In a world where everyone is looking for a financial edge, many people believe real estate investing is their ticket to freedom. Most people can’t afford to buy apartment buildings or lack the necessary expertise to purchase distressed homes and then flip them. However, owning one or two rental homes is within reach for many middle-class Americans. When the stock market is unreliable, and savings accounts don’t pay enough interest to keep pace with inflation, this investing method can be alluring. But are rental properties really a good investment?
The Pros of Rental Home Ownership
For the most part, the answer to this question is yes. However, potential rental homeowners would be wise to temper their expectations and take a hard look at their possible return before purchasing. Here are a few reasons why rental homeownership can be a good investment choice.
It’s a Great Way to Build Long-Term Wealth
Rental homeownership is a long-term play. The cost of entry can be high, as can the ongoing costs of maintaining your investment. However, real estate is a good investment because it fills a need that isn’t going away. People will always need homes to live in. Even though a rental owner may experience short-term vacancies while turning their property over, they can typically count on a tenant occupying their home. At the same time, their investment is growing in value.
Portland has enjoyed an incredibly hot real estate market over the last several years. “Since 2015, the median home price in Portland has increased by about 38.7%, from $337,000 to $467,621.” Portland investment property owners enjoyed all that wealth growth in addition to their monthly rental income. However, the Portland market has cooled a bit, thanks in part to COVID. As a result, experts predict home values will fall by 2% this year, which is an excellent illustration of why real estate is a long-term investment strategy. People looking to get in and out quickly with a significant profit likely won’t be successful. Instead, you should be prepared to ride the waves and count on home growth value over time.
You Can Get Into an Investment With Relatively Little Money Down
If you want to purchase $300,000 worth of stock, you’ll need $300,000 in cash. The same is true if you’re going to invest that money in gold. However, the same principle does not hold with real estate because you can purchase a $300,000 home without spending $300,000. Many banks will loan you the money to buy a house so long as you make a 20% down payment. That means you’ll need to come up with $60,000 to own a $300,000 asset.
Smart investors can leverage their good credit to borrow the money they’ll need to enter the rental market. They’ll also be able to make the most of their $300,000 asset by spending less than that total. That’s a much lower barrier to entry than many investment modalities. Of course, with a banknote, you’ll need to make monthly mortgage payments, which is why you’ll want to find a great tenant who will pay them for you.
You Can Create Passive Monthly Income
Passive income is the holy grail for investment gurus. According to the IRS, passive income is money you earn through two sources: a business you don’t actively participate in (like royalties or stock dividends) or rental income. If you own a rental property or two, you’ll have passive income flowing into your pockets every single month. However, passive income is not the same thing as profit. If you’ve done your work carefully as a rental owner, the monthly rent you charge your tenant will be greater than your combined costs of owning the rental. That leftover money is your profit.
Your total profit will depend on many different factors, including the amount you owe on your rental, total maintenance costs, and the amount of rent the market supports. If you’re serious about real estate investing, it’s essential to calculate your anticipated return on investment for every new property you buy. That will help you compare multiple potential new properties to find the best opportunity. It will also help you determine if rental property ownership is the right choice when compared against other investment channels.
The Cons of Rental Home Ownership
As with most things in life, there are downsides to rental homeownership. These factors could lead some people to decide that being a landlord is not a good investment. For example:
Your Money Will Not Be Liquid
Whether it’s to pay for an emergency or to jump on a sudden opportunity, it’s nice to have money available when you need it. However, if all your money is tied up in rental home equity, you’ll only be able to access that cash by selling the property. If you’ve ever sold a home before, you know this isn’t a quick process. You also understand that selling a home can be very expensive between taxes and fees, which can cut into your profits. To make matters worse, if you need to sell your property during a dip in the housing market, you could be sacrificing years of lost equity. This is another argument for why real estate investing is used best as a long-term financial strategy.
It’s Easy to Over-Leverage Yourself
The ease with which you can enter the rental market can also spell trouble for certain investors. When you borrow as little as possible to purchase a rental home, it means you have much less room for error. Like what we witnessed during the Great Recession, a large drop in the market could wipe out all your equity in a very short time. When you begin to add in maintenance costs along with taxes, insurance, and all the other costs of homeownership, it won’t be long until your investment is underwater.
When that happens, there’s little an owner can do but wait out the situation. If they suddenly find themselves without a tenant, their out-of-pocket costs will increase dramatically, which could force them into bankruptcy or foreclosure. The problem compounds for investors who own multiple properties.
Your best bet to avoid over-leveraging yourself is to make a significant down payment if you borrow. Then, be sure to budget every month for repairs, maintenance, and the times your home will be vacant. Otherwise, rental ownership could be a fast track to ruin.
It Takes a Lot of Work
One of the most important things to understand about rental homeownership is that it takes a lot of work. While the income may technically be considered “passive,” there’s nothing passive about attaining it. Rental homeowners must be excellent record-keepers, bill collectors, construction supervisors, and marketers. Without filling those roles, you’ll be missing out on a critical component of successful rental homeownership.
Too many people believe rental homes are turnkey operations that only require occasional trips to the bank to cash checks. Nothing could be further from the truth. To make this investment successful, you need to be committed. Otherwise, it won’t be a good investment for you.
Want to Learn More? We’re Here to Help
Fortunately, you don’t have to tackle rental home ownership on your own. Rent Portland Homes by Darla Andrew is one of Portland’s best property management companies. We take care of all the essential details of managing your rental, like marketing your property, collecting monthly rent payments, and lease preparation. Because we handle a portfolio of rental properties, we can also offer management services for less than you might think. By adding our expertise to your rental portfolio, you can improve its performance, realize more profit, and do less work at the same time. If you’d like to learn more, contact Darla directly by phone or text at (503) 515-3170, or fill out the form on our contact page. Together, we can make Portland rental properties a good investment for you.