Why Your Rental Property Isn’t Making Money (Even at $1,800/Month)
Most landlords believe their rental property is profitable because it produces monthly income.
But when you calculate rental property ROI, the results often tell a different story.
In many cases, the bank earns a higher return than the landlord..
The Scenario (Very Common Right Now)
Let’s walk through a typical deal:
- Property Value: $250,000
- Rent: $1,800/month
- Mortgage: $150,000 at 7%
- Equity: $100,000
At first glance, this looks like a solid investment.
But let’s calculate the real numbers.
👉 What is your return on equity?
Why the Bank Makes More Than the Landlord
Your mortgage payment is approximately $998/month.
Early in the loan:
- About $875–$900/month is interest
- That equals roughly $10,500 per year
👉 The bank is earning 7% on $150,000
Meanwhile, they take:
- No tenant calls
- No repair costs
- No vacancy risk
- No part (or full) time J O B they didn’t sign up for
Breaking Down Rental Property Cash Flow
Here is a realistic monthly expense breakdown:
Here’s what your $1,800 rent actually looks like:
| Expense | Monthly |
|---|---|
| Mortgage | $998 |
| Property Taxes | $250 |
| Insurance | $125 |
| Maintenance / CapEx | $150 |
| Vacancy Allowance | $90 |
| Total Expenses | $1,613 |
Cash Flow Left: ~$187/month
That’s about:
👉 $2,244 per year
Step 3: Real Rental Property ROI (This Is What Matters)
You have $100,000 tied up in this property.
Your return:
- $2,244 ÷ $100,000 = 2.2% ROI
Even with optimistic assumptions:
👉 You’re likely earning 3–4%
Meanwhile… the Bank Is Earning More Than You
As highlighted in the image above:
- Landlord: ~4% return
- Lender: ~7.5% return
That means:
👉 Your money is working half as hard as the bank’s
Why Rental Property ROI Declines Over Time
As you hold the property:
- Your equity increases
- Your cash flow stays relatively flat
This creates what many investors don’t realize:
Declining return on equity
Over time, your rental becomes less efficient.
The Equity Trap in Real Estate
Many landlords fall into what’s called the equity trap:
- High equity
- Low returns
- High effort
You may feel wealthy on paper, but:
👉 Your money is underperforming
In other words:
You become equity rich… but cash flow poor
A Better Way to Think About Your Rental
Cash Flow vs ROI: The Critical Difference
Cash flow answers:
“Am I making money each month?”
ROI answers:
“Is my money working efficiently?”
A property can be cash flow positive and still be a poor investment.
How to Improve Rental Property ROI
If your ROI is low, you have options:
1. Raise Rents (If Market Allows)
- Immediate impact on ROI
- Often limited by market conditions
2. Refinance (When Rates Drop)
- Reduces interest expense
- Improves cash flow
3. Sell and Reinvest
- Unlock equity
- Move into higher-yield opportunities
4. Use Seller Financing
This is one of the most overlooked strategies.
An Alternative Strategy: Become the Bank
Instead of renting the property, you can:
- Sell to a buyer with financing terms
- Collect a 10–20% down payment
- Create a loan at 8–10%+ interest
This transforms your role:
👉 From landlord → lender
Rental vs Seller Financing (Side-by-Side)
| Rental Property | Seller Financing |
|---|---|
| 2–4% ROI | 8–10%+ ROI |
| Active management | Passive income |
| Repairs & vacancies | Predictable payments |
| Illiquid equity | Sellable note asset |
Why Seller Financing Works
You are stepping into the same position as your bank:
- Collecting interest
- Secured by real estate
- Paid monthly
This often produces:
👉 Higher returns with less effort
Final Thought on Rental Property ROI
If your rental property ROI is under 5%, it may not be performing as well as you think.
The key takeaway:
👉 Cash flow alone does not equal profitability
Understanding ROI allows you to:
Reduce unnecessary effort
Make better investment decisions
Improve returns
Next Step
If you want to evaluate your own rental property ROI:
- I can run the numbers with you
- Show alternative strategies
- Or model a seller financing scenario
Simple conversation. No obligation.
If you are interested in talking with me further, go to the Contact page, or understanding more about mortgage notes, you can download my book: A Comprehensive Guide for Investors in Profitable Mortgage Notes.
