The 5 Fastest Ways to Lose Money with a Rental Property

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You’ve decided you want to invest in rental properties.

Excellent decision!

There are so many benefits to rentals, including cash in your pocket each month, tax benefits, equity building, and most importantly it’s passive income!

So you know you want to invest in them, but where do you start? You probably know to “find a house undervalued” and “rent it out” and “boom you make money”. Well, okay, that isn’t necessarily wrong but there is a lot more that goes into the success of a rental property than just buying a house at a good price.

When I first started buying rental properties, I had no idea what factors are truly important in ensuring financial success. Had I known, I could have saved thousands of dollars in losses over the few years I’ve had my properties!

The caveat I throw out here is that if you buy a rental property that goes against any of my suggested risk factors, it is not to say at all that the property won’t be a success. You have to look at risk vs. reward as a spectrum, of sorts.

On one end of the spectrum you have super high risk but high return. On the other end of the spectrum is minimal risk and lower returns. On neither end of the spectrum, or anywhere in between, is any particular result guaranteed.

You can most definitely have financial success with a property caked in risk factors, however the chances of success are much lower (and with a lot more headaches). You increase your chances for success as you move up the spectrum towards the lower risk side, but even at that end it’s not to say you will always have success either. You just have much better chances of it.

So what are the actual factors that can hurt your rental property investment?

5 Ways to Lose Money with a Rental Property

  1. Price-to-rent ratio. This term refers to how much it costs to purchase a property versus how much rent it can bring in. If the price-to-rent ratio on your property doesn’t work, you will consistently lose money every month. For example: an Atlanta property purchased for $95,000 that rents for $1100/month vs. a Los Angeles property purchased for $460,000 that rents for $2250/month. If you run those numbers, the Atlanta rent will easily cover the mortgage and expenses and then even leave some extra in your pocket each month. The Los Angeles property rent, however, will doubtfully even cover the mortgage each month much less any of the expenses. See the difference between the two? The difference is the price-to-rent ratios. If you buy that Los Angeles property, or any other high-priced property whose rents don’t cover the expenses, you will lose money all day long.
  2. Bad tenants. Assuming your price-to-rent ratio is intact, the next fastest way to lose money on a rental property is with bad tenants. Worse than ending up with bad tenants one time is ending up with bad tenants consistently. Most people think they understand this, but it seems like everyone attributes the loss from bad tenants to having to do excessive repairs on the property after they leave (which is certainly what I thought too). The repairs can end up costing a lot for sure but often worse than repairs is vacancy. The scenario- bad tenants decide to up and stop paying rent. They inevitably give some bunk excuse, but regardless, you have no income coming in.You, or your property manager, file for the eviction immediately but even in the states where the eviction process happens “quickly”, this will still take some time. The tenant stops paying, the eviction is filed, a court date is scheduled for likely a month or so later, after the court date the tenants still have another week or so to pay their debt, if they don’t pay a writ has to be filed, in some counties you have to wait for the sheriff to escort the tenants out, and then it may take 1-3 months to find new tenants, all after paying money to clean up and repair the house to make it rent-ready again. All of that can easily be 4-5 months of no rent coming in (and that is only for a landlord-friendly state who does fast evictions!Never mind the states that are tenant-friendly and take months to get the tenants to court and out of the house). Or maybe your tenants spared you all that trouble by just leaving the property with no warning (but of course they steal your appliances on their way out). Even then, you are still looking at 1-3 months of vacancy while you look for new tenants. If you have a mortgage on the property, you have to continue to make those mortgage payments every month regardless of whether you are getting income or not. That can be rough! Nevermind the thousands in lost rents, but you are also spending potentially thousands on the mortgage and other expenses. Repairs are the least of the worries with bad tenants in comparison to the detrimental expenses of evictions and/or vacancies. No doubt, bad tenants are the fastest way to lose money on a rental property.
  3. Maintenance. While I just let repairs semi off the hook as being a culprit for costing you money on your rental property, I’m bringing them back on the hook. Yes, tenant damage can definitely cost you money (always check with your insurance policy and see if it covers tenant damage), but general maintenance of a property can cost way more. I’m talking roofs, HVAC systems, wiring, siding, appliances, flooring, anything.Anyone who has ever owned a house, whether for themselves or as an investment property, knows how much these things can cost. Thousands! Not to say a newer property won’t have any of these problems, but the older the property you buy, the more you better expect to dump into maintenance quicker. It can be brutal.
  4. Declining market. What happens if the market you invested in starts declining? Maybe a major industry goes out of business or a natural disaster hits, who knows. Or maybe it’s just consistent population decline. Either way, the value of your house will drop. The good news is the value of a house doesn’t matter if you aren’t trying to sell it, but if you suddenly need to sell or maybe you have a financing issue where you really need to refinance (like if you have an adjustable-rate mortgage that jumps, knocking out your cash flow each month), you might be hosed. Let’s take the example of needing to sell. If you have to sell for much less than you bought the property for, you could lose tens of thousands (or more). Or, let’s not even think of the value of your property.Let’s think about a declining population causing a decrease in market rents, forcing you to adjust accordingly and causing you to suddenly lose money every month because the income isn’t high enough to cover your expenses anymore.  Or maybe people just stop wanting to live in that area, or never wanted to do in the first place, so you can’t find a renter. But you are stuck still paying the mortgage if you have one and property taxes and insurance. Money will flow out of your pocket faster than you can count the bills.
  5. Not using a tax professional. One of the biggest financial advantages to owning rental properties is the tax benefits. If you do your taxes correctly, you are likely to set yourself up so that the income you earn on the properties ends up being (essentially) tax-free and then you may even get more money in tax benefits on top of that. If you own one rental property, maybe I would be okay with you doing your own taxes. But even then, and most certainly if you own multiple properties, you are going to do yourself damage by not using a tax professional whose primary clients are real estate investors.A lot of CPAs will be worthless in maxing out the tax benefits on your rental properties, but if you find one who specializes in the field, you are certain to maximize the money you get to put in your pocket. The reason you need a CPA who specializes in real estate is because the laws change so often, impacting your write-offs and ways to properly report the numbers, those CPAs will be up on all of the latest much more than one who only has one or two real estate investor clients.Even if you are extremely good and diligent with filing taxes, or even if you are a retired CPA yourself, I still think you need to check-in with a current CPA professional or you are bound to miss out on easy income you would otherwise pocket.

Preventing the Losses

Have I completely scared you away from buying rental properties? I wouldn’t blame you. All of the above certainly sounds horrifying. And the worst part is, those problems are so common in rental properties! That’s the bad news. The good news is that there are actually ways to mitigate all of those risk factors. Although even if you mitigate every single factor, you still aren’t guaranteed perfect success but you will have so dramatically lowered your risk that you are in a much better position for avoiding those issues.

What are the mitigations? These guidelines go for investment properties in general:

  • Buy in areas with good price-to-rent ratios. Make sure the market rents suggest that you will profit every month after all expenses, compared to how much you have to pay for the property. This is critical. You won’t find good price-to-rent ratios typically in places like Los Angeles, San Francisco, New York, and most Florida cities. Those are just examples and far from all-inclusive of every market with bad price-to-rent ratios.
  • Do not buy in lower-quality areas. This includes the ghettos, the slums, or generally any area where typically the people living in that area are not of great quality. Not to say every person living in a lower-quality area is bad, but the chances are much higher that they will be which will increase your chances of the bad tenant scenario. The nicer the area, the higher-quality the tenant your property will attract.If you really want to shoot for the areas that are likely to attract the highest-quality tenant, look for areas that are more primarily owner-occupant residents than renters. This goes for general markets too. Some cities boast that they have a huge percentage of renters, which suggests you will always be able to find a renter, but that kind of statistic actually says that the general quality of the population may not be as high. Not to say you have to own your own home to make you “high-quality”, but you get my drift. If you do choose to invest in a low-quality area, I highly recommend sticking with Section 8 tenants which will dramatically increase the chances of you receiving your monthly rents.
  • Try to buy newer properties that check out in an inspection. No matter how good of an old house you get, it is an old house and will cost you a good bit in maintenance much sooner than if you were to buy a newer property. Always get a full inspection before buying any property so you know all the potential issues, but regardless of the initial condition you will have to start putting money into maintenance eventually. The nicer of a property you buy upfront, the longer you can go without forking over that money and maybe less total over time.
  • Buy in growth areas. This goes for both macro and micro markets. Large cities in general may be on the decline due to industry failure or lack of desirability, or small areas within a larger growth market may be going down the tubes for any random reason. Don’t buy in those areas. Buy in cities with good industry diversification (so if one industry tanks it will have little to no effect on your property), a solid trend of population growth, and generally cities where people actually want to move.
  • Use a tax professional who specializes with real estate investors. If you really think you are that good at taxes, spend the money at least once to let a professional do your taxes one year and compare them to what you come up with. If there is no difference, maybe you are that good. But try it out to see.

There are so many mitigations to lower the risks of rental properties. People just don’t realize what factors realistically cost an investor more than they ever bargained for. I know I didn’t know when I started! And when I hear other people talk about wanting to buy rental properties, I realize they don’t realize the reality either.  The other trick that gets people is that to buy a newer property in an owner-occupied neighborhood in a nice area will inevitably cost you more money than buying an old property in a not-as-nice area.

When people see the higher returns on the lower-quality properties, they take those numbers as gold and buy like crazy. Don’t be tricked by supposed numbers! No returns estimate can take into account the level of disaster the above factors can cause. You may pay more, but buying higher-quality properties in nicer areas will almost always put more money in your pocket over the long-run.

Be smart, use common sense, and be willing to be taught on how to make a rental property work!

Does anyone have a property that totally rocked it and a property that totally tanked? What was the difference between them?

Photo Credit: susivinh

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About Author

Ali Boone(G+) recently left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor only two years ago but managed to buy 5 properties in just 18 months using only creative financing methods. Her focuses have been on rental properties and overseas investing in Nicaragua.

34 Comments

  1. You did it again! Nice post. You definitely not only confirmed some of the experiences I’ve had, but as with the financing post from a month ago, this is very relevant to my life because now that I have obtained my pre-approval letter from a bank for an amount that I need, I am hitting the ground running to close on the new house before 90 days elapse (and I have to get my FICO score hard-pulled again). I am thinking about each of the first four things you mentioned. Some are critical.
    1. Yep, ROI is something that deserves to be tattooed backward on my forehead so I see it every time I brush my teeth. Critical! I am aiming for $200+ in cash flow after my expenses. Though my expenses don’t contain property management because I’m going to do it, I am saving 10% a month toward maintenance. At 4.7% interest over 30 years, I hope that I cash flow out of the gate, cash flow nearly every year, and that my rent can keep pace with increases in the cost of tax, insurance, maintenance, etc. I also hope to buy in a subdivision that experiences positive demand over the life of the loan. The general area is growing, so I think as long as I don’t buy into one that shows current maintenance issues and doesn’t have too high a renter-occupied rate, I will probably be fine. Probably.
    2. I have had a nightmare tenant. It was a Section 8 voucher tenant. Totally screwed up my unit. It was 33% my fault though because I wasn’t on top of the property manager. I received $750 for about 25 months in a row almost without fail, and then we both realized how bad the place was. I’m talking kicked in front door in a domestic violence incident, hole in the drywall for another one, lightbulbs missing, smoke detector removed, p-trap under the kitchen sink removed, tub completely defaced, crayons on the wall and floor, etc. It took 100 man hours and $3,000 to prep the place. Ruined my former great cashflow. You know it was bad because I kicked her out and her record of submitting Section 8 rent was excellent. Had to evict and it took 3 months to find a new tenant because Section 8 froze its rolls to exclude new tenants. Royally screwed up by business model. And to think, I thought politicians could be trusted. Well anyway, I lost my ass on that unit in 2013. It is needless to say, in a war zone. Had an AC compressor stolen once. 10% ROI but not easy. I also have to clean leaves and branches off the roof and the huge double driveway. The rehab also was a little cheesy – one time the tenant actually broke the toilet bowl. The BOWL.
    3. I am a freak about condition. I literally didn’t buy in a neighorhood once because I was worried about the neighborhood’s condition. As in, the condition of the REST of the houses. Now that’s serious concern over condition. I also am a licensed home inspector, have read a bunch, and am getting trained Monday and Tuesday to use an infrared camera in home inspecting. It’s good for energy efficiency and good for detecting moisture issues. Also overheating electrical situations such as an electrical panel that is gettting to hot for whatever reason. Just another arrow in my quiver. I’m also obtaining my real estate license in March so that I can save some commission on future houses and with mls and entry priviledges, I can fairly easily assess houses from different angles.
    4. It’s a seller’s market here, so I have pretty much put to rest the idea that I’m going to find the perfect deal. I think I prioritize rentability (demand), condition (of the house and of the neighborhood as a whole), and return on investment (cash flow and appreciation potential) more than I do price. I can’t score a good deal on a house that has these criteria in this area in a seller’s market. So I can either find a good deal because I found some channel for scoring one, or I can get all those other criteria, but not both. Since the bank will only loan on a house with a good roof, that kinda takes out serious rehabs, but I would accept a light rehab if I can beat other investors to the punch.
    I’m jazzed about my first loan. I really had to think long and hard about leverage, as I consider the greatest risk the risk of a deficiency judgment. Not more than a 1% chance of occurrence I say. So I’m full steam ahead. If I can prioritize all the things that you mention in this blog, and get it right, I bet my chances of using leverage successfully are good to great. Houses are 50% of my retirement goal, so I really do have to get all this nearly perfectly correct. One other thing I might do is to find a turn-key rental in another area besides mine to have a little diversity. Less control, more diversity. I am thinking about these topics daily, and I think this blog is a good spur to keep the important things in mind.

    • Great info Jason! Glad you shared everything as it’s great stuff for everyone to read so they understand what kind of realities can go on with a rental property. Thanks again for sharing!

  2. Lemme get this straight. Buy low, rent high, not in the ghetto, but in a nice neighborhood….. Also, buy newer as opposed to older….. Am I getting this right? Got it, I’ll be right on that when I go to sleep tonight.

  3. Sara Cunningham on

    Very sensible advice and in most cases all the things you mention do happen. However I have 2 properties in my portfolio that come to mind. The first supports your points on neighborhood, cost, age of property etc. the other goes somewhat against them.

    The first is a duplex we own. It’s not in a great neighborhood. I have 1 side rented to a Section 8 tenant who has lived there since we bought it. The other side has had numerous tenants. Firstly Section 8 is great we do get the rent on time every month. However when you are dealing with these properties they have to be inspected and passed every year for payment to continue. Without fail there have been numerous issues every year. On average we pay about $1200 to get it up to scratch. Not a bad thing because at least the property stays in half decent shape. The other side has had problems, too many different tenants, copper wiring stolen from the AC unit, violations for trash not kept cleaned up. Appliances breaking, broken windows, clean out fees and of course no rent during vacant periods. So yes this supports all the points you made about how to select the right property, except that in spite of it all the cash flow is still good.

    The second property was originally our own home till we moved. Great neighborhood, HOA, house in tip top shape etc. The first year we had it rented we went through 3 different tenants. This was in spite of using a property management company who carefully screened the tenants etc.The first tenants moaned about everything to a light bulb not working to the filter needing changing in the ice maker. They moved out after 6 months. The next tenants complained consistently also. Except when they should of. They ended up flooding the entire ground floor because they ignored a leak under the master bedroom sink. They then decided to move out and take appliances and some pictures that belonged to the property. We ended up with a house that took 3 months to completely redo downstairs from walls to ceilings to floor coverings.And of course no tenants for 3 months either. The present tenants have been in there 15 months and so far so good. Just goes to show that more expensive houses, better type of tenant and nicer neighborhoods don’t also mean success.

    • I totally agree Sara and thanks so much for sharing both of those scenarios! Great for everyone to read. As I mentioned in the article, buying nicer and newer definitely doesn’t guarantee ultimate success by any means. As confirmed with your situation, it may attract high-maintenance tenants who don’t always use their brains! Lol. Definitely a possibility. It does lower the chances though, which is nice. It really does come down to the tenant screening, which is a science in itself.

      I hope the new tenants stay great, and good luck with that one side of the duplex!

  4. Great post. I have had similar experiences, one other thought. We were buying properties in 2004-6 period when everything was going crazy. We could only afford properties in not so good areas, however it wasn’t such a big deal then because good tenants couldn’t find affordable rent in the areas they wanted to live in either.They were willing to consider less desirable neighborhoods, so at the time we didn’t have the experience of tenants ruining the properties or not paying the rent. Come 2008 to 2010 it is a different story, good tenants can now afford to live in the more desirable areas because rents have gone down along with the house values. Pool of people to choose from who fit acceptable criteria reduces and problems begin, do I let the property sit vacant until the right person turns up or do I compromise to fit the pool of people available. This is just another factor to take into account when you are looking at neighborhoods, and what cycle real estate is at in your area.

    • Susan, that is a really interesting perspective I had never thought of. You’re totally right and that really is something to consider- the effects of the market cycles. Thanks for sharing! I’m definitely taking a note of that for my own knowledge to remember when investing.

  5. Great Article!!! Although I’m just starting out, I already know what NOT to do concerning rental properties. I have a friend who could definetly be the poster child for this article. I want do things right from the beginning. Looking forward to reading and learning from your other articles. Thanks Ali. You Rock!!! :)

  6. “Do not buy in lower-quality areas” if you want to watch-from-the-sidelines (and there is absolutely nothing wrong with that approach).

    However, let me point out, there’s HUGE potential to capture cashflow and buckets of equity IF an investor is willing to advocate for a lower quality neighborhood. Typically areas are low quality because they are burdened with fixable issues.

    A motivate leader-investor can help restore the area’s buoyancy by implementing best practices used in neighborhood restorations. The tactics aren’t new or difficult, but they do require a caring leader.

    • I totally agree Al. Lower-income areas can a) be very profitable and b) have room for an advocate to really help the area and further increase values and profitability. It definitely requires a certain level of involvement, patience, and knowledge. If you have all of those, it can be a great avenue to jump into. I do recommend anyone who wants to go that route to talk to someone (maybe you!) who has done it and gain as much knowledge going into it as they can. For the average investor, however, be warned of how much goes into succeeding in that arena and really understand if it’s something you are willing to take on. If you are wanting just a rental property to collect money from with less involvement, I don’t recommend it.

    • Al,
      Could you please elaborate on your post and in regards to the tactics that can make investing in a lower quality area and how to be an advocate of these neighborhoods?

  7. Ali,

    Following Al’s lead, I’d say “Try to buy newer properties” if you want to watch from the sidelines (again, nothing wrong with the more passive, turn-key approach).

    I would like to point out that there is HUGE potential for forced appreciation in purchasing older properties – whatever older means in your area(s) {here it means Queen Anne, Second Empire, Victorian, Edwardian}.

    Taking an old Victorian building through a modernisation and a {deep} energy efficiency retrofit can reward you, and your tenants, with a healthy, comfortable, and affordable property that exhibits that grand elegance new buildings just cannot provide.

    • Definitely Roy. That of course depends on how much work you want to put into a rental property, but if you are up for the work then absolutely try for the forced appreciation. It can be a very strong and profitable strategy.

    • Ha Jordan. Thanks! Well, I’m hoping to never join the Guru circuit. At least not in terms of selling big expensive how-to programs. I’m much more the mom-n-pop shop type ;)

  8. As a very very brand new investor I see pro and cons in both. Each one has a worry or concern to take in consideration. Say I have 50K to start my investing career, on one hand I could go into the “nicer” areas but going to sleep at night worrying about the mortgage payment that is due every month ($400-500) plus other expenses and say a 60 day vacancy, would make me scratch my head as the new guy on the block. On the flip side dealing with your property being “destroyed” or not being taken care of properly by the tenant would do the same described as above. So, where do I go from here? I know I want to invest but which side of the fence do I want to be on.

    • It depends on what you are most comfortable with William. My only response to what you said is that if you buy smart, you shouldn’t have to worry about the mortgage payment every month because there should be enough cash flow to cover that, all the expenses, AND leave some extra. So then if you take that extra and build a nest egg, or have a nest egg anyway, you don’t need to worry. Just stay on top of what is happening at the property and you shouldn’t have to worry about that mortgage.

      The more education you have about your options and the consequences (whether good or bad) of those options, the better you will be positioned to make the smartest decision. It’s different for everyone.

  9. I think its all about knowing the proper parameters before investing in each one. For instance, every lower income neighborhood is not the same. It is a shame to discount major cash flow because of sweeping generalization (although that leaves more room for others to profit from the lack of attention). To blanket statement that you’re going to lose money really is, with much respect, a little too much:

    With Leveraging Methods you can completely vet a neighborhood for the likelihood of low rental rates, vandalism, vacancies, etc, that there is no reason for you to be at higher risk. However, its all about an investors knowledge of Crucial Key Metrics they should be looking at in these neighborhoods. Be it mobile home investing or low income housing investments, there are a TON of experienced real estate investors knocking it out the park and NOT losing any money than their counterparts in nicer neighborhoods with zero cash flow. Its a new world, and we have so many more tools and resources than we did in the past.

    However, you write put lower quality, and there is room in there for what that mean. I personally don’t associate low priced homes with lower “quality” tenants, so maybe more clarification on what you mean by lower quality will help.

    • Lisa, I apologize if I wasn’t clear enough in the article… I did not say you will definitely lose money. I said the risk of losing money is higher, but in fact there are a lot of investors who do make a ton of profit on those types of properties. The risk comes in more when an investor just goes in and buys a property because the numbers look good and they have no idea what comes with that type of investment (whether it be high-end, low-end, mobile homes, student housing, any type of property…). A lot of investors want to buy low-end properties and just have them as easy cash-flowing passive investments. There is more that needs to go into it to make it successful. As you say, it’s those “parameters” people need to be aware of. For the average investor who isn’t that into involvement with a property, lower-quality housing is riskier.

      Lower-priced properties will not always attract lower-quality tenants, but there is a sliding scale there and the lower-priced the property, the more likely it is to attract lower-quality tenants. If you buy a $20k dumper in a sketchy area, what high-class upstanding citizen is going to want there? That is an over-dramatization, but you get my point. But again, in absolutely no way am I saying that only lower-quality people will rent that property. I’ve heard plenty of stories of perfect paying and well-kept folks renting a low-end property for 20 years and never missing a payment. That’s excellent. But again back to people needing to understand the parameters… if you screen potential tenants hardcore, you just may find a great tenant and your investment will sore. But when people don’t realize that the screening process of tenants for a property like that needs to be even more diligent and thorough in order to find that good tenant, they end up letting whoever in and it botches up the investment.

      I can’t say enough…. lower-end properties can be extremely profitable, absolutely. But there is an added layer of work that needs to go into them in order to make that happen, and if someone isn’t aware of that or they aren’t interested in doing that extra layer of work, it could be detrimental to their investment.

      • Got it! I like this explanation a lot better :-) I DO think going into this having a good solid mindset is the key to success. Now, this mindset isn’t hard to see or implement, and I use my own Leveraged Analysis Technique that I show people about setting themselves up properly (which I will be discussing across my video blogs over the next few weeks).

        I think thats fair when you caveat having an analysis technique can be the difference (as an informed investor). Good thing we have BiggerPockets to share these techniques (Al Williams’s Brand of setting parameters, my own Leveraged Analysis Technique) to help.

        In everything, the more informed you are, the more proportionate your chances of success! Thanks Alie for the reply!

  10. Oh, if it were only that easy Ali!

    Having a definite plan and knowing the basic concept of one’s goals is good. Though, there are so many details that can only be learned through experience. No matter how much I read, there’s always something new that I learn from my own personal experience through this business!

    Plus, experience allows one to see what they like/don’t like and exactly how they operate. Many times self development is overlooked in our field but knowing oneself is definitely key to being successful in any business endeavor.

    Nice write-up, thanks for the reminder!

    • Totally agreed Rachel. The only way to truly learn is by experience. Not only to learn what you didn’t know, but to figure out what meshes best with you personally, and to figure out how to grow from there. Everyone will make mistakes along the way, it’s part of the process, and the most and best you can do is to get what education you can diving into it and go from there!

  11. Thanks for Sharing Ali

    This article is great. What resources are out there where we can get stats like % of owner occupied homes and price to rent ratios?

    • Hmmm Che, I can’t say for sure. Price-to-rent ratios, I just know those by going through gobs of inventories and running numbers in random areas of interest (and by knowing where all the big investors are buying). Owner-occupied, you’re best bet there is probably to talk to property managers. That’s more of what I’ve done, if I didn’t know the area. As far as actual written statistics, I’m not quite sure. Networking with other investors in your area of interest is probably a quick way to determine the best areas and learn more about the different areas.

  12. In my most humble opinion, as long as house is being rented out, there’s no “true lost” in the property since it’s eventually still yours and you have potential upside gain in the value of the property when you sell it at the right market conditions.

    • That’s true Dave except if it’s not rented, it’s a problem, or if the rents are covering your costs and you are having to pay out on the property. It can get expensive.

      • Sufficient checks on financial standing including your own debt servicing will avoid this problem. Always invest in areas with better potentials e.g near to universities or business hubs where you know people comes to work or study and they need homes.

        This will greatly reduce your chance of house standing vacant.

  13. Thanks for sharing this great article, Ali! As a real estate investor myself, I couldn’t agree more with what you mentioned in the article.

    I want to add that property investing involves lots of research and numbers crunching to see if the investment makes sense. Hence, the investor should not outsource the thinking and property selection to real estate agents or properties featured in property exhibitions and seminars alone. Never invest just to hope for capital appreciation but for positive cash flow through rental. In my opinion, if you can’t make money out of rental immediately and can only HOPE that the investment property COULD rise in value in the future, that’s gambling and not investing! Any property investor must be able to hold on to the investment property for the long term to ride out possible rough economic times that are beyond our control.

  14. Ali,

    I loved your article. Thank you for laying out the pros and cons. A thought kept niggling at the back of my mind as I read and I wanted to share an idea. Now a days vacation rentals are putting a spin on the whole passive-income-from-rental-property challenge, a spin that actually plays to the owner’s advantage! When I hear folks talking about the right location for an investment property, “good area” vs “bad area” they are thinking in terms of the maximum rent they can charge in the area based on local figures for average household income, home values, market rents, etc. But with a vacation rental, the best location is where travelers want to be and things to do around the area. I have found that properties in the outskirts and suburbs can command up to 3 times the regular rental income, if they are within roughly a 30 mile radius of local “hot spots.”

    I had a friend who was also the poster child for your article who had a 2bd/2ba house in a rural area of Los Angeles, CA. He had just finished evicting the tenants and as he was repairing the damages and getting ready to start looking for tenants again, he decided to try renting it as a vacation rental instead. He was actually able to get guests in there lightening fast and made $3,777 his first month (his regular rental income had been $1,200 per month). Ever since he’s been making steady income at or above $1,200 every month, and he loves being able to come and go in his own property as he pleases. It’s a great way to eliminate eviction headaches and increase passive income, even if the location isn’t the best.

    For investors who might be thinking of buying a property solely to rent as a vacation rental, they can begin to look at neighborhoods through the eyes of their new tenants: people who are on vacation, to determine the property’s desirability and chances of success. They may find that an otherwise undesirable neighborhood will reveal a diamond in the rough and create a huge cash flow opportunity. Or for rental properties that are vacant or under performing, it could be an option to explore as well.

    I hope this new perspective helps.

    • Good thoughts Sue. As with any investment method, there are always pros and cons for it in comparison to other methods. Vacation rentals can certainly work out well, but there is also a lot more risk there (due to no leases and what if vacationers stop coming) and there can be a ton of work that need to go into them (such as cleaning after every vacationer…you essentially have to get a property rent-ready several times a month (if not a week) versus once every year or few years with a normal rental). Vacation properties are also much more dependent on the economy succeeding because people stop vacationing when the economy goes bust.

      I only say those as to bring up the cons about vacation rentals, certainly not a smash to your idea because if done right, there can definitely be a lot of potential there. Just a little more risk and work.

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