Investing in rental properties has been an awesome experience for me. I own 16 rentals and I have an ultimate goal to purchase 100. I have had a great experience with rental properties, but many people think investing in rental properties is a bad idea. Many of those people are more than happy to express how bad rental properties are, especially if someone expresses an interest in buying properties themselves. Why do so many people think investing in rental properties or real estate is a bad idea? Are rentals really that risky and dangerous or are there other reasons that people talk bad about them?
What are the bad things people say about rental properties?
I don’t negative comments on this blog about rental properties often, but there are a few. I try to educate people on how to buy rentals the right way and maybe that helps people see how awesome rentals can be. I do get a lot of comments from readers who have been told by others how horrible rentals are. I see comments on Facebook from people commenting on other real estate posts and so many of them are negative! Here are some of the things I see:
- The only way to make money with rental properties is to invest in multifamily and wait 20 years.
- If you get a loan on rental properties you will lose everything when housing prices drop again.
- It is a nightmare dealing with tenants. They never pay rent on time and will trash your house.
- It is impossible to make money with rentals, because prices are too high.
- The stock market makes more than rental properties. The historic returns on rentals are 3 percent and with the stock market the historic return is 6 percent.
- The vacancies and maintenance on rentals properties will eat up all of your profit.
- Buying rental properties is an evil thing to do, because it causes housing prices and rent prices to increase hurting the poor and middle class.
Some of these arguments are valid depending on the properties you are investing in. Some of these arguments make no sense at all once you look deeper into them. I am going to go over each comment later on in the article, but first I want to explore why people say these things.
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Why do people say investing in rental properties is a bad idea?
There are many people who talk bad about rentals. There are those that have never bought rental properties, but have heard stories about how had they are. There are those who owned a property or two and had a very bad experience. There are also those who have owned many rentals and still own rentals, but for some reason still talk bad about them!
If you are getting advice about investing in real estate, please pay attention to who you are getting advice from. Do not let them deter you from investing in rental properties until you have talked to them and asked many questions.
- Those who have never owned rentals. If someone starts talking bad about rental properties you have to ask them if they have ever owned a rental property. If they have never owned a rental, but heard “stories” about how awful they are, is that a good source to listen too? Many people don’t want to see other’s succeed if they have not succeeded. They know if you never try something, it will be impossible to succeed at it!
- Those who have owned one or two rentals. There are a lot of people who have owned a rental property or two with some horror stories. The most common horror story I hear is: “I couldn’t sell my house and had to move, so I decided to turn it into a rental. I couldn’t afford a property manager, because the rent wouldn’t cover my mortgage payment. The tenants never paid on time, they left the house a mess and I lost a ton of money.” Of course they lost money! They rented a house that was never meant to be a rental and did not cash flow. They had no idea how to manage the house or screen tenants and they probably never checked on the house because they didn’t live in the area. Make sure you know the reasons behind why people who owned rentals, thought they were a bad investment.
- Those who own many rental properties. Once in a while I hear experienced investors talking about how bad it is to be a landlord. Their tenants are a pain, the properties always need work and it takes a ton of time to keep track of them. The funny thing is many of these experienced rental property owners still own their properties and make a ton of money from them. Many of them have even retired from their jobs and all they do is real estate investing. If their properties are so horrible, why haven’t they sold them and why do they make them so much money? I think some people like to complain and others may even try to scare away future competition.
There are some investors who have bought rental properties the right way. They bought houses below market value, with plenty of cash flow and still had a bad experience. From what I have seen the investors who buy rentals they right way and still have a bad experience are few and far between. If you hear someone talking bad about rentals, make sure you get the whole story on why they had a bad experience. Did they have a clue what they were doing? Did they know how to properly calculate cash flow? Did they know how to manage their properties?
Are the bad things people say about rental properties valid?
Many people who talk bad about rentals have either not invested in rentals themselves or didn’t have any idea what they were doing when they had a rental. But what about the things they say? People can say some pretty scary things that appear to be valid points.
- “The only way to make money with rental properties is to invest in multifamily and wait 20 years.” This is just a silly statement. You can make money with single family homes or multifamily homes. How much money you make on either property depends a lot on your market. You don’t have to wait 20 years to make money on rentals. I make about $8,000 a month on my rentals with loans against them.
- “If you get a loan on rental properties you will lose everything when housing prices drop again.” You don’t have to lose anything when housing prices drop, because you don’t have to sell your rentals when prices go down. If you invested in properties with cash flow, you will even continue to make money if prices go down. I know many investors with many properties who made money during the last housing crisis. The investors who got into trouble over-leveraged themselves and had minimal or no cash flow.
- “It is a nightmare dealing with tenants. They never pay rent on time and will trash your house.” This can be true if you don’t take the time to choose the right tenants or pick the wrong property management company. This can even happen when you choose the right tenants and the right property management company. Bad things happen on occasion, people lose jobs, have medical bills and run into trouble. Again if you have proper cash flow the good months will more than make up for the bad ones. If you check your rentals regularly and properly screen your tenants the risk of a property being completely trashed is very low. Many investors who have their properties destroyed never checked on them for years.
- “It is impossible to make money with rentals, because prices are too high.” It is tough to make money when housing prices are high, but possible. One of the keys is buying below market value and choosing the right places to invest. If you live in San Francisco it may be hard to make money with rentals. Investing in the right rental properties is not easy. You cannot go to any big city where millions of people want to live, buy any house off the MLS and make a ton of money.
- “The stock market makes more than rental properties. The historic returns on rentals are 3 percent and with the stock market the historic return is 6 percent.” This argument is usually made by stock investors who are trying to convince people the stock market makes more money than real estate. The problem with this argument is they are comparing the stock market returns to the housing index, not rental properties. Investing in rental properties produces completely different returns than the housing index returns. Here is a great article that explains why the argument is not valid.
- “The vacancies and maintenance on rentals properties will eat up all of your profit.” This is true and a valid point if you don’t account for maintenance and vacancies. Many investors assume their profit is the rent minus the mortgage payments, taxes and insurance. You have to account for maintenance and vacancies, even if they do not occur every month.
- “Buying rental properties is an evil thing to do, because it causes housing prices and rent prices to increase hurting the poor and middle class.” I have heard this argument a lot and it really surprised me the first time I heard it. Some people feel that rental property owners set the market rent and when they buy rentals they make it harder for people to buy houses. Rental property owners do not set market rent, the market sets market rent. If there are more rental properties the market rent will actually go down, so buying rental properties could decrease the amount of money people pay in rent. Not everyone can buy a house due to credit, income and other factors. Some people have to rent and investors buying rental properties allows those people to have a place to live.
Can you do everything right when investing in rental properties and still lose money?
There is no guarantee with any investment, even if you hide your money under your mattress. If you buy a rental property below market value, have plenty of cash flow and manage the property well there is a chance you could lose money. You could have a bad tenant who trashes the house and won’t leave. In most cases you will lose money in the short-term when you lose money, not the long-term. The more rentals you have the more diversified you will be and the less that one bad tenant will hurt you. Yes you can lose money, but if you invest for the long-term with cash flow and you are not stretching your financial capabilities, you will almost always make money in the long run.
Many people talk bad about rental properties and investing in real estate in general. Most of the time the people talking bad have no idea what they are talking about or what a good rental property investment is. You should be happy so many people talk bad about rentals, because that means fewer people are buying rentals and it leaves the great returns for the few of us who do invest. For those people who do own rentals and talk bad about them, what is their motivation and why have they not sold their properties?
To avoid tenant problems proper screening is vitally important and we now use SmartMove for credit and background checks.