Calculate Income on A Rental Property

The real estate market is always hot if your perspective is right. Buy low and sell high, rent out your investment as it builds equity, or borrow against your property to build wealth through other means.

If you’re specifically looking to buy an investment property, you can make money on its appreciation over time or by renting it.

Here’s what you’ll need to factor in to ensure you’re set up for success:

Purchase price and mortgage rate

Deciding how much home you can afford involves understanding your income, debts, savings, and lifestyle, along with what lenders will approve. The stereotype is that most people put down 20% but the reality is the average down payment on a home is 6-7% for first time home buyers.

Many lenders now accept lower down payments with PMI which adds to this trend (private mortgage insurance). PMI is a percentage added to the monthly cost (paid to the lender) but it ultimately just adds to more interest vs. principal being paid down. Ideally you want to avoid paying PMI by increasing your down payment.

For those proceeding with a second home purchase, the average down payment is around 13% to 17%. Often these second home buyers use the equity from selling their first home to trade up.

Evaluate your loan term and down payment. Can you afford the down payment (aim for 20–25%). Have you been pre-approved for a mortgage? What are your loan options (conventional, FHA, etc.)? Are mortgage rates unconscionable right now?

Closing costs

Ensure you’re holding the property long enough that the closing costs are nominal against the appreciation and rental income. Appreciation is the value of your home over time.

The average closing costs for a property typically range between 2% and 5% of the purchase price, depending on the location and whether you're the buyer or seller.

For a buyer, closing costs will include:

• Loan origination fees - a loan origination fee is a charge by a lender for processing a new loan application

• An Appraisal

• Title search and insurance

• Attorney fees (in some states)

• Recording fees - which are a charge by your local government (usually the county) to officially record the sale or mortgage documents of a home purchase in public records

• Escrow deposits (for taxes and insurance)

• Prepaid interest

For a seller, closing costs will include:

• Real estate agent commissions (usually 5%–6%)

• Title fees

• Transfer taxes - a tax imposed by a state, county, or city on the sale or transfer of real property and usually calculated as a percentage of the sale price or a flat fee per $1,000 of the property value.

• Legal fees (if applicable)

  
  

Property Tax and HOA fees, Insurance

Weigh the importance of school districts, the local economy, and demand for rentals when looking at your prospective property tax and HOA fees (if applies).

Is there a strong rental demand in the area? When it comes to the economy, is there job growth, school quality, amenities, and what does the crime look like? Urban, suburban, or rural neighborhoods, each have different tenant profiles and risks.

Lastly for any long term investments look at future developments. Planned infrastructure or business projects can increase value.

Maintenance

Always get a thorough inspection to identify potential repair costs before buying.

Additionally, older properties may need more maintenance. A good benchmark is 1% to 2% of property value per year as your maintenance budget. For a $300,000 condo, that’s $3,000 to $6,000/year ($250–$500/month).

Typical expenses include HVAC servicing, appliance repairs or replacement, plumbing, electrical fixes, paint and solutions to flooring wear.

Vacancy rates, Holding length of time, Value Appreciation

Estimate your monthly rental income and subtract all your expenses - this includes: your mortgage, taxes, home insurance, repairs, vacancies, and management fees. Aim for positive cash flow or a solid return on investment (ROI).

Assume a percentage of your net proceeds will go towards a vacancy rate offset by the local value of appreciation in your area. The national average vacancy rate on residential rentals (homes vs. apartments) is approximately 5% to 7% though rentals in urban areas can be lower, such as 3% to 5%.

The appreciation rate on a home refers to how much a home's value increases over time. It varies widely depending on location, market conditions, and time period, but there are some general benchmarks.

The long-term national average is about 3% to 5% per year adjusted for inflation. In recent years (2020–2022) home appreciation spiked to 15%–20%+ per year in some areas of the country, due to low interest rates and high demand.

Lately since 2023–2025 there’s been slow growth, around 2%–4% per year in many areas, with some markets seeing flat or even declining values.