Many Americans have been fortunate enough to chase a new life direction or job offer and purchase a new home without needing the equity in the previous one for the down payment. A share of these homeowners become landlords. Some would be referred to as “accidental landlords,” or those that held on to their old property while waiting for positive equity to return with appreciation. Others perhaps wanted to try their business acumen. Regardless, it is important, and not altogether straightforward, to understand the earnings associated with becoming a landlord.

In becoming landlords, homeowners earn rental income to cover the expenses associated with maintaining ownership of the home and continuing to pay down the mortgage. At the same time, the home’s equity grows as a larger and larger share of the home is owned, and home values continue to appreciate.

To understand total landlord earnings, let’s follow a single family home being rented out in Las Vegas.

How much gross income you earn depends on the rental demand for your home. Let’s say you can rent your house for $1,180[1] a month. Unfortunately, Las Vegas has one of the highest rental vacancy rates in the country at 13.2 percent[2], so you may be able to rent the home only 86.8 percent of the year, or approximately for 45 weeks out of the full 52. This leaves you with a gross rental income of $12,254 in the first year. This value will of course grow as median rent grows. Unfortunately, rents in Las Vegas are not growing very fast given the extra supply of homes to rent. Over the past five some years, median rents have grown at an annualized rate of 0.4 percent[3] in the Las Vegas metro area. Historically though, rents in the regional Southwest have grown at an annual rate of 3.2 percent[4]. We assume that during the first year of renting out your house, rents will increase by only 0.4 percent, but gradually move to the historical inflation rate over the next five so that for year five and beyond, rents will increase 3.2 percent every year.[5]

Being a landlord, however, is not cheap. A significant chunk of your mortgage payments is interest to the bank. Property taxes[6] continue to increase with the value of your home. We assume you’re not aiming to be a slum lord, so you’ll continue to maintain[7] the home and will either allocate your valuable time to assist and find tenants or pay someone to do it for you[8]. And on top of all that, homeowners insurance for landlords is 25 percent more[9] than that for a homeowner living in the home.

The good news is you can continue to deduct the interest and property taxes from your taxable income. The bad news is that with all these expenses, by year seven of being a landlord in the Las Vegas metro you’re losing $90 a month.

However, this loss considers rental income and the expense of maintaining ownership alone. Recall that a chunk of your mortgage payment is going to principal, increasing your share of this appreciating real-estate asset. In Las Vegas, home values are still appreciating rapidly and are forecasted to increase by 8.5 percent[10] over the next year. Over the next five years we might expect the annual appreciation rate to progress to historic rates. Between 1980 and 2000, for example, home values appreciated 2.7 percent[11] in the Las Vegas metro area. A reasonable bet from there is to assume this historic appreciation rate into the future.

So if you have $65,162 of equity in a home that is currently worth $182,500, in seven years you could have $155,954 of equity in a home worth $252,387. To liquidate that equity, you have the sell the home. We assume the closing costs are 8 percent of the home’s value: $20,191.

Despite the accumulating cash flow losses, the total value of your landlord business (rental income less the costs associated with maintaining ownership of your home plus the liquid equity) is estimated to be around $130,650. So even without being cash flow positive, it can pay to be a landlord.

[1] Las Vegas metro median rent in June 2014.

[2] 2012 1-year American Community Survey.

[3] Annualized rental inflation according to Zillow Rental Index from 2010 to the present.

[4] Annualized rental inflation according to the CPI for Rent, Housing and Shelter from 1984 to 2000.

[5] We use this same assumption for all other regions. The first year rental inflation rate matches the average annual increase in the Zillow Rental Index since 2010. The rental inflation rate for year five and beyond is set according to the average annual increase in the CPI for Rent, Housing and Shelter from 1984 to 2000. The inflation rates for the interim years are estimated by a cubic spline between the first and fifth year rates.

[6] Assume 1 percent of home value annually. Note that we increase the property taxes every year as your home appreciates in value. In reality, property taxes increase in fits and starts every few or several years. Our assumption smooths this irregular pattern.

[7] We assume you spend 0.5 percent of the home’s value maintaining the property in the first year. The spending then increases with inflation.

[8] A good rule of thumb for rental management services is 10 percent of rental income plus anywhere from $100 to $200 in legal fees to create the lease or rental contract. We assume $200 in legal fees up front and 10 percnet of rental income over time.

[9] We assume homeowners insurance to be 0.5 percent of the home value annually. Twenty-five percent more sets a landlord’s homeowners insurance to 0.63 percent annually.

[10] ZHVI year-over-year forecast between June 2014 and June 2015.

[11] Average annual HPI appreciation rate from 1980 to 2000.