Is Your Rental Property Profitable? Calculating True Ownership Costs Over Time

Conventional wisdom says that real estate is an asset. However, any unprofitable rental is a liability. The landlords who fail to consider all true ownership costs can't see the full picture and may perceive that their cash flow is positive while hidden expenses erode income. If you want to determine whether your rentals are actually profitable, learn to calculate the total cost of ownership and other metrics to bridge the gap.

What Is the Total Cost of Ownership?

Total cost of ownership is the sum of all expenses associated with an income-generating property over its life. Add acquisition cost, operating cost and disposal cost, then subtract residual value.

Acquisition cost includes all fees required to purchase a rental and prepare it for occupancy, including loan interest and financing charges. Capital improvements, such as renovations and key system upgrades, also fall within this category, regardless of when these projects take place, which is why you use them to increase your basis when filing capital gains tax.

Operating cost covers expenses needed to manage your rental. They can be regular or irregular. Regular expenses include routine maintenance tasks — such as biannual gutter cleaning, HVAC tuneups, and lawn mowing — and property and income taxes. Irregular ones are emergency repairs. Forgetting to incorporate intermittent or occasional costs can lead to inaccurate calculations.

Disposal costs are fees incurred at the end of your rental's life cycle, which apply when you sell or demolish your rental. Depreciation can impact your capital gains tax liability. The IRS considers it a capital expense and accepts it as a deduction over the life of your property, and the federal agency will recapture some of it at resale, whether you claimed it or not.

Residual value represents the money you can recover when you dispose of your rental. In simple terms, it's your rental's expected selling price.

Inflation adjustment matters when calculating true ownership costs. Your data should reflect changes in purchasing power, showing how your expenses rise or fall over time. Compounding the annual inflation rate is key to estimating future costs based on your target holding period.

What Other Metrics Should You Calculate?

Total cost of ownership is only half the battle when determining a rental's profitability. It focuses only on the cost side, but you can use these metrics to calculate income in various ways:

• Cash flow: Rental income minus expenses
• Gross operating income: Potential gross income minus vacancy and credit losses, then add other income
• Net operating income: Gross rental income minus operating expenses
• Capitalization rate: Net operating income divided by the current market value
• Cash on cash return: Expected rental income before tax divided by total cash invested
• Gross rent multiplier: Market value divided by annual gross income
• Debt service coverage ratio: Net operating income divided by annual debt service

How Much Profit Can Landlords Make Across Florida?

The profitability of rentals varies from one unit to another, as landlords' individual situations and personal decisions directly affect a property's earnings. Investors who must comply with the Foreign Investment in Real Property Tax Act are a good example. Foreign landlords may have to pay an additional tax equivalent to 15% of the purchase price when they sell.

Even statewide data on notable expenses doesn't guarantee that two neighboring rentals can be equally profitable. For instance, the absentee owner of a detached single-family home who includes some utility bills in the rent may pay lower than the state average of $459.40, while the next-door landlord who owns a similar property and charges the tenant separately may have higher expenses.

Home values and government budget needs primarily drive property tax effective rates. If your rental is in a county with high expenses and ambitious projects, expect to pay higher ownership costs than landlords operating in less costly areas. According to Florida TaxWatch, the per capita total property tax levies ranged from $415.94 and $4,873.55 in 2024. Property owners in these 16 counties paid more than the statewide figure of $2,397.57.

Go Beyond Ownership Costs to Assess Profitability

Determining your rental's true ownership costs can help you identify hidden expenses that reduce its profitability. However, they don't show how much income your property generates. Calculate all relevant metrics and consult professionals if necessary to determine whether your asset is truly an asset.

Evelyn Long is a writer that specializes in housing market trends. She is also the editor-in-chief of Renovated Magazine, where she writes essential resources for renters and homeowners. She has contributed to several other publications like the National Association of Realtors and Realty Executives.