It’s no secret that I love rental properties. Sure, flipping and wholesaling properties might be fun. Notes and tax liens might have fewer tenants. The stock market might be more popular. But rental properties are my true business love.
Let me explain why.
Is A Rental Property A Good Investment?
I’ll be honest: the answer to this question will always depend on your individual goals nd circumstances. I’ll explore why rental properties are a good investment below, but also mention a few reasons why they might not be for some people.
However, overall, if you’re new to investing then a rental property is a great option. The US rental property market is undergoing a boom, with more and more people choosing to rent every year. It’s no coincidence: the tough housing market and high mortgage interest rates are making renting a far better option for many people. So, if you choose to enter the rental property scene right now, you’ll be in the right place at the right time.
But there are several more general reasons why rental properties are a good investment, regardless of what’s happening to the housing market. Let’s look at them in more detail.
15 Reasons Why Rental Properties Are A Good Investment
1. You can invest in rental properties using leverage
Rental properties are great because you can borrow the bank’s or someone else’s money to increase the potential return. This is known as leverage.
In other words, you don’t need to have 100 percent of a property’s purchase price on hand to be able to buy it. Rental properties allow me to buy large properties for far less cash than I might need to purchase stocks or other investments.
2. Investing in rentals allows you to hustle for greater returns
Not only can I leverage my cash, but I can also leverage my time and abilities to make magic happen in this game—something difficult to do with other investments. In other words, I can hustle.
If I want to do the work needed to rehab a property, I can do that. If I want to leverage my networking skills to raise money, I can do that instead. If I want to leverage my knowledge and time to find better deals that provide an even greater return, I can do that.
Rental property investing gives me the ability to hustle for my future.
3. You can manage the investment directly
I’ll fully admit I’m a bit of a control freak, and that drives me toward rental properties in a powerful way. With a rental property, I am directly responsible for the outcome of my investment.
It is up to me to analyze a property before I buy it. It’s up to me to ensure the property is in good condition to rent; it’s up to me to ensure the property is running at peak performance.
I don’t have to depend on some board of directors in New York City for my life’s direction. I can manage my investments directly and personally.
4. People always need a place to live
The real estate market will go up and down, but the beauty of rental properties is that demand will never end. People always need a place to live, so unlike the latest tech trend or your brother’s startup, real estate is an investment that will last.
Furthermore, because increasing student loans are making qualifying for a mortgage more difficult and our culture increasingly values mobility, the demand for rental properties will only grow over time.
5. Rental property investing benefits from property value appreciation
The value of real estate goes up over time. Sure, housing market crashes do happen, but they are infrequent, we’re unlikely to see one anytime soon, and real estate goes up not down in value in most places most of the time.
What that means for you as an investor is that if you decide to sell your rental, you will get more for it than you paid, which can give you the extra cash you need, including for your next investment. And if you get into the habit of upgrading your properties before selling them, you can increase your profits even more. This is called the BRRRR method, used successfully by real estate investors for decades.
6. Rentals are relatively stable and predictable
Yes, events such as the market collapse in 2007 and COVID do happen, but rental property owners who were investing for long-term gains did not suffer like those who were trying to be “fancy” (or as my good friend and fellow landlord Jordan says, “punk drunk on greed”).
Furthermore, I would argue that the 2007 real estate crash was predictable for those who were paying attention—because one of the defining characteristics of the real estate market is the boom-and-bust cycle that never goes away. Once an investor learns to identify this cycle, the old adage of “buy low, sell high” becomes much easier to achieve.
7. Rental property investing lets you diversify your portfolio
Rental properties also offer an incredible amount of variety within the asset class.
I can invest in single-family houses, small multifamily properties, large multifamily apartments, office buildings, high end, low end, Section 8, transient, and any of a number of other options. Then, within each of those classes, I can find larger properties; smaller properties; ones that are newer, older, taller, shorter, ugly, beautiful, and so on.
This is called diversification and it protects your portfolio against downturns in any one housing sector.
8. Getting started in rental property investing is simple and straightforward
Although I’ll never claim that working with rental properties is easy, I do maintain that investing in rental property is fairly simple and straightforward.
Sure, it involves more than just buying a piece of property and placing renters in it, but the strategies for success are not overly difficult to learn or master. To help, a tremendous amount has been written on the topic by those who have mastered it. Books, podcasts, videos, blogs, forums, networking groups, mentorship, and more can be found to help you learn nearly everything you will ever need to know.
In addition, knowledgeable people are available to help. Several months ago, I ran into a situation I didn’t know how to handle (a smoking tenant accidentally lit part of the outside of her house on fire yet claimed she hadn’t). I reached out to other investors on the BiggerPockets Forums and received some excellent advice on how to proceed—and it didn’t cost me a thing.
9. You can earn passive income when investing in the rental property market
Passive income takes care of itself while you take care of your life. It’s the dream of millions of people, and investment in rental properties is one of the most accessible way of getting passive income.
What is passive income? It’s a way of making money without having to do hands-on work for an employer. While you may not be able to quit your job straight away when you start out as a property investor, you likely will be able to do so several years in, if you do it right. What would you do with your time if you didn’t have to work 9-5 for a living? Spend more time with family? Pursue that hobby you never have time for? Passive income an give you what no job ever will: freedom.
10. Rental real estate is an inflation hedge
Rental real estate is one of the best ways of hedging against inflation. There are several reasons for this: one is that home values tend to go up over time at a rate that’s either comparable to or greater than the rate of inflation. So, if you ever need to cash in on a rental property, you can compensate for any increase in living costs caused by inflation.
Secondly, you can adjust rents to reflect growing inflation. This is a good option if you find yourself in shorter-term financial difficulty but don’t want to cash in on the rental yet. Multi-family rental properties offer especially high rental yields, so you should look into this rental property type if hedging against inflation is one of your top investment goals.
11. Rentals offer multiple ways to profit
One of the greatest benefits of rental property investing, especially compared with other real estate niches and strategies, is the opportunity to capitalize on all four of real estate’s major profit sources:
Cash flow
Appreciation
The loan pay down
The tax benefits
12. You don’t have to be present to make money
Finally, I love the idea that I can make money without physically needing to be present. That’s called a “job,” and I want to avoid that.
Understand that real estate is not generally a 100 percent passive activity, but over time, the systems you create can help you outsource most of the land lording process.
The dollars will roll in whether you get out of bed in the morning or not.
13. Rental property investing has many tax benefits
If you invest in rental real estate, many of your expenses will be tax-deductible, including:
Property tax
Mortgage interest
Maintenance and repairs
Owner expenses such as travel
As a rental property owner, you’ll also be able to apply for a capital gains deferral via the 1031 exchange method.
14. Rental properties can help you secure your retirement fund
Rental property investment is a long game and can help you retire more comfortably. While it’s true that just one rental property probably won’t help you build your retirement fund, owning several rentals likely will. The more you invest, the better your cash flow and ROIs, and the more opportunities you have to put said returns into your retirement fund.
15. Insider trading is legal
In the Wall Street world, there is a concept known as “insider trading,” which is when an investor makes a profit on a stock because he or she had access to some secret bit of information that helped him or her buy or sell at the right time.
This practice is not just discouraged in the stock market, it is also illegal and can even land you in jail (just ask Martha Stewart).
However, as a rental property investor, I can leverage any secret knowledge I can find to benefit my investments. If I know that a new light rail is moving into a neighborhood, I can jump in and swoop up properties before word gets out.
If I hear that a major industry is leaving an area, I can get out of that area before the market declines. And unlike in the stock market, this is 100 percent legal and encouraged in the rental property realm.
When to Avoid Investing in the Rental Real Estate Market
We’ve looked at the benefits of investing in rental real estate. But when is investing in rentals not such a good idea?
The main case scenario when investing in a rental may not be the best idea is if you’re in need of cash right now. Rental property investment, depending on how you go about it, can give you substantial returns in just a few years, but even so, that’s years, not months. If you are cash-strapped and need money fast, then you should reconsider investing.
You should also think about how you’ll be funding your rental investment well in advance. Most lenders want bigger down payments on rental investment properties, typically at least 25% of the home value. If you don’t have that kind of money, you’ll need to look for alternative sources of finance such as real estate crowdfunding, which is also not without its risks and drawbacks (smaller returns is the biggest one).
Frequently Asked Questions About Rental Property
Investing
Still not sure whether investing in rental properties is a good option for you? Here are the most common question potential investors ask me before taking the leap into rentals.
How much profit should a rental property make?
There’s no hard and fast rule here. In fact, any amount of profit on a rental is good because it will accumulate over time. Remember: rental property investment is a long game. Even if a property only makes you $100 a month, over 5 or 10 years that’s thousands in profit. And if you own several rental properties and continue growing your portfolio over time, your profits will grow too. You should only worry if the property is making no profit or is making you losses.
What kind of mortgage do you need for an investment property?
Any potential investor needs to understand that the mortgage they apply for won’t be quite the same as an ordinary residential mortgage. Rental property mortgages require higher down payments (typically around 25%) and come with higher interest rates. That’s because as a rental property investor, you are higher risk to the lender. Rental properties are at a greater risk of standing empty, so lender will want to safeguard themselves against any missed mortgage payments as a result of this.
How can I finance an investment property?
Mortgages are still by far the most popular method of financing investment properties. There are other ways, too, such as approaching a local lender fora fix-and-flip loan, or trying a crowdfunding platform.
Of course, as with alll other property investments, paying for your rental in cash is by far the best way of financing your investment. If you can afford it, definitely go for it. Cash is still king.
What credit score do I need to become a property investor?
The better question to ask yourself here is: ‘what credit score will give me the best rates as a rental property investor?’ While you probably can get a rental property mortgage with a score of 680, you will get much better interest rates with a score of 700+. In fact, you should aim for a score of 730+ to get the very best loans in this category.
How much can I borrow on a rental property?
That will depend on your credit history and how well you’ll be able to reassure your lender that the mortgage payments will be made on time. Most investment experts agree that it’s slightly harder now to take out multiple rental property mortgage than it used to be, and most lender won’t lend you more than 75-80% of the purchase prices of a rental. However, as you build your real estate portfolio, you’ll also build your credibility with lenders. If you can show that your first property is consistently turning you a profit over a couple of years, you’ll be more likely to get approved for your next loan. The Bigger Pockets How to Buy Rental Property Guide contains the essential tips and insights you need to get started. Success begets success, so keep going.