Should you invest in a rental property?

Many savvy homeowners consider buying a rental property as a sure-fire way to build long-term wealth. But is it really all that it’s cracked up to be?

We asked 10 individuals for their perspective on owning a rental property, and whether they saw it as a worthwhile investment.

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Owning a rental property

According to IRS income data from 2018, approximately 10.3 million individuals reported owning rental properties. In a study conducted by the Census Bureau that same year, it was found that individual investors accounted for 72.5% of all single-unit rental properties in the US.

Now, you may be saying to yourself:

“If 10 million people can own a rental property, then so can I!”

While you may be well-suited for a rental property, it’s important to remember that it isn’t all rainbows and unicorns. And it certainly isn’t passive income, as some investors may lead you to believe.

There are risks and rewards to buying a second property to rent for income and for long-term appreciation, just as there are with virtually any investment. If that rental property you’re eyeing doesn’t promise the same (or better) return as investing in stocks, index funds, or bonds, then you may be better off putting your money elsewhere. 

If you're considering buying a house as an investment, you should be prepared to take on all financial responsibilities that come with it.

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Pros of owning a rental property

We heard many benefits of owning a rental property from our conversations, which include:

Extra income

Not every rental property guarantees an income right of the gate. But if you’re smart about where and how you build your rental units, as you’ll hear from Muhammad below, then you may come out on top.

“I recently bought a property from my savings and am currently building a two-story home on it. I will rent each portion to generate passive income and preserve my savings as the property value grows over time. The rental income will add 1/3 of the monthly income I make from my job which I can reinvest into my passion of traveling around the world. Purchasing a rental property is one of the best decisions that I have made in my life which will help me when I am ready to retire.”

- Muhammad Saad Khan, Cloudways

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Build long-term wealth

If you’re ready to jump into the rental property world, don’t expect huge returns right out of the gate. As you’ll hear from Becca’s story below, the rental property game is a long one. If you can manage the ups and downs of managing tenants — in her case, across state lines — then you may be in for sizeable gains over the long term. 

“My family has moved six times in 11 years. Like many military families, we own property in more than one location. It's not uncommon for military families to buy a home at one duty location, then rent it out when we move elsewhere. It's a great way to build long-term wealth while still serving in the military. While we have never purchased a home explicitly as a rental property, we have rented out two of our previous homes. Being a landlord isn't always easy, especially from another state or even another country. But rental properties provide excellent financial benefits, particularly long-term.”‍

- Becca Stewart, PCSgrades

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Financial security for retirement

For most, a sizeable 401(k) in combination with social security benefits are enough to fund a comfortable retirement. However, if you’re a globetrotter like Agata, you may prefer building up your nest egg by buying properties located in your favorite vacation destinations. Not only does it give you guaranteed accommodations, but it could provide long-term financial stability well into retirement.

“Purchasing a second home as a rental property is a great option to ensure financial stability in these economically challenging times. Especially when the property’s location is an attractive tourist destination. My family decided on such an investment a few years ago, and we’ve never regretted it. We bought two apartments for rent in Zakopane, a resort town in the Polish mountains visited all year round by people from different parts of the world. Now, my parents feel much more financially secure thinking about their retirement than a decade ago. And we have a lovely getaway if needed.”‍

- Agata Szczepanek, Resume Now

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Cons of owning a rental property

On the other side of the coin, many respondents noted that there are drawbacks to owning a rental property:

Requires time and effort

Many people dream of owning property in their favourite vacation destination. But before you put any money down, it’s important to crunch the numbers to determine whether the additional makes financial sense. The time and effort you pour into the property may be more than you can manage, and you may be better off sticking to renting when you visit.

“I once had a client who was considering purchasing a second home as a rental property. After some deliberation, they decided against it because of the extra time, effort and money it would require from them, and they didn't see the rental income as enough of a benefit. They were looking in a location where they wanted to frequently vacation themselves, and they decided that it would make more financial sense to simply continue staying in hotels or other people's rental vacation homes. The decision to purchase a rental property is something to be heavily considered for both pros and cons.”

- Matt Woods, SOLD.com

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Costly repairs

If you’re already a homeowner, you should be no stranger to the unexpected costs of homeownership. Buying a rental property, especially one that requires you to pay for home improvements or is located in an area that lacks modern infrastructure. Before you read Karen’s story below, you should know that installing a sump pump can cost as high as $2000 — according to HomeAdvisor. That could be a whole month's rent gone with one repair!

“When we sought advice from friends and family who have, they were wary of recommending it. They detailed landlord realities, such as having to quickly make costly roof repairs for their long-term renters and their own home down the block after a surprise microburst. They also lamented always being on call, such as lake house owners' July Fourth plans with family dashed to troubleshoot a sump pump overflow for Airbnb renters. I am also aware of additional costs incurred by landlords regarding insurance since I work for Clearsurance.com. Landlord insurance typically costs 25% more than standard homeowners insurance.”

- Karen Condor, ExpertInsuranceReviews.com

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Good tenants can be hard to find

Oh boy, here’s one we hear about a lot — bad tenants. Even if you take the time to check references, you can still end up with tenants who don’t respect your property. Property damage, unpaid rent, and leaving your property vacant can all have a significant impact on your investment’s return. In Bruce’s case, the trouble just wasn’t worth it:

“I did own a home that was used for rental property for a while. Then, I decided it was best to sell it. The problem with owning rental property is handling the tenants. Not only do you have to make sure they pay rent on time but you also have to make sure they don't destroy the property in the process. Sometimes, you have to clean up after they leave and the mess can be more than you anticipated. Tenants present another problem. Those who live at the same property for a long time start to mentally own it. They may feel a right to entitlement. This can be a big issue if you decide to raise the rent, rent it to someone else or sell it.”

- Bruce Tasios, Tasios Orthodontics

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Things to consider

When we surveyed the group, some of their responses didn’t fit neatly into either a pro or a con. Their circumstances were unique and provided insight into the nuances of owning a rental property. Before making the jump yourself, consider the following:

Rental properties aren’t for everyone

While a rental property may make sense financially, you should consider how taking on more responsibilities could affect your day-to-day life and well-being. One respondent purchased a property, only to sell it a few years down the line because the lifestyle didn’t match up with their personality. Here’s what they had to say:

“If you’re highly organized, analytical, and like things a certain way, then don’t go the rental property route. I am Type-A all the way, and my rental property venture was a nightmare. When I purchased a small second home as rental property a few years ago, I thought it was going to be a great investment on paper. But the thing I didn’t consider was how renters don’t care about the property they live in. There is no pride of ownership or sense of responsibility in terms of maintenance… It was the most infuriating experience of my life, and in the end, I had to sell because my blood pressure couldn’t take it anymore. So take it from me if you’re Type-A, think twice about it.”

- John Ross, Test Prep Insight

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Recouping your investment takes time

It’s important to understand that purchasing a rental property is more often than not a long-term investment. In some housing markets, home values are so high that rental income alone won’t cover the mortgage, let alone the cost of insurance and maintenance. Making a profit can take years, or may never come.

One of the individuals surveyed noted that unless you can find a property at a bargain bin price, it may not be worthwhile. 

“There aren't a lot of tax incentives for renting out homes and it would take a long time to recoup your initial investment of the purchase unless you buy a foreclosed house. That has its own set of problems”

- Arun Narang, Smile by Design Dental

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More debt = more risk

Like any leveraged investment, owning a second property increases your debt load and the potential blow to your finances if things don’t work out. If you stretch yourself too thin, a single emergency home repair or poor tenant could cascade into you losing your home, or worse, bankruptcy.

“If you have to take out a mortgage for it, it will significantly increase your debt ratio. Yes, you can make money doing it, but your time as a landlord will be very frustrating due to many unexpected repairs and evictions if you happen to run into bad tenants who can and will destroy the place, so you will have to come up with thousands of dollars in repairs and find people to do them. It is not suitable for everyone. You certainly are welcome to take up the challenge.”

- Joy Were, Getpaydayloan

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Add a buffer for repair costs

Paying for emergency home repairs could spell trouble for investors who are already stretched thin. Luckily for this individual, they saw the risk and decided to set the rent at a rate that would cover the mortgage and any surprise costs that could come their way.

“I wondered about purchasing a second home for quite some time before pulling the trigger. Looking back, I wish that I'd done it sooner. I started by purchasing a second property near my own so I wouldn't have to pay a property management company 10-15%. To choose the property, I started by getting pre-approved by a local mortgage lender and then conducted searches on platforms such as Zillow and RedFin. 

Once I was serious about a place, I toured it with my real estate agent. I made sure that not only did the rental comps measure up against the mortgage payment, but I also added in a $500 buffer in case a repair was needed or property taxes went up unexpectedly. The rule I followed was only to purchase a place that I would be comfortable living in. That way, if I had trouble renting it, I'd move in and rent my other home out if preferable. I also prioritized a longer lease over more rent money for my first few investment properties so I could predict cash flow.”

- Kelly Skelton, Backyard Assist

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The bottom line

Rental properties aren’t for everyone. However, if you can manage the added responsibilities of owning an additional property, and are smart about how you manage additional costs, then it may be a worthwhile venture to help you build long-term wealth.

Ready to invest? The Fraction Mortgage could be the solution for you.

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.