It is not a smooth 200 each month. It is quiet for months, then 1,800 for a water heater, then 3,200 for a mini split, then paint and new blinds because turnover is a reset button. If your unit is older, budget more. If your HOA has not raised dues for years, expect a special assessment at the worst possible time. If you run everything at one inch of cushion, one repair turns you into a forced seller.

Screening and lease design are part of the math. A great tenant pays on time, treats the home like a home, and usually stays longer, which reduces vacancy and turnover costs. A messy lease invites disputes and unpaid rent, which destroys yield and mental health. If you are new, pay a solid property manager or at least hire a lawyer to standardize a lease that fits your local rules. The fee feels heavy until you price a lawsuit or a bad eviction.

So can you make money renting out. Yes, if you treat it like a small business with boring guardrails. Run the sensitivity math before you fall in love with a listing. Price in vacancy. Add every recurring cost. Put a real number on repairs. Include management, even if you plan to self manage, because your time is not free. Stress test rent down by 200 and rates up by one percent. If the deal only works at the best possible rent and the lowest possible expenses, it does not work.

If you are young or just getting started, house hacking is the most forgiving way in. You live in one unit or one bedroom and rent the others. Your cost of living drops while you learn the ropes. You have more control over the space, and you are physically present for repairs and inspections. Your first purchase becomes both shelter and an education.

If you are going to buy purely for a rental, shop the numbers, not the paint. A property that is slightly less cute but comes with lower taxes, newer systems, and no HOA can beat the flashy listing with a rooftop grill and a monthly fee that eats half your margin. Location still matters, but the cash flow version of location is simple. Demand that stays rented at reasonable prices without launching full marketing campaigns each time. Access to jobs, transit, and services. A tenant profile that you understand and can serve well. You do not need the trendiest neighborhood. You need the most predictable one.

Also, plan your exit before you enter. Are you holding for cash flow, or are you banking on appreciation to create equity for a future refinance. If the plan is a refinance, check what loan to value your lenders are actually advancing in your market and whether rental income can count toward your debt to income. Some banks look at global DTI. Others underwrite to the asset. If you build a plan on a refinance that is not available, you lock up cash longer than you can handle.

Here is the real gut check that keeps people honest. Take your expected annual cash flow after every expense and divide it by the cash you put in. If that number is below what you could get from a low effort index fund once you account for your time and headaches, ask yourself why you are doing this. There are valid answers. Diversification, learning a hands on skill, a belief in your micro market, or a plan to 1031 exchange where legal. Just be explicit. If the only reason is “everyone on TikTok says passive income,” step away from the close button.

One last thing. If you already own a place and want to rent it out because you are moving, you are not locked into hero or zero. Run the same math. If it breaks even with a healthy reserve and you like owning that area, keep it. If it bleeds each month and you would lose sleep, sell, reset, and buy again when the math and your life are in sync. Renting out can be smart. It just is not magic.

The verdict is not sexy, but it is reliable. You can make money renting out a property when you buy right, finance conservatively, operate with real reserves, and respect the boring math. You will not make money by hoping rent covers the mortgage and calling the rest “passive.” Treat it like a small business that happens to live inside four walls. If the numbers work on paper after you punish them a little, you give yourself a shot at a real surplus. If they only work in a hype thread, close the tab and keep looking.