Owning rental property is a little like ordering pizza with anchovies. It might be just what you're looking for, but it's certainly not for everyone.
Rental real estate can be a valuable investment, providing additional income and the potential for long-term appreciation. But unlike owning stocks or mutual funds, rental property requires ongoing attention, financial resources, and a willingness to handle unexpected challenges.
Before becoming a landlord, it's important to understand both the opportunities and responsibilities that come with owning rental property.
Owning rental property is a little like ordering pizza with anchovies. It might be just what you're looking for, but it's certainly not for everyone.
Rental real estate can be a valuable investment, providing additional income and the potential for long-term appreciation. But unlike owning stocks or mutual funds, rental property requires ongoing attention, financial resources, and a willingness to handle unexpected challenges.
Before becoming a landlord, it's important to understand both the opportunities and responsibilities that come with owning rental property.
The Benefits of Owning Rental Property
There are several reasons why rental real estate appeals to investors.
1. A Steady Stream of Income
One of the biggest attractions of rental property is the potential for consistent monthly income. When tenants pay rent, that money can help cover your expenses while providing additional cash flow.
Of course, if you have a mortgage, a significant portion of your rental income may go toward the monthly payment. You'll also need to account for insurance, property taxes, maintenance, and periods when the property is vacant.
The goal is positive cash flow—earning more from the property than it costs to own and operate.
2. Potential Property Appreciation
Real estate can also increase in value over time. If your property appreciates, you may eventually sell it for more than you originally paid.
However, appreciation isn't guaranteed. Property values fluctuate based on market conditions, location, and other factors. And when you sell, any profit may be subject to capital gains taxes.
Rental property ownership comes with potential tax benefits. The IRS generally allows landlords to deduct certain expenses associated with maintaining and operating rental properties, including mortgage interest, insurance, property taxes, repairs, and maintenance.
You may also qualify for depreciation deductions, which allow you to recover the cost of the building over time. However, depreciation reduces your property's adjusted tax basis and can increase your taxable gain when you eventually sell. Major improvements generally must be capitalized rather than deducted immediately.
Because these rules can be complicated, it's wise to consult a qualified tax professional.
4. Opportunities for Personal Use
Some investors purchase vacation properties, such as beach houses or mountain cabins, that they rent out seasonally while occasionally enjoying themselves.
The IRS has specific rules for properties used for both rental and personal purposes. Generally, if your personal use exceeds the greater of 14 days or 10% of the days the property is rented at a fair rental price, the property is considered a home for tax purposes, potentially limiting rental expense deductions.
Even when personal use falls below that threshold, expenses must be appropriately divided between rental and personal use.
5. Renting Property You Already Own
You don't necessarily have to purchase another house to become a landlord. You might be able to rent out a basement apartment, an additional room, or another portion of your existing home. This could provide additional income without requiring a major real estate purchase.
Depending on your circumstances, you may also qualify to deduct a portion of certain expenses associated with the rental space.
The Challenges of Owning Rental Property
While the potential benefits are appealing, rental property also comes with significant responsibilities and financial risks.
1. A Substantial Upfront Investment
Purchasing rental property often requires a sizable down payment, closing costs, and additional funds to prepare the property for tenants.
If you're financing the purchase, you'll need to charge enough rent to cover your mortgage and other expenses while still generating positive cash flow. And remember, unexpected repairs and vacancies can quickly reduce your profits. Maintaining adequate cash reserves is essential.
2. Limited Liquidity
Unlike money in a savings account or investments that can be sold relatively quickly, real estate is generally considered an illiquid asset.
If you suddenly need access to the money you've invested in a rental property, selling it could take months. You may also face transaction costs and unfavorable market conditions.
That's why it's important not to tie up too much of your available savings in a single property.
3. Expenses Beyond Your Control
As a landlord, you'll face expenses that can increase without warning.
Property taxes and insurance premiums may rise. Major appliances may fail. A roof might need replacing. Changes in the surrounding neighborhood could also affect rental demand and property values.
These are risks you can't eliminate entirely, but you can prepare for them by maintaining adequate reserves and carefully evaluating the property's long-term financial outlook.
4. Maintenance and Repairs
Owning rental property means being responsible for keeping it in good condition.
That might involve routine lawn care and minor repairs, but it could also mean receiving a phone call in the middle of the night about a broken water pipe or malfunctioning heating system.
Are you comfortable handling those responsibilities yourself? Or would you prefer to hire a property management company?
Professional management can make ownership more manageable, but those services come at a cost, often taking a meaningful percentage of your rental income.
5. The Responsibilities of Being a Landlord
Perhaps the most overlooked challenge is managing tenants.
You'll need to advertise vacancies, screen prospective renters, collect payments, and address concerns. You may encounter tenants who consistently pay late or fail to care for the property. And sometimes, you'll face difficult decisions.
What happens when a tenant experiences financial hardship and can't pay the rent? You'll naturally want to respond with compassion and understanding. But you must also recognize your financial responsibilities and know when firmer action may be necessary.
In some circumstances, that could mean pursuing eviction in accordance with applicable laws.
Being a good landlord requires more than financial knowledge. It calls for patience, sound judgment, clear communication, and a willingness to balance compassion with responsibility.
Making a Wise Investment Decision
Rental property can be a rewarding investment, but financial potential alone shouldn't determine whether it's right for you.
Consider your financial situation, available savings, willingness to assume risk, and capacity to manage the property. Just as importantly, think about your temperament. Do you have the time, patience, and flexibility to handle the responsibilities of being a landlord?
For some people, rental property can be an excellent way to build long-term wealth and generate additional income. For others, the demands and uncertainties may outweigh the potential benefits.
Neither conclusion necessarily reflects a lack of financial wisdom. Good stewardship means understanding the resources, opportunities, and responsibilities God has entrusted to you and making thoughtful decisions about how to manage them.
And as with any major financial decision, don't make it alone. Seek wise counsel, carefully evaluate the numbers, and invite God into the process through prayer. James 1:5 offers this encouragement:
“If any of you lacks wisdom, let him ask God, who gives generously to all without reproach, and it will be given him.”
Ultimately, the question isn't simply whether rental property could make you money. It's whether owning it would be a wise and faithful use of the resources God has placed in your care.
On Today’s Program, Rob Answers Listener Questions:
My 85-year-old relative wants to sell his home and give the proceeds to his heirs now. Would that be wise, or would it be better for the property to pass as an inheritance?
I receive $2,100 a month from my Jackson fund. Should I reinvest all of it, or use some to enjoy time with my children and grandchildren and help with their expenses? Is that essentially giving part of their inheritance early?
My wife and I have about $20,000 in high-interest unsecured debt. Is a debt-settlement program like Freedom Debt Relief worth considering, or are the risks too great?
Would remodeling my home be a wise investment if it required about 25% of my retirement savings?
Remember, you can call in to ask your questions every weekday at (800) 525-7000. Faith & Finance is also available on Moody Radio Network and American Family Radio. You can also visit FaithFi.com to connect with our online community and partner with us as we help more people live as faithful stewards of God’s resources.
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