The Real Cost of Being a Landlord

Being a landlord sounds like easy money. Buy a house, rent it out, collect a check every month, and let the tenant pay your mortgage. That's the version you see on social media. The real version has a lot more line items, and most of them show up at the worst possible time.

Let's start with the math everyone gets wrong. Say you buy a rental for $200,000 and rent it for $1,600 a month. That looks like $19,200 a year coming in. But your mortgage payment is probably around $1,300 a month, which is $15,600 a year. That leaves $3,600. Sounds okay until you subtract everything else. Property taxes might be $2,400 a year. Insurance might be $1,800. That's already more than your $3,600 leftover, and we haven't fixed anything yet. A new water heater is $1,200. A roof is $8,000 to $12,000. An air conditioner is $5,000. One bad year with a couple of repairs and you're losing money on a property that's supposed to be making you rich.

The rule of thumb experienced landlords use is that you should budget about 50% of your rent for expenses that aren't the mortgage. That sounds crazy until you add it up: taxes, insurance, maintenance, repairs, vacancies, property management if you use it, and the occasional big-ticket item. On $1,600 a month in rent, that's $800 a month in expenses.

Vacancies are the expense people forget completely. A tenant moves out, and the place sits empty for a month while you clean it, fix it, and find someone new. That's $1,600 gone, and you still have to pay the mortgage, the taxes, and the insurance that month. If you have one vacancy a year, you've lost a full month of rent, which is about 8% of your annual income from the property. Budget for at least one month of vacancy per year. If you don't have one, great, that's bonus money. If you do and you didn't plan for it, that's a crisis.

Then there's the tenant risk. Most tenants are fine. Some are not, and the bad ones are expensive. A tenant who stops paying rent doesn't just cost you the rent. In most states, you can't just change the locks. You have to go through a legal eviction process, which can take one to three months, during which you're getting no rent and still paying the mortgage. The eviction itself can cost $500 to $2,000 in court fees and legal costs. And if the tenant damages the property on the way out, the security deposit rarely covers it. A trashed unit can cost $3,000 to $10,000 to fix. One bad tenant can wipe out two years of profit.

Maintenance is another thing people underestimate, because they think about it like a homeowner. When you own your own house and the faucet leaks, you might live with it for a month. When you're a landlord, you have a legal obligation to fix it, and in many states, quickly. A broken heater in January isn't a "get to it next week" situation. It's a "fix it today or the tenant can legally withhold rent" situation. And you're paying a plumber's rate, not doing it yourself on a Saturday, unless you happen to be handy and live nearby. If you live far from the property, you're paying someone else for every single repair, plus a markup.

Property management is the other option, and it costs about 8% to 12% of the monthly rent. On $1,600 a month, that's $130 to $190 a month, or $1,500 to $2,300 a year. That eats most of the cash flow on a typical single-family rental. But it also means someone else handles the midnight calls about a broken toilet, the tenant screening, the rent collection, and the eviction process. For a lot of landlords, especially ones with a day job or ones who live far away, it's worth it. Just factor it into the math before you buy, not after.

Taxes are the part that actually works in a landlord's favor, and it's the reason real estate investing is still popular despite all of this. You can deduct the mortgage interest, the property taxes, the insurance, the repairs, and the management fees. You can also depreciate the property, which is a paper deduction that lets you write off a portion of the building's value every year even though the building isn't actually losing value.

So when does being a landlord actually make sense? It works when you buy the right property at the right price, and the right price is almost always lower than what a first-time buyer wants to pay. The rent needs to cover the mortgage plus all the expenses, with something left over. If the numbers don't work on paper before you buy, they won't magically work after you buy.

What it doesn't work as is a passive income fantasy. A rental property is a small business that happens to involve a house. It takes money, time, and a tolerance for problems that show up on weekends. Done right, it builds wealth slowly, through the tenant paying down the mortgage and the property gaining value over years. Done wrong, with no reserves and no margin in the numbers, it's a money pit that eats your savings and your weekends at the same time. Run the real numbers before you buy, and if they don't work, walk away. There will always be another house.

Disclosure: This article was drafted with AI assistance and reviewed by the author.