Landlording & Rental Properties

The 6 Best Arguments for Investing in Rental Property

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11 Articles Written
House with "For Rent" sign in front

Real estate investing is great because there is a strategy for everybody! You can flip houses, syndicate apartments, buy and hold rental properties, wholesale, buy notes, invest in real estate investment trusts (REITs), and so on.

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Regardless of your risk tolerance, experience, or capital, you can find a strategy that works for you.

In this article, I’m going to discuss why I prefer buy and hold investing over other strategies!

What are the Four Pillars of Rental Property Investing?

The four pillars of rental property investing are cash flow, debt paydown, depreciation, and appreciation. Some of these pillars can be found in every real estate investing strategy but not in the same capacity.

For example, when you flip a house (properly), you will receive a large amount of appreciation in a short period of time. You will not, however, benefit from cash flow or debt paydown with a fix and flip.

Wholesalers won’t see returns from any of these pillars but will instead receive a large fee, essentially for finding the deal.

As you can see, these strategies are all different, but I really enjoy benefitting from all four pillars of buy and hold real estate investing!

row of several small wooden house models all are white but one blurred trees in background

Cash Flow

Cash flow is the life blood of rental properties.

Every month you (hopefully) receive a rent check from all of your tenants. You then subtract the principal, interest, taxes, insurance, utilities (if applicable), and budget for maintenance/capital expenditures, plus all other expenses.

The money left over after subtracting all expenses from your monthly rental income is called cash flow!

Cash flow is important for a few different reasons:

  1. It is income that you can save/re-invest in your portfolio. Think of it as a kind of dividend.
  2. When the market plummets, cash flow will continue covering the mortgage payment so you don’t get forced into selling the property at a loss.
  3. Cash flow can be increased in various ways, thus adding value to your portfolio and wallet!

An added bonus to cash flow is that when markets crash and people are forced to sell their homes, the rental market may actually bring in more money. This is due to supply and demand laws, as fewer homeowners equal more tenants in a market.

Related: The 5-Point Rental Property Shopper’s Checklist

Debt Pay Down

Unless you’re buying real estate with cash (not my favorite method), you are going to have a mortgage payment to someone. Every dollar of principal you pay off on that mortgage is a dollar you didn’t really spend.

I say that because you are basically just stashing cash in the equity of your home, and as long as the value doesn’t plummet, you’ll be able to get that money back. You can even tap into equity before you sell the home!

Rental properties make this even better because you aren’t paying the debt down. That is because the rent your tenants pay will cover your mortgage payment.

A great example of this is one of the properties I own. The mortgage payment is $1,625/month. It brings in around $4,500/month in rental income.

After all expenses, I cash flow around $1,000/month on this property. Every mortgage payment I make pays off around $800 worth of principal. That means I pay off roughly $9,600 of my debt every year!

So, I build almost $10,000 in equity annually without paying a penny out of pocket. Couple that with the cash flow, and this property is building my net worth very steadily!

Bonus: the interest on the mortgage payment is a tax deduction. This deduction is also paid for by your tenants!

Aerial view of a green leafy suburb

Depreciation

This big fancy word is an awesome tax credit for real estate investors!

The IRS understands that buildings, appliances, furniture, etc. get old and eventually need to be replaced. They compensate you for this by allowing you to write off a percentage of the income you receive utilizing depreciation.

Residential rental properties are depreciated over the course of 27.5 years. Commercial rental properties are depreciated over the course of 39 years.

This is calculated by dividing the purchase price of the building by the number of years it takes to depreciate. For example, a residential residence purchased for $100,000 would allow you to write off $3,636.36 annually.

This depreciation is a great way to keep an additional portion of your rental income in order to reinvest it!

Related: 22 Unforgettable Experiences From My First Rental Property

Appreciation

Everybody loves appreciation!

Appreciation is simply the value of your property increasing over time. This can happen due to market value increasing, renovations, adding square feet/bedrooms/bathrooms to the property, rezoning, and several other ways.

Ultimately, if the value of your building increases due to either improvements or market cycles, that is appreciation! Appreciation is a great bonus for your rental property portfolio but should not be the only reason you invest in a property. That is because appreciation can quickly disappear if the market tanks, and you don’t want to be stuck holding a property that you’re underwater on.

Additional Benefits of Investing in Rental Properties

In addition to the four pillars of rental property investing, there are various lifestyle and long-term benefits to rental properties.

I owe it to you to point out a few of these bonuses, and you owe it to yourself to think through them!

woman using internet website for rental apartments, houses

Inflation Hedge

Real estate investing is a great inflation hedge! As you know, we have dealt with 1 to 3 percent inflation (or more) for decades. Every year, your money is worth less and less because of this.

Every dollar you have sitting in a bank, stocks, 401(k), and so on is affected negatively by inflation. Real estate, on the other hand, is not negatively affected, because the cost of land increases with inflation.

Think of it this way: every dollar you spend is worth less and everything you buy costs more as a direct result of inflation. However, because you own real estate and inflation increases the value of land, your money is less affected by inflation. In fact, it may even be a good thing for you!

Less Time-Intensive

Rental property investing requires a lot less time and work than Airbnb rentals or flipping houses. It is considered passive income because you can automate almost everything and not have to deal with it much after purchase.

I have a property manager who handles just about everything for my properties. I spend less than an hour a month on my rentals on average, and this allows me to focus my efforts elsewhere. This makes rental properties a more ideal investment strategy for those of us who still maintain a W-2 career.

It is also more scalable than active investing with systems in place for management!

Rental Properties for the Win

In case you haven’t noticed yet, I prefer buy and hold investing. Rental properties are a great way to build long-term wealth, and the cash flow you receive can even continue to pay you in retirement!

There are many other successful real estate investing strategies; the point of this article wasn’t to give them a black eye. Instead, I wrote this solely to showcase some of the reasons that rental properties should be a part of your portfolio—whether it is your main investment strategy or not!

Do you own rental properties? Or do you intend to in the near future? Why or why not?

Please leave a comment below. 

David Pere has been active in the U.S. Marine Corps since 2008. He got his start as a real estate investor in 2015 and since then has bought and sold over 50 rental units, partnered on multiple fix-and-flips, and built a growing community of like-minded investors. Through these experiences, From Military to Millionaire was born with the goal of teaching personal finance and real estate investing to service members and the working class. David is the host of The Military Millionaire Podcast and has created a YouTube Channel where he shares the knowledge that helped turn his life around. In four years, David has gone from living paycheck-to-paycheck to replacing almost half of his income. He aspires to help others follow in his journey to financial freedom!

    Denise Brown-Puryear from Julian, North Carolina
    Replied 3 months ago
    David, I so agree. And I love the way in which you chose to write the article by stating that "Buy and Hold" is YOUR preferred method of real estate investing. It is ours as well. We have benefited over 30+ years in the biz from the 4 pillars as mentioned in your article. Now at so-called "retirement" age (LOL...), we continue to have rental income (debt free at this time) which supplements our "retirement income". This has worked for me over the decades and this is where I'm most comfortable! Thank you for a well written article!
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    @Denise thank you for the kind words! So cool to hear what you guys have been able to create. I can't wait to be looking back from that side of the equation, like you're able to do! What an awesome position to be in for "retirement!"
    George Krischke Real Estate Broker from Honolulu, HI
    Replied 3 months ago
    Aloha Denise, Thank you for your well written article. I'm a fan of collecting rent, just like you. There is one more pillar that you touched on but only briefly. That is the additional power of all real estate tax benefits. My portfolio is sizable and I get to deduct any and all expenses due to sec 469 of the IRC. Deductions have bexome limitless. I look at maintenance expenses as investments into the future that further increase my cashflow. It is the cumulative and compounded benefit of all these pillars combined that make real estate better the longer you stick with it. Some of my early rentals I bought 27 years ago. These are free and clear now and at the end of their 27.5 year depreciation. I'm excited to go through a new series of 1031 exchanges and double my cash flow and portfolio size again. Nobody said that life is perfect, but real estate can make life pretty sweet.
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    @George thank you for the feedback. You're right, there are so many more tax benefits out there, but that is not my realm of expertise so I wanted to keep this a little less complicated haha.
    Kim Snyder from California
    Replied 3 months ago
    Love this article. I am a first time investor and I keep going back n forth in my head. Rental or flip for the first? This helps me make a decision.
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    @Kim I'm glad you found it helpful. As with everything, there are pros and cons to both, but ultimately whatever makes you feel the most comfortable with taking action!
    Jorge Guadian Investor from Killeen, Texas
    Replied 3 months ago
    David like the way you wrote your points of views of buy and hold. And as you know being a soldier there is more uncertainty do to deployment or change of station. But just like you at a lower degree I only have 11 duplexs and 1 home rental. A snap shot of my experience. I started buying rentals (duplexs) when I was in the Army at my 12 year mark in 1996. As a E-6 with a wife and 3 kids household expenses seemed to never end.I knew I didn't want to get out of the military I enjoyed it and 8 more years until retirement didnt seem much plus I didnt want to throw away 12 years down the drain. I knew I had to find a another way to make extra money. Real Estate investing made sense everyone that has money has some type of investment property so that was the best decision Buying my 1st duplex with a FHA loan was easy and then the next year, I actually had a duplex built a 3 bed rooms 2 baths with 1 car garage I used my VA.During all this time I was living in one side . I pumped extra to the principle each month and was able to pay off one at 16 years the other in 19 years. After they were both paid off I had my home built. In 2016 I bought 2, in 2017 only 1, in 2018 bought five. All my kids are in the Army my wife and I manage all 11 duplexs a House 23 tenants. . With my military retirement and the rentals income life is pretty great financially. Im debt free except for the Mortage payments that are being paid by the tenants. Not a bad investment for all those years I was being under paid as a soldier.David again nice article you wrote.
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    @Jorge that is amazing! I love hearing stories like this from other veterans. What a great way to provide for yourself and your family too! Thank you for the kind words!
    David Mincey Flipper/Rehabber from Randallstown, MD
    Replied 3 months ago
    David, excellent article and very well written. I concur with all of the other posts. From my experience, I realize that you need a combination of both flips and buy and holds. However, as everyone surely knows, buy and holds are the greatest long term, wealth building tool. Starting next year, I plan to rebuild my rental portfolio. Thanks again for a great article!
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    Thank you for the feedback brother! I agree, the greatest strategy is a mix of strategies, right? I'm flipping a house right now, and will roll the money into a BRRRR or long-term buy/hold!
    Michael Backer
    Replied 3 months ago
    Why do you prefer not to pay for buy and holds with cash?
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    Several reasons. Leverage, which allows me to scale. Asset protection, debt makes my property less desirably in the event I get sued. Cash, I didn't have a ton, and wanted to take action. Leverage, I'm mentioning this twice because it is such a benefit!
    Mike Nguyen
    Replied 3 months ago
    Great article! I am actually looking into buying my first rental property in 4 months and can't wait. And you're from Oceanside?! Man I wish I would have been able to connect with you when I was still in San Diego. :(
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    I just got stationed in Oceanside last month Mike, was in Oahu prior to that, and will be headed to Missouri in a couple years (long term).
    German Vellon
    Replied 3 months ago
    I love your article David..You hit on so many points about buy and hold...Im a newbie who will be purchasing properties in the near future....looking foward to reading more of your posts
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    Thanks German, I appreciate the kind words!
    Ronny Lee
    Replied 3 months ago
    loved this!
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    Thanks Ronny!
    Wais J. Wali
    Replied 3 months ago
    Great article 👍
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    Thank you!
    Judith Utley
    Replied 3 months ago
    Im interested in wholesaling because I dont have the money yet to invest in rentals. Any pointers for an cautious newbie? Great inf btw.
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    I have written an article about this on my website, but not for BiggerPockets (yet). I've only dabbled in wholesaling a little, but could point you in the right direction for some successful wholesalers to talk to. Feel free to shoot me a message.
    George Lui Investor from Palo Alto, CA
    Replied 3 months ago
    Great article. I thought I knew all the 4 pillars by heart, but the statement "Every dollar of principal you pay off on that mortgage is a dollar you didn’t really spend." added a new perspective! :)
    David Pere Rental Property Investor from Oceanside, CA
    Replied 3 months ago
    Thank you George! I'm glad to hear that resonated with you. It is a great feeling to look at the mortgage statement at the end of the year and see how much principle was paid down!
    Chandika M.
    Replied 2 months ago
    I'm having a tough time deciding between building my own rental portfolio, versus investing in some of the CRE deals in places like CrowdStreet which are offered by seasoned firms in each space (private equity deals before the crowd-funding revolution). The former has the comfort of asset in my name while the latter has massive convenience and likely better ROI given the experience of the firms?
    ANTOINE D THOMPSON
    Replied 2 months ago
    Thank you for the information