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.
For more information on how to buy the best rentals, which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
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.
Why Rental Properties are the Best Choice
Investing in real estate is a fantastic way to retire early or increase your income. There are many ways to invest in real estate, but person I think long-term rental properties are the best real estate investment. Long-term rental properties take little management, give great returns and produce cash flow for years and years into the future. Flipping, wholesaling and most types of real estate investing are more like a job than investing; take more time, more money and once you stop working, you stop making money. Rental properties have provided me with over 20 percent cash on cash returns and that does not even factor in account equity pay down and appreciation.
What types of real estate do I invest in?
I love rental properties, but that is not the only type of real estate I invest in. I own 11 rental properties, I also fix and flip 10-15 homes a year and I invest part of my IRA into a REIT. I also run a real estate team that sells 200 houses a year and invest a lot of money into that business. Each type of real estate investing has its advantages and disadvantages, but rental properties have been the best investment, because they don’t take as much time, they produce money every month whether I work or not and they have great tax advantages. Here are the basic pros and cons of the different types of real estate investments.
- Rental properties: long-term cash flow, great tax advantages, guard against inflation, high or low cash investment, relatively easy to finance.
- Fix and flips: great short-term profits, no tax advantages, more work than rentals, high cash investment, hard to finance.
- REITS: easy to invest in, low cash investment, no control, have to buy at market value.
- Wholesaling: low cash investment, a lot of work required, medium quick profit potential, must keep working to make money.
- Partnerships/JV: minimal time investment, minimal control, high risk, could have long-term cash flow.
What are your real estate investing goals?
Your choice of real estate investments will depend on what your goals are. If you want the easiest investment; flips, wholesaling and rentals are not the way to go. They all take time to learn, patience to find deals and a long-term plan. A REIT is easy to invest in but you have no control and have to pay market value like a stock.
If you want to make the most money possible in a short time flipping and wholesaling is your best investment. Both types of real estate investing take time to learn, but when you sell a flip or wholesale deal you get a large sum of money right away. The downside is you have to keep finding those deals to keep the money coming in.
If your goal is to produce long-term wealth, rental properties are the way to go. Long-term rentals won’t give you a huge pay-day right away, but they keep creating income month after month. Long-term rentals also have great tax advantages that could allow you to make money while actually claiming a loss on your taxes.
Why are rental properties such a great real estate investment?
I make about $6,000 each month from my rental properties after all expenses. That figure is going to keep coming in as long as I own the rental properties and will increase because I am paying off mortgages and rents will go up over time. I have my real estate team manage my properties and I spend very little time working for that money. My blog InvestFourMore focuses on rental properties, flips and real estate agents. Check out my complete guide to purchasing long-term rental properties to see more details on the advantages of rentals, but below are the summarized advantages of rental properties.
Rental properties provide cash flow
Every month my rental properties conservatively bring in $6,000 a month in income. I bought my first rental property in December of 2010 and have since bought 10 more rentals. If you buy rental properties for the right price in an area with a high rent to value ratio, you will make money every month. I make $500 cash flow on each rental property I own, which I have bought from $80,000 to $135,000. My cash flow calculator is a great tool to help you determine the cash flow on rental properties.
My last rental property purchase was rental property number 11 and it rents for $1,400 a month. My cash flow is $506 a month after I figure the monthly expenses and mortgage payment, which includes taxes and insurance.
- Rent: $1,400
- Mortgage payment: -$544
- Monthly maintenance: -$210
- Monthly vacancies: -$140
- Cash flow $506
That $506 a month equals about a 20 percent cash on cash return on the cash I invested. I include quite a bit for maintenance and vacancies even though those costs rarely occur. When I do have a large repair bill it can make up for months of no repairs. In reality I am making much more than $506 a month, but I will have large repairs occur like replacing a roof that will make up for all the months with no repairs. I rarely have a vacancy in my market and my vacancy costs historically have been much less than 10 percent, but one nasty eviction could make up for that as well.
You can buy rental properties below market value
I buy my rental properties at least 20 percent below market value. There are not many investments that allow you to buy below market value; the stock market, mutual funds and REITS are all bought at market value. I can buy houses that are distressed or need work and get a great deal on them. After I have bought a house below market value and made repairs on it, the house is usually worth 30 to 40 percent more than I paid for. I bought rental property number 11 for just over $109,000 and I made about $12,000 in repairs to it. That house is worth at least $150,000 and probably more in today’s market.
Rental properties have great tax advantages
The IRS allows you to depreciate rental properties, which means the value of the structure of a rental property can be deducted from your taxes over 27.5 years. If a structure is worth $100,000 then $3,636 can be deducted from your taxable income every year. You can also deduct or depreciate expenses on rentals and pay a lower tax rate on the profit you make if you sell a rental property. If you sell a rental property you can also complete a 1031 exchange and pay no taxes on the profit. It is possible with enough depreciation to make money on your rental property every month, but actually have it show as a loss on your tax return.
Is is easier to finance rental properties
It is easier to get a loan on a rental than a flip, which is a huge advantage to rental properties. Leverage allows you to increase your returns and make more money off appreciation and higher rents. I use ARMs to finance my rental properties that are amortized over 30 years. I have to put 20 percent down, but my portfolio lender lets me get as many loans as I want. Because I put 20 percent down on my rental properties and they still have great cash flow, I can buy three times as many properties as I could with cash purchases. Buying more rental properties amplifies the other advantages like cash flow, equity pay down and the tax advantages.
Over time real estate will appreciate
I don’t invest for appreciation, but it is a great bonus. My rental properties increased my net worth by $600,000 due to appreciation, buying below market value and adding value through repairs. I think it is very hard to predict appreciation, but given enough time the real estate market has always increased. Because I use leverage to buy my rental properties, I see great returns when housing prices increase. I paid about $97,000 for my first rental property, which was a great deal. It is now worth close to $200,000 thanks to appreciation and making minor repairs. I spent about $30,000 in cash to buy that property, which means if I were to sell that property I would make about $75,000. That is a 250 percent increase in my investment over four years and I am not even considering the cash flow and equity pay down. This is an extreme case of appreciation and buying below market value, do not expect this to happen every time you buy a rental.
Your rents pay down your loan every month on rental properties
When you buy rental properties with leverage, not only can you make money every month, but you pay down the mortgage every month. I paid off my first rental earlier this year with cash flow from my other rental properties. The $506 I make every month does not take into account the principal I am paying down on my mortgage. Every year I will pay off about $1,500 of my loan and that amount will increase over time as my equity increases.
How fix and flipping fits into my real estate investing strategy
I think rental properties are the best real estate investment, but I still fix and flip homes. Fix and flipping may not be the best way to invest, but that does not mean it is not a good way to invest. I fix and flip 10-15 homes a year because it makes me a lot of money, but flipping is more of a job than an investment. As soon as I stop buying houses, repairing them and selling them, I stop making money. It also takes a lot of my money to complete a flip, because I cannot finance the entire cost of the property and I have to pay for the repairs. I average about $30,000 in profit on every flip and I use much of that money to buy more rental properties. Most of the flips I buy would not be good rental properties for me, so I am able to make money on the flips without sacrificing making money on rental properties. I explain how I decide whether to flip or hold as a rental here.
How wholesaling fits into my real estate investing strategy
I have never wholesaled a house, but that doesn’t mean it is a bad way to invest. I have met many wholesalers who do an amazing job and make a ton of money. Wholesaling is similar to flipping, but you sell houses quicker without repairing them. You have to continually buy houses to make money and it is more of a job than owning rentals as well. I am seriously thinking about doing more wholesaling and less flipping because of the smaller investment needed and quicker transactions.
How do I invest in REITs?
I invest a small part of my IRA into Real Estate Investment Trusts. REITs are made up of different forms of real estate holdings; usually commercial or residential rental properties. A REIT is managed by someone else and all you have to do is buy the REIT like a stock. I invest in REITs mostly for fun and have seen decent returns, but so has the entire stock market. I do not invest a lot of money into REITs because you cannot buy below market value, you have no control and I make much more money buying rental properties myself.
Investing into real estate as a JV partner
A JV partner invests money into real estate without doing any work or finding the real estate investment. I have seen JV partners in rental properties and fix and flips. A typical agreement is the JV partner gets 50 percent of the returns from the investment for providing the money and the other party gets 50 percent for doing all the work. I think a JV partnership can benefit both parties, but there is a lot of risk involved if the person doing the work does not know what they are doing or quit. If you have a great relationship with experienced investors it can work very well.
People also invest into real estate with private money. Private money is loaned to investors to buy flips, wholesale, or buy rental properties. The money has a higher interest rate than a mortgage from a bank, but the investor usually gets a steady return with less risk than the stock market.
Fix and flipping and wholesaling make investors a lot of money, but you have to keep buying properties and working for that money to keep coming in. JV investing takes less work and time, but you have no control over the investment and can be risky. Rental properties provide monthly cash flow, the money keeps coming in every month and you have complete control over the investment. I use flips to buy more rentals because I want that money I work so hard to make, making money for me. When you factor in cash flow, buying below market value, appreciation, tax advantages, and equity pay down, I am making much more than 20 percent on my money.