Real Estate Investing Basics

Why Your Rental Property Isn’t Making Money

Expertise: Landlording & Rental Properties
12 Articles Written
Frustrated student behind the desk keeping hands on face

Do you ever wonder why you just cannot seem to make any money on your rental property? Let’s talk about it.

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Why a Rental Property Does or Does Not Make Money

First of all, you have to understand that there are five ways that you're going to make money in real estate—and not all of them have to do with cash flow.

5 Ways to Make Money in Real Estate

1. Cash flow

The big misconception that a lot of people have is that if your property is not cash flowing, you are not making any money. And if you’re not making any cash flow, you’re losing money. However, you have to understand, cash flow is only one piece of a five-part puzzle.

2. Equity

Next, you have equity capture. That's when you buy the property for less than what it's worth. Therefore, when you actually close on it, you're capturing equity at that point.

Related: What Is Cash Flow Anyway?

3. Depreciation

You also have depreciation. If you have a job and you're able to depreciate the property, you were able to get tax advantages for depreciating that asset.

4. Debt paydown

There’s the debt paydown, as well. You have a tenant in that property. That tenant is paying down your debt to zero. If it's a 30-year mortgage, eventually you will owe nothing on that property, and the tenant will have paid that down.

rent online concept, woman using internet website for rental apartments, houses and flats

5. Appreciation

Last but not least, there's appreciation. No matter what you do, properties are going to go up in value. Think back 30 years ago. If you could go back in time and buy a property—or 10 properties—where you grew up, you would be thinking a lot differently based on appreciation. You would not even really be concerned about the cash flow.

So when you say that your property is not making money, you want to be very careful. It may not be making you immediate cash flow, but you have a tenant in the property paying down the debt. You are getting the tax advantages and you’re depreciating it. You are getting appreciation, because it’s going up in value. And if you bought it correctly, you are getting some equity capture.

The one thing you may not be getting is cash flow. But as you can see, this is not the end of the world.

Real World Example

One day, an owner was telling me that their property was not making them any money. His perception was he was losing $200 a month.

And yeah, that was the reality. He was losing $200 a month.

But after we started talking about this particular property—which was in a major downtown area that was going up in value—he realized that even though he was losing a couple hundred dollars a month, the money that he was making on appreciation totally eclipsed anything that he was losing on a monthly basis.

So yes, he was laying out a little bit of cash, and he had what’s called a “negative geared property.” However, what he was not thinking about were the other ways that he was making money.

It’s not the fact that your property’s not making you any money; it’s the fact that one of the five is not making you money. Chances are, it’s making you money other ways—you’re just not thinking about it the right way.

Don’t focus just on cash flow. Look at all the other variables—those that you may have considered when looking into buying it in the first place.

And again, if you have maintenance on your property—let’s say you have to replace the air conditioning unit or the roof or the hot water heater—those are called capital improvements. That is going to improve the property. It’s not a loss. You’re actually making the property worth more money.

Exterior street view of cute bungalow home decorated for fall wi

Remember, just because you have to outlay cash or maybe you’re losing a little bit of money every month, as long as the other factors come into play—cash flow, equity capture, debt paydown, depreciation, and appreciation—that’s probably not the case overall.

Related: The No. 1 Reason New Real Estate Investors Lose Money

Think of all those things before you decide that your property is not making money. If you do look at all those things and you still decide that it is not making you money, guess what you can do? You can very simply sell the property.

There’s nothing that says that you have to hold onto a property just because you own it. There’s always an exit strategy. Sometimes the exit strategy is just getting rid of it and taking that money and turning it into a better deal that will make you money.

And more importantly, the mental stress that you’ve got to deal with. Whenever you have a property that you’re upset about or that’s bothering you, it’s always in the back of your mind. If that’s happening to you, it’s not worth it.

Sell the property, take the money, roll it into a better deal. And now you’re able to buy something that is better energy for you, and you’ll feel a lot better than you currently are.

Hopefully this information was helpful!

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Questions? Comments?

Let’s discuss below. 

Steve Rozenberg is the Head of Investor Education for Mynd Management, a national property management company that combines talented experts with data and technol...
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    Account Closed
    Replied 7 months ago
    Steve, Good advice, many investors only look at the cash flow. Regarding badly located rentals, perhaps 1031 Exchange a few into one single better properties. Also, even if an investor will not make a substantial profit on the sale of a rental but has held it a long time and accumulated a hefty amount of depreciation, rather than pay 25% tax on the recaptured amount why not 1031 Exchange into a better property. Even add money to the deal, perhaps by borrowing from a Company 401(k). Why investors lookin at their IRA and or 401(k) and consider them sacred cows never to be red for real estate is a myth created by and perpetuated by Wall Street.
    Erik W. Real Estate Investor from Springfield, MO
    Replied 7 months ago
    I like the 5 way approach that shows the various ways WEALTH is created by a combination of cash flow, equity (buying below market), appreciation, amortization, and tax write offs. For the newbies out there, if we're going to look at the whole picture, let's look at the whole picture. 1) Equity is a function of the market and changes. You may build equity for 5 years that one down turn erases if it's time to exit now and you have no options. Sure, down turns are no big deal as long as you don't sell....but if you do sell.... if you have to sell, then ouch! 2) Appreciation, same advantages and disadvantages as equity. 3) Amortization, same advantages and disadvantages as equity. 4) Tax write offs, a positive for now, but will have to possibly be recaptured when sold unless using a 1031 or leaving to heirs on a stepped up basis. It's good to analyse all angles as that can help achieve a better overall picture for the wealth building power of real estate. All aspects must be considered, the pluses, the minuses, and the ones that can switch from plus to minus and vise versa depending on the market at the time the investor exits. All in all, a fascinating topic, and I agree that real estate is probably the greatest way for the average person to build wealth over time! Thanks for sharing.
    Terry Lowe
    Replied 7 months ago
    It also depends on your goals. We also have to put dinner on the table. Everything else you say is absolutely true, but our goals also include some external necessities, like food, college, a home, and maybe some fun. For us it’s the labor that we can’t/don’t want to afford. We are retired and do as much work ourselves as we can. (Talk about cheap labor.) We just finished a small re-do of paint, new lighting, new switches and outlets, new door knobs and cleaning and even some outdoor work. It looks awesome and I bet we will get an additional $200./ month on a 1 bed/1bath apartment. Doing our own labor probably saved us close to $10,000 in labor, and our materials were around $2500. We will recapture our materials in one year, and the rest is money in our pockets! Plus we get some (moan n groan) exercise. We do this for 2 units a year, and allow ourselves 30 days to get the unit back on the market. And when they can, our children and grandkids help out. What a great way for them to learn about their future investments!! For us it’s a win/win.
    Gayle Quinlan Real Estate Investor
    Replied 7 months ago
    Thank you for this !!! I have a studio in downtown Chicago..I only make $150 a month but tenant pays for everything ! And all my husband does is nag me..lol sell it get better cash flow! Ill tell you I get young professionals that have been amazing..it always rents within a week..and its not going anywhere ! Great article Ill be having my husband read !!
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 7 months ago
    The article needs a little clarity. Not making “money”. That is very open term. Are you not making profit, cash flow, or asset? Those are distinct from each other. Depreciation or costs recovery is part of the calculation of profit in the statements of operations and the statement of cash flows. It is not distinct item. It is included in IRR and NPV as part of the cash flows. Debt pay down does not make money. It is a transaction impacting the balance sheet, statement of operations, and statement of cash flows consisting of a reduction of the balance sheet asset cash for the payment, reduction of the balance sheet liability of the loan for the principal portion, increase in interest expense. Once the payment is made equity from debt reduction does not earn anything. With inflation the dollar of loan reduction is worth less one year from now. With 2% inflation the dollar is worth 98 cents one year from now. In a sense, the investor could be better off with an interest only loan. The amount that would be principal pay down is invested at higher than inflation. Appreciation is commonly misused word in the USA. Appreciation is when you made the asset more opulent or bigger, so the asset is worth more. If you did nothing to the asset and the asset is worth more in the future, then that is asset price inflation from lack of supply and or demand not appreciation. I wouldn’t say “appreciation” makes you money. It is considered capital gain and it is a cash flow. It is distinct from the tax treatment of Net Income.
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 7 months ago
    You and the writer are dealing on two different levels in the RE business. You are right and he is right. For a small-time investor or a newbie, the term appreciation here in the USA is commonly used to denote any type of increase in market value. Yes, this term can be overly broad for a professional investor. Most small investors would just love to have a free-and-clear property paid for out of years and years of cash flow. They don't consider the inflation factor and bifurcate the effects of their capital improvements. It's like the difference between the Peewee League and the NFL.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 7 months ago
    it is not two different levels at all. i have taught matriculated and non matriculated real estate economics and real estate finance. the problem is the term started out by being misused in non academic situations and it stuck. 60 years ago? there is the loss of distinction between added value and a non value add increase in price. investors have better information for decision analysis when they understand the distinction.
    Christopher Smith Investor from brentwood, california
    Replied 7 months ago
    I actually I think basic annual cash flow is a pretty good starting measure of your profitability, in fact I would do one better than that and say you should be making money after depreciation to really know for sure whether you are becoming economically profitable or not. In any event, its really about comprehensive cash flow over the life of the investment, which would include all the annual cash flows plus the proceeds at sale all discounted at an appropriate rate (so you can avoid all the other Mickey Mouse calculations in between and just cut to the chase). My properties all have significant annual cash flow, all have significant bottom line income AFTER depreciation and all have significant underlying price increases as I bought them at the depth of the housing crises. While it turns out that I would make significant money even if they didn't cash flow at all (massive terminal cash flow amount), I wouldn't have invested in them if they did not generate significant annual cash flow as price appreciation is to too uncertain for me to rely upon. So is "comprehensive" cash flow important, absolutely its really the only game in town.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 7 months ago
    profitability and cash flow for two different two things. two different financial statements. profitability is a measure of income and expenses. there are more steps necessary to calculate cash flow. you can be profitable meaning there is Net Income and have negative cash flow. Bad. Net Income means there is tax due. there is not cash flow. all ROI calculations are based on before tax cash flows and after tax cash flows. Ideally, good structured real estate investments have Net Losses after depreciation not Net Income. Net Income means there is federal tax due. federal tax reduces cash flow. Cash flow is vastly more important than Net Income.
    Barry H. Investor from Scottsdale, AZ
    Replied 7 months ago
    Great article. This article could have a spin-off on properties which make ONLY cashflow. I remodel properties in Kansas City MO which, after I put a $30K+ remodel into them, they are worth about the same as they were 10, 20 or even 50 years ago (i.e. no appreciation). That said, because the remodel commands the best rental rate in the neighborhood, they CASHFLOW over 20% to 25% annually when I sell them to investors for 25% down and provide seller-financing, even when you include PM fees, taxes, insurance, loan costs and even $1000/Yr in projected ongoing repairs/maintenance. In the 1st year after the remodel, there are typically no additional repairs. That is what is cool about real estate - you can make money many ways or hyper-focus on one aspect (i.e. cashflow or appreciation).
    Vitaly Lunev Lender from Irving, Texas
    Replied 7 months ago
    I agree with the premise that you make money in multiple ways, however, if you are banking on appreciation to bail you out, it is not a good spot to be and 2008-2010 were a very good illustration of that point.
    Ricardo A Perez from Hollywood Florida
    Replied 6 months ago
    I agree Vitaly.
    John Mahady Investor from DuPage, IL
    Replied 7 months ago
    If your return is not better than bond interest rate than sell the property and buy bonds.
    Gabriella Selva
    Replied 7 months ago
    As an amateur investor, this was super helpful information. Real Estate is somewhat a foreign language to me still and it's a lot of information coming at me all at once. You broke it down easily and got straight to the point.