Unless you have unlimited funds and you have no interest in whether or not your Florida rental home is profitable or a money pit, at some point you will need to sit down and do some sums. How you do these sums, what you include, and what you exclude, depends on the end result you are trying to achieve.

If you are calculating your profitability for your income tax returns, then you will be bound by various conventions and rules that are appropriate for this purpose. However, these rules may not be very helpful if you are looking to get a genuine picture of what your rental home is costing you (or hopefully earning you) in real money. This is the picture that I am going to try to generate here. I will set out a series of calculations that will work down to a realistic bottom line of what your rental home is either earning you or costing you.

It is important that I make one thing clear at the start: These calculations are only rough approximations. I am assuming that you want a realistic answer to this question today, not a perfect answer in the very distant future. These calculations are just one of many ways of looking at things. Almost every step could be argued at length, but I believe they will are adequate for this purpose. Accountants and bankers will invariably feel unwell when they read what follows. They do not work with the sort of approximations I will be using!

We need to think in terms of two broad areas when we are calculating the cost of owning a rental home. The first area is the capital cost of purchasing the home, which will be represented in our profitability equation by the cost of having this amount of money tied up in the property. This cost may be mortgage interest, or it may be lost interest in capital that could have been invested elsewhere, or in most cases it will be a combination of the two.

The second cost area is the day-to-day running costs that leave your bank account, hopefully to be replaced by regular rental income. Into this area we will also put any costs of improvement, upgrading or maintenance.

Income also covers two areas. The first area of income is the regular rental checks that you are putting into your bank account. The second area is capital appreciation. Your home will hopefully increase in value year by year. This can also offset the cost of ownership.