How Much Money Do Landlords Make?
How much money a landlord makes from real estate depends on how much real estate they own and the type of real estate owned.
A landlord who owns commercial real estate could make more or less money than a landlord who owns residential real estate.
It really depends on location and quantity as the two main factors but also the property financials itself.
However, there is also a metric called Cap Rate that can determine how much money a landlord makes from real estate property.
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Factors that Determine How Much You Can Make From Real Estate Investments
#1: Cap Rates
Cap rate is a percentage rate that looks at the income of a property versus how much the property was bought for.
If you pay $100,000 for a rental property that will produce $6,000 of net income then the cap rate is 6% when you divide the net income against the purchase price.
In other words, cap rate is the net return on investment if you pay all cash for a property with no financing debt.
Depending on the cap rate of a property, you could make different amounts of money as a landlord depending which property you choose and its respective cap rate you are buying at.
When buying, you should try to negotiate a lower purchase price, which will raise the cap rate (return on investment). This will help you make more money.
Landlords who live in popular cities like Miami, Los Angeles, Seattle, San Francisco can charge much higher rents than landlords who live in Idaho or Wyoming.
Rent is based on demand and supply and in these cities, populations are growing faster than housing supply causing a shortage. This pushes rental prices higher as renters compete for limited supply of landlord’s rental property.
This can impact the top line when a landlord is trying to determine how much money they can make from rental property.
The more rent you bring in, the more money you can make provided that expenses do not also increase to off-set the higher rents.
But such can be the case as landlords in California may pay higher property taxes and insurance than a landlord in Idaho or Wyoming might pay.
#3: Cash Flow
To determine if you will make more net income from rental property in one location compared to another, you should analyze the cash flow of the property.
This means taking the total possible rent collected in a given year and subtracting the total possible expenses to calculate a net income that is left as your profit, known as “cash flow”.
One factor for cash flow to consider is your mortgage payment.
Since real estate costs more money in expensive, high demand states like California, this also means you’ll have to take out a larger mortgage on the property.
This can impact cash flow as a mortgage payment could suck away most of your profit, leaving you with less money after debt is paid.
#4: Quantity of Real Estate Property / Units Owned
Another reason some landlords make more money than others is because of quantity of real estate owned.
If a landlord owns a profitable 17-unit apartment building, then it’s obvious they’ll be making more money as compared to the landlord who owns 1 single house.
The goal to getting wealthy and making lots of money in real estate as a landlord is to acquire many properties and own many “units” to scale income and profits.
Most landlords start out with their first property and as they make more money from their job as well as from the real estate investment property, they can save away a down payment to go purchase a second property.
This is how they slowly scale and build up a portfolio of rental properties until they own several and earn enough net income to replace their job income.
Final Thoughts On Income Potential of a Landlord
Overall, there is no clear cut answer to how much money landlord’s make.
It depends on what types of real estate as this can impact the expenses a landlord faces and how much cash flow or net income is left after expenses.
It also depends on the location which impacts the amount of rent a landlord can charge.
Lastly, it depends on quantity as a landlord who owns lots of properties that cash flow, will in turn make more money than a landlord who owns very few properties, bringing in less in rent.
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