This guide breaks down common expenses and an example of property managing a single-family home on the rental market.

How Much Does It Cost to be a Landlord?

How much does it cost to be a landlord, really? Will you achieve positive cash flow once you've crunched the numbers? 

While the costs of being a landlord will vary greatly from house to house, considering common expenses and maintenance can help you make financial estimates for your rental property. This guide can help you prepare for the cost of being a landlord, adjusting costs o your specific circumstances and including debt owed on a property for the most accurate estimates.

Belong compiled the average costs of managing a rental property from a variety of sources including HomeGuide, Forbes Home, Bankrate, Zillow, and Investopedia. Property management costs have been averaged from industry and market analysis conducted across California, Washington, and Florida including Belong’s own pricing models. 

Disclaimer:We don’t enjoy using the word ‘landlord’. We prefer to refer to members in our network as homeowners and residents, not landlords and tenants, since we’re on a mission to upend and redefine the traditional landlord-tenant relationship. That said, sometimes the words tenant and landlord need to be used to provide clarity, because the costs for homes on a residential home will differ to a rented home — so in this article we use them interchangeably. This article provides a guide based on average costs for homeowners of residential property for rent in the US but actual costs will vary.

Example costs of being a landlord: Fixed costs

To determine how much it costs to be a landlord, begin by identifying and calculating the fixed costs associated with owning a rental property. Fixed costs for landlords include mortgage, insurance, property taxes, HOA fees, and rental licenses or inspections. These fixed amounts will account for most of the costs of being a landlord and vary greatly depending on the location, how much the home is worth and the amount of debt owing. 

Consider a two-bedroom rental home that has Seattle’s median rent of $2,699 per month. Sample fixed costs in Washington (above mortgage and any taxes owed) may include: 

Average rental property maintenance costs for landlords

To estimate how much it costs to be a landlord, consider calculating the annual maintenance costs. In calculating the yearly maintenance cost, homeowners should account for ongoing maintenance costs and common repairs or replacements. 

Common types of ongoing maintenance can include lawn care, pest prevention, gutter cleaning, and snow removal, plus the odd toilet or appliance repair. HVAC systems or pools will also require additional maintenance. If you expect your resident to address these maintenance needs, we recommend that those responsibilities are clearly outlined in the lease. 

In considering the costs of repairs, carefully evaluate the condition of your rental property. Older rental properties or properties that have not been recently updated will likely require more repairs. 

Ongoing maintenance costs (national averages): 

Pest prevention: $80 - $120 per visit and $400 - $950 per year

Pool maintenance and operation: $3,000-$6,000/year 

Clogged drain or toilets: $75-$300/each 

Average rental property management costs 

If you own a rental property, you will likely choose to either self-manage the property or engage a property manager or property management company. These options each come with different costs.

If you choose to self-manage your rental property, you'll need to account for various costs. You should also factor in the cost of your time or the expense of hiring someone for specific tasks. 

On average, here is a breakdown of costs to manage a rental property:

Cost to list property: $0 - $29 per listing site

Photography of property: $110 - $300 per session

3D tour or video: $200 - $5000 per session

Accounting or tax professional fees: $2,000+ per year

Legal fees or attorney: $150 - $400 per hour as needed

Tenant verification tools: $20 - $40 per applicant 

Additional costs to consider include mileage and home office costs for self-managing a home. You may also incur cleaning costs before putting your home up for rent, though after this will generally be taken care of by vacating tenants or the security deposit.

If you choose to hire a professional management company to assist, many of these costs (such as tenant screening, marketing, photography, creating a lease) are included in a flat management cost, typically 6 - 12% of the monthly rental income. 

There are also additional property management fees that homeowners should factor into the costs of being a landlord. Depending on your property management contact, you can expect to see some or all of the following fees: 

Placement fees: 50% - 100% of first month’s rent per new tenant

Maintenance Markup: 0-20% of contractor fees

After-hours & holiday contact: 0 - 25% surcharge

Lease renewal fees: $0 - $250 per contract

Inspection fees: $0 - $150 per inspection

Advertising/marketing fees: $150 - $3000 depending on package

Eviction protection: ~$200 or additional 1-3% of management fee

Source: Belong analysis of property management companies in California, Washington and Florida, as well as own market knowledge/fee structure. Belong does not charge fees for set-up, lease renewals, eviction protection, marketing and more. 

Meet Belong. A modern-day solution for landlords. 

What if there was an alternative to traditional property management? Belong helps residential property owners attract, find, and retain residents who love their homes. We work with single and multi-family homeowners with either a vacancy or a current resident. We help make renting out your home more enjoyable and profitable—all with transparent pricing and no hidden fees. 

Belong offers homeowners everything needed to manage their rental property

Belong helps prepare your home for future residents by completing any maintenance or repairs that you might need. We also help you identify the right rental price for your home using a combination of expertise and technology. Belong markets, shows your home to potential residents, and creates 3-D virtual walkthroughs and photos. We also screen and place your new residents using a comprehensive vetting process.  

Finally, Belong manages the relationship with your residents. Our Member Service Team will handle all communication and requests. We collect rent, schedule visits, and process maintenance requests. 

We understand the costs of owning a rental property and support our homeowners by offering them guaranteed rent. You'll get paid monthly, even if your resident pays late or not at all. We feel confident enough in our ability to find the best residents that we're willing to guarantee your monthly rental income. 

How much does it cost to be a landlord? This guide breaks down common expenses and an example of property managing a single-family home on the US rental market

Explore what to do with an investment property that’s negative cashflow.

Your Investment Property Is Negative Cash Flow. Should You Hold or Sell?

What to do with an investment property that’s negative cashflow.

Is your rental property starting to feel more like an expense than a lucrative investment? Maybe your rental home is barely breaking even, and you’re not able to cover your costs in rent. You might even be losing hundreds of dollars a month, struggling to keep up with mortgage, property tax, and maintenance bills you can’t afford. 

What should you do? Do you hold onto the property, or sell right away? 

At first, this question might sound counterintuitive. Why would anyone hold a negative cashflow asset? Isn’t the whole point of an investment to make money? 

Well, yes — and often, that does mean selling is the right thing to do. But property is a little different from other types of investments. There are situations where holding a negative cashflow property can be the right decision, but it depends on many different factors. 

Today, let’s explore why your home could be negative cashflow, strategies to get it profitable again, and reasons you might choose to hold or sell. 

First of all, let’s clarify why you’re losing money on the property. 



There are many possible reasons your property could be cashflow negative. But generally, this situation arises either by accident, or as a strategic, calculated decision. 

You might be surprised to learn that many people buy property knowing it won’t turn a profit — at least not right away. 

This is a common property investment strategy called negative gearing. When owners buy a property they know won’t cover its own costs, they’re betting that eventually, the home will rise in value enough to turn a profit. That could happen by commanding a higher rent, or from the proceeds of a sale. 

Obviously, negative gearing is a higher-risk investment strategy than buying a profitable home. But that doesn’t mean it’s never a wise decision. 

Negative gearing is more common in super-hot housing markets, like large urban centers. In these settings, prices might be high and down payments low — but buyers can be more certain that their home’s value will continue to rise. 

The costs associated with the property might reduce the owner’s total tax burden, because they’re counted against other income. 

However, often the owner of a negative cashflow property did not plan for their situation. They were seeking out another income stream, only to find themselves losing money. 

Property investing is complex — it’s easy for buyers, especially novices, to overestimate how much they’ll be able to earn. Plus, homeownership is full of unexpected expenses that can eat into cashflow. 

Investors might not realize how expensive repairs and maintenance can be. They might be out of touch with market rents in their area, leading them to lose money on a rent that’s too low, or on a vacancy, if they set it unrealistically high.   

When buying a rental property, buyers can’t just assume that they’ll make money by renting out their home. They need to run the number and do an actual analysis, ideally with a property accountant and an expert on their local market. 

Losing money on an investment is scary. But a negative cashflow property isn’t the end of the world. 

If you want to get your property out of the red, first you need to analyze where your income and expenses stand now. Then you have two options — reduce what you’re spending on the property, or find ways to charge more. 

No matter what, start by performing (or revisiting) your comprehensive cashflow analysis. 

You can’t make your home profitable until you actually understand what you’re currently spending, and what the realities of your local rental market might allow you to charge. That includes the cost of holding the property right now, and a nuanced understanding of your local market. 

If you didn’t complete a cashflow analysis when buying your home, now is the time to contact an accountant and get started. If you did run the numbers, but you’re still losing money, come back to the analysis with expert assistance to identify where the problem is. 

Owning a property comes with three major kinds of expenses — property tax, your mortgage payment, and maintenance or repairs. Here are a few ways to get the monthly cost of each down. 

Reduce maintenance fees by finding reliable, better-priced contractors. Or, try finding a management company (or modern alternative like Belong) that can do so for you 


Make sure you’re taking advantage of tax breaks to reduce what you owe. Work with your accountant to audit and optimize how you file taxes


If possible, renegotiate your mortgage. For example, maybe interest rates are down, or a longer tenure could reduce your costs 

After reducing costs, look at ways to increase what you can charge for your property. Here are a few ideas.

If your cashflow analysis revealed that you’re charging below market, raise what you charge in rent 


If there’s demand for short-term rentals in your area, try listing on a site like Airbnb instead of looking for long-term residents 


Raise the value of your home by renovating. This could allow you to charge at the higher end of your local market rate 


Rent out any spaces, like a parking spot or a garage that current tenants aren’t using

Holding a negative cashflow property only makes sense if you believe the home will become profitable — and you can afford to hold it until it does. Deciding if negative gearing is right for you means assessing both your personal financial situation, and the realities of your home and market. Just like so many other choices in property investing, it’s a highly individual choice with no hard-and-fast rules. 

Maybe your personal circumstances have changed, such as through a job loss or unforeseen expenses. If you can’t afford the extra costs on the property, it doesn’t matter whether or not they could pay off in the end. 

Or maybe the property itself has issues you can’t fix. If the home is in an undesirable location, a weak rental market, or has serious maintenance-related problems, it could be that no amount of waiting or renovation will make it profitable.

Only you can decide when owning a negative cashflow property isn’t working — but we still recommend taking advantage of some expert advice. If you need some guidance on how to manage your rental home, reach out and book a consultation with us at Belong. 

From hold or sell to making profit-friendly changes, explore what to do with an investment property that’s negative cashflow.

Understand how to purchase an REO foreclosure property and what makes them different from other real estate investment opportunities. 

What is an REO Foreclosure?

An REO Foreclosure is a real estate-owned property that failed to sell during foreclosure. The mortgage lender, bank, or mortgage investor owns the property, and these types of properties are sometimes also called “bank-owned” homes. REO foreclosures offer buyers another avenue to acquire real estate. 

Still, as with all investments, it’s critical to understand precisely how to purchase an REO property and know what makes them different from other real estate opportunities. 

For a house to become an REO property, the home must go through several steps. In the pre-foreclosure stage, a homeowner will default on their mortgage. If the homeowner and mortgage lender cannot agree on an option to allow the homeowner to remain in the home (sell via a short sale or return the deed to the lender/investor), the property enters the foreclosure process.

A foreclosure sale is scheduled, and the home is listed for a specific price. If the property does not sell, the lender or the investor will take over property management.

If the property does not sell at foreclosure, the home becomes an REO (real estate owned) property. A house may also become REO property if the previous owners moved out or passed away at the end of a reverse mortgage. If their heirs won’t or don’t want to pay off the mortgage, refinance or sell the property, they can return the property to the lender or investor, and it will become an REO property. 

REO properties are typically categorized as distressed and always sold “as-is.” Remember that these properties are foreclosed when the owner cannot pay their mortgage. As a result, it’s unlikely that REO properties will be well-kept. If the previous owner did not have money for the mortgage, it’s doubtful they kept up with much maintenance. There is also little incentive to keep a home in good condition if you know it is being foreclosed. You will find that REO properties are frequently discounted to sell quickly, which can provide real estate investors with a unique opportunity. 

Pros and cons of purchasing an REO property 

REO properties are a less common way to purchase a real estate investment. As such, they come with distinct pros and cons. Understanding the potential benefits and pitfalls will allow you to decide if buying an REO property is right for you. 

Price is the most significant benefit of purchasing an REO property. The initial listing price of REO properties is often below the current market value, and investors will find that banks are often willing to negotiate the sale of these properties. Purchasing an REO property also offers a buyer protection from outstanding property taxes. There are no outstanding taxes on REO properties, which can be preferable to buying a tax foreclosure home because the new owner would inherit the tax bill. 

REO properties are sold “as-is,” meaning they can have expensive repairs that will likely exceed the standard 1% – 3% of the home value. If you carefully inspect the property and estimate repairs, REO properties can still offer an upside. 

Those interested in purchasing a multi-unit REO property should familiarize themselves with the Protecting Tenants at Foreclosure Act which requires giving the tenants 90 days’ notice. You may be required to honor the terms of the existing lease. 

REO properties can also come with additional costs, including attorney fees and the cost of securing the property. Depending on the market, there can also be a lot of competition for these types of properties. 

You can start your search for REO property listings by using publicly available lists from the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs, the Department of Agriculture, and the IRS. Fannie Mae and Freddie Mac provide an aggregate list of REO properties. 

If you are interested in purchasing an REO property, you’ll want to find a real estate agent with this type of property experience. They have a better understanding of how to structure a suitable offer. The right real estate agent will also have good insight into what repairs or changes will be needed for each property. Finding a lender to provide the appropriate financing for an REO property is also critical. Finally, you may need to identify an attorney with REO property experience. 

Once you have identified the best professionals and a suitable REO property, you must submit an offer. Through this process, you will have the opportunity to inspect the property and get an appraisal, which is highly encouraged in purchasing an REO property. The seller is unlikely to pay for an inspection and will not fix anything identified in the inspection report, but having a professional inspection will ensure you have all the information needed to make an informed decision and offer. 

General vs. special warranty deeds for REO properties 

When purchasing an REO property, you will receive a general or special warranty deed. Understanding the difference between the two is essential to protecting your new asset. 

With a general deed, no one can claim issues with your title from before you owned the property. A general deed also indicates that there are no liens and that the property is owned free and clear by the seller.

With the sale of an REO property, you are more likely to receive a special warranty deed. This deed only guarantees that no additional title issues have been created since the bank or investor took over ownership. While the bank or investor has the right to sell the property, there’s no promise against other pre-existing title issues or liens. If you have a special warranty deed, an owner’s title policy can help protect against any pre-existing property claims.

Once you’ve purchased your real estate investment property, consider Belong 

Belong is a new alternative to old-school, expensive property management. We use data and real-time insights to price your property and find your new residents. We help you get your new real estate investment ready for the residents of your dreams. With Belong, you’ll have access to 24/7 customer service and a team of full-time maintenance professionals, who can even assist with renovations and strategic financial decisions on your new investment. 

Once you’ve purchased your new real estate investment, we invite you to explore working with Belong for the smoothest process, guaranteed rent, and concierge-level support. Learn more about Belong for Homeowners.

Predicting the annual cost of home maintenance on your rental property will allow you to plan for expenses and ensure that there are fewer surprises in store.

How to Predict a Property’s Annual Cost of Maintenance

Predicting the annual cost of home maintenance will allow you to plan for expenses and ensure that there are fewer surprises in the future. Maintenance is critical because it prevents more expensive repairs and replacements down the line. 

If you are unfamiliar with your property, you should begin by inspecting any major appliances and house systems, including your heating and cooling units, insulation, roof, and hot water heater. It’s also helpful to understand the current state of your electrical, water, and sewer systems. If you recently purchased the property and had a professional inspection, you can find much of this information in their report.

Factors that impact the annual cost of maintenance

Your annual maintenance costs will vary depending on the current age and condition of the property. It’s common for a single-family home to require more maintenance than a condo or apartment that may have an HOA. In some cases, the HOA may be responsible for some maintenance. If this is the case, be sure you are familiar with any fees or costs associated with their maintenance. 

The location of your rental property will also impact the annual maintenance cost. You can expect more maintenance for homes in very cold climates (consistently below 20 degrees) or if you receive significant snowfall. Similarly, homes in humid climates or areas that receive lots of rain will likely need additional maintenance to combat mold and mildew. Frequent rain can also impact the roof and require more frequent siding repair or tree removal.

Carefully consider all of these factors as you calculate annual maintenance costs and plan for expenses. 

The Annual Maintenance Checklist for Rental Homes in California

The Annual Maintenance Checklist for Rental Homes in Florida

The Annual Maintenance Checklist for Rental Homes in Washington State

How to estimate rental property maintenance

Several calculations can help homeowners predict their maintenance costs. Keep in mind that these formulas should be used only as an estimate.

The 50% maintenance rule suggests that homeowners should allocate half of their rental income, or mortgage, for repairs, maintenance, taxes, and insurance. If you already know your tax and insurance costs, you can quickly determine what remaining amount to attribute to maintenance costs. We recommend using this calculation against one of the other formulas to verify your estimate.  

You can also use the square footage of your home as an indicator of your annual maintenance costs. If you use this rule, you should start by estimating $1 per square foot for yearly maintenance costs. If you have a 2,000-square-foot house, your annual maintenance estimate would be $2,000. This estimate may not include yard maintenance, tree removal or care, or snow removal. Likewise, this rule does not account for significant repairs that may be needed. 

If you use the 1% maintenance rule, you will plan that maintenance costs for the year will equal 1% of the property value. For example, if your home is valued at $500,000, your annual maintenance costs will be $5,000. If you use the 1% rule to estimate your maintenance expenses, keep in mind that it does not include any major repairs or replacements. 

The 1% rule can be a helpful maintenance cost indicator because as home values increase and inflation continues to rise, you can expect maintenance costs to increase. While we’ve been using the 1% rule for some time, it’s wise to consider saving closer to 2-5% of your property value, depending on your property’s age, condition, and location. 

Average costs of common rental property maintenance

To accurately predict your annual maintenance cost, you should use a combination of calculations. Consider using a formula and comparing it against the actual costs of routine maintenance. 

Routine maintenance costs (every few weeks or months)

Routine maintenance costs should include any expenses you expect to incur on a regular or semi-regular basis. Keep in mind that some maintenance may only be seasonal. You may need to plan for yard maintenance in the summer and snow removal in the winter. 

You should expect homes to require minor repairs on a semi-regular basis. Things break, and you’ll be less frustrated if you have planned for these repairs, even if you can’t plan which things might need repairs. If you can make these minor repairs yourself, you’ll likely save money on annual maintenance. Likewise, a responsive, reliable handyperson can save you many headaches and additional costs. 

Leaky faucets or toilets: $150-$400/each 

Appliance repairs - washer/dryer, refrigerator: $100-$400/each 

Major maintenance and replacement costs 

Major repairs and maintenance costs can be extremely expensive and cause homeowners significant difficulty. Almost all homeowners will experience a considerable maintenance cost at some point. However, if you assess the current state of your home systems and appliances, you’ll better understand which expenses might arise in the future. As you evaluate your home, you can keep these costs under consideration. 

Sewer line or septic tank replacements: $5,000-$15,000

After you’ve evaluated the current condition of your home, you can plan for additional expenses that are likely to occur in the future. For example, if your hot water heater is ten years old, it’s prudent to begin setting aside money for a replacement. 

Every system in your home has an expected life expectancy. With regular maintenance, you can extend the life of these systems. However, these things will ultimately need to be repaired or replaced. You can expect the exterior paint on a home to last anywhere from four to six years. HVAC systems can last 10-20 years, depending on the climate. The AC may need to be replaced sooner in warmer climates where the system runs more frequently. A traditional water heater has a lifespan of 8-12 years, and a tankless water heater will last 20-25 years. 

The roof of your home is one of the most expensive items to replace. Each type of roof will last for a different duration. It’s critical to familiarize yourself with the kind of roof you have and its current condition. Roofs will generally remain in good condition for 12-25 years. 

Many of us are now spending more time at home, and many may still work from home, either part-time or full-time. As a result, you can expect more wear and tear on a home. 

Property management and asset management play distinct roles in real estate. Find out how successful real estate investors use both to maximize their returns.

Asset Management vs Property Management (and Why You Really Need Both)

The most successful real estate investors don’t go it alone — their wealth is driven by the support of both an asset manager and property manager to maximize income and make strategic decisions on their investments. In this article, we discuss what the difference is between asset management and property management, and how Belong is taking the best from both worlds to create a new service that makes this help more accessible to the everyday rental home investor. 

When it comes to maximizing the income and value of real estate investments on the rental market, asset managers and property managers play two very distinct roles. 

Property management generally describes anyone who manages the physical, day-to-day operation of a home. Services like marketing and listing a home on the rental market, vetting tenants, issuing the lease agreement, collecting rent, and inspecting the property. 

Asset management refers to a professional who gives advice on strategic and financial decisions for the asset, helping to optimize management to suit the owner’s financial goals. For example, this could include cash-flow maximization, tax strategies, or optimizing for long-term equity. They also monitor the performance of the home as a real estate investment and can help determine when it’s the best time to acquire, hold onto, or sell a property in a specific local market.  

Is there a need for both asset management and property management?

While you can certainly get away with just one of these services (or even none, if you take on self-management yourself), there are huge benefits to having help in managing your property as both a financial asset and rental home. 

Property management is an obvious choice for rental property investors. If the property is well-maintained and cared for by quality, trustworthy residents you can retain the home’s value and minimize vacancy periods. 

But when it comes to maximizing the returns on your investment, homeowners who use a real estate asset manager can realize higher profits and stronger portfolio growth. 

This is because asset managers are finance professionals that keep a close eye on ever-evolving market trends. With a solid understanding of the economic climate and latest predictions, they can help homeowners to stay responsive, acting fast to mitigate risk and capitalize on opportunities. 

This is different to getting broad financial advice too. Your home is not the same as the next investor’s and your financial objectives are unique to your personal situation. A good real estate asset manager can take your goals and circumstances into account, providing guidance on what can benefit you and your family specifically. 

Even if you’re an ‘accidental investor’ and have inherited your home, an asset manager can take a practical approach and examine all angles to determine how best to manage financial decisions on what to do with the property. 

Belong looks after your property as both an asset and a home

If you partner with Belong you will have all the benefits of a property manager and asset manager — plus a whole lot more. Belong isn’t a property management company, but a complete residential network and service that goes above and beyond for homeowners and their residents. 

These unexpected perks (that you won’t get from a traditional property manager) include having a highly qualified asset manager on staff. 

Our experienced asset manager has managed over a billion dollars in real estate assets on behalf of institutional clients — a service now available to everyday rental property investors who partner with Belong. With in-house asset management, Belong homeowners can run the numbers on their own property (or properties) and get expert assistance navigating strategic decisions to meet personal financial goals. 

And because you can also access Belong’s dedicated team of real estate and maintenance professionals, your home will always attract the best price and the best residents when it’s on the rental market. 

Discover the difference between Belong vs property management

Asset management is just one of the many ways Belong is eclipsing the old-school property management model. Our homeowners also enjoy a unique hospitality experience that includes guaranteed rent, a 24/7 concierge service, access to employed tradespeople, and 66% less vacancy. All without hidden property management fees and scary markups. 

Learn more and find out if your home is eligible at belong.com/homeowners.

If you're looking for the best app for landlords, we've got one better: a people-powered app to manage your rental home with real maintenance & finance options

The Belong App Just Got a Smart, People-Powered Upgrade

Attention homeowners, the Belong app got a major upgrade just for you. The same app that your residents use to log requests and pay their rent can now be used to manage your homes, directly from your smartphone. 

We are pleased to announce that the Belong app now serves everyone in our residential network, with new homeowner features launching this month. 



When your home is on Belong, you can use the app to login and manage your home on any Apple or Android device. 

Keep up with the marketing of your home and view your online listings

Track your rental income and monthly earnings

Get updates on your home and residents directly in the app 

View your lease agreements and information on your residents

Review and approve repairs from our vetted in-house Belong Pros

Make instant requests for upgrades, repairs or removalist services

Plan your future cash flow with Belong’s finance options

And if you need further assistance, you can also chat to your concierge, available 24/7 in the app. 

Access resident and homeowner features from the app 

Sometimes our residents are homeowners too! Whether you want to pay your rent for a home you love or manage repairs on a home you own, simply switch profiles to access the services you need. 

Belong’s app is NOT just an “app for landlords”

If you’ve ever searched through the long lists of “best apps for landlords” you’ll notice there’s a common theme. These apps are designed for property managers, not homeowners. 

What’s the difference? Well, property management is hard work and not every homeowner wants to take on the heavy lifting of self-management (like being permanently on-call if things go wrong!). Apps designed for landlords generally have a bunch of features that support the administration of owning a rental property — but you’re still in for a lot of hard work. 

Belong’s app is designed for homeowners. People who want good residents living in their home, without any extra stress. 

What makes the Belong App’s homeowner features different is its people-power. When you make a request on the Belong app, a real person will take care of the job for you. Whether you need something repaired or upgraded or want to view the photoshoots of your home listing — behind every feature is a vetted professional making your life easier.

Managing your rental home with an app has never been easier. Because with Belong, you’re not doing the work —  just calling the shots.

Download the Belong App from the App Store or Google Play

The only finger you need to lift is the one that’s going to push the download button in your Apple or Android store. 

Not yet a Belong member? We serve Los Angeles, Miami, Orange County, San Diego, San Francisco Bay Area, Seattle, and many more. Check here to see if your home is eligible. 

Understand how capitalization rates (or cap rates) are calculated to identify the best methods for assessing a potential rental property investment.

Capitalization Rate: What It Is and How To Calculate It

The capitalization rate is one of many ways to evaluate a potential investment property. Still, it’s critical to understand how capitalization or cap rates are calculated and their limitations. With a better understanding of calculations like cap rates, you can identify the best methods for assessing a potential rental property. 

Capitalization rates compare and estimate the future return on investment or ROI of one or more real estate properties. Cap rates for residential and commercial real estate are expressed as a percentage. They’re a popular tool because they help individuals estimate the potential return on real estate investments. 

Capitalization rates measure the potential yield of a specific real estate property over one year, assuming that the property is not financed. You can also think of cap rates as the percentage rate of return, either a loss or gain, of a specific property based on the income it generates, minus expenses. 

How do you calculate the capitalization rate of a property? There are two methods or formulas that are used to calculate capitalization rates. 

Most real estate investors will use the calculation which divides the net operating income by the property’s current market value. This calculation can be expressed using this formula:

Capitalization Rate = Net Operating Income / Current Market Value

In this calculation, the net operating income equals the estimated annual income minus expenses like maintenance, property management, and property taxes. This formula is most popular because it compares the projected income of a property against the current market value. 

The second formula used to calculate capitalization rates differs because it compares net operating income against the property’s purchase price. 

Capitalization Rate = Net Operating Income / Purchase Price

This formula puts more emphasis on the acquisition cost of a specific property, as opposed to the current value of a property. While there is no drawback to using this formula at the time of purchase, it’s not ideal for properties purchased months or years prior. Using the purchase price from several months or years ago will incorrectly estimate a property’s potential return. Similarly, this formula works poorly for homes that have been inherited because the purchase price is zero. As a result, using this formula can result in unrealistic expectations. 

To estimate the net operating income of a property, you will need to calculate the annual rent by multiplying the monthly rent by twelve. Once you have calculated the annual rent, you will need to subtract expenses. Expenses should include taxes, utilities (if not paid by the resident), property and liability insurance, and maintenance. 

If you are unsure of the monthly rent, we recommend that you research similar properties in the same area. You’ll need to look for other properties that have similar amenities. Identifying several similar properties will help you accurately estimate your monthly rent for a property. 

Why don’t the capitalization rate formulas account for financing 

Capitalization rates do not account for property acquisition costs like interest and closing costs for a very specific reason. The cost of acquiring a property will vary significantly depending on current interest rates, type of loan, and your particular closing costs. While other formulas can account for these costs, capitalization rates are designed to provide a baseline rate of return, regardless of loan repayment or interest rates. Excluding acquisition costs ensures that investors compare potential properties based on possible returns without factoring in highly variable costs unique to each individual. 

When you shouldn’t use capitalization rates to assess real estate properties 

You should not use capitalization rates to evaluate a property if you plan to use the property as a vacation or short-term rental. The potential income, occupancy, and expenses are too variable to assess a property accurately. 

Understand how cap rates are calculated to identify the best methods for assessing a potential rental property investment.

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