Is one rental worth it?

23 Replies

It seems that rentals are only worth it when you can do the domino effect to get a bunch of houses and be on the line for a bunch of debt. I have a full time job, and can get a house for 50k and get about 9000 in rent per month. From calculations and other research, it looks like I’d make about 15%. That is good, but it’s a lot more work and risk than buying an index fund that should average about 10%. (Also the rent would be taxed around 25% because of my tax bracket, and it seems like depreciation and other write offs would only cover 3 or 4K each year)

Is my math off? Or is it silly to just have 1 rental property (paid in cash). The numbers just haven’t looked good enough (or about even) for the risk and extra work.



Updated about 1 month ago

Sorry. 900 a month*

Clearly a typo with the 9K per month right? I think you mean per year or 750/month.  This would be a home in a C/D class area which means that 750 is not the most stable rent to count on either.  You are quite a few years late (or maybe early) to the party for the most part.  

Given the overall tone of your post I would agree an index fund is probably a better choice for you

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I'm not sure where you can get a house for $50K and net (or gross) $9K per month in rent.

If you can get 10% return elsewhere then that that route.  Don't forget that if you hold a rental for many years, you are also having the tenant pay down your mortgage.

You are better off putting 20% down and holding a mortgage with rentals.

There is nothing wrong with having only one rental unit. A significant number of landlords only own one property - usually their prior residence. 

The way I read your post, you have $50K and are looking for an investment. Nothing wrong with buying an index fund. It's a relatively safe and stable investment. If you like real estate, you could buy a REIT fund. This is much less work that owning real estate. Few people get rich playing safe or not working hard.

Personally, I think you are looking at investing in real estate all wrong. A $50K house is not going to be in a nice area or attract quality tenants. It's not an investment for the faint of heart. Why not look into buying a $250K property, maybe a duplex, using the $50K as a down payment, and then renting it out. Buying right can have the rent cover your costs, potentially provide free cash flow, all the while the tenants are paying off your mortgage and building up your wealth. Just principal reduction alone will generate an 8%-9% return on your money the first few years.

How do you get to more than 1 rental without having one first?

I bet 95% of stock investors would take a guaranteed 10% return over the next 5 years.

If the fed ever decides there’s inflation and starts raising rents the stock market could easily be even, maybe give or take 5-10% over the next 5 years combined. I’d take the bet against a greater than 50% stock market return over the next 5 years. 

You have almost zero control over your stock returns and you have almost 100% control over your rentals returns. That’s why most employees stick 100% to stock retirement plans. 

@William Hutchinson My brother-in-law's inlaws told me that one rental wasn't worth the work. In his experience, he suggested three. I would add that you might buy a little nicer property and leverage because rates are cheap, you can write it off and you need a rainy day fund. And nicer properties attract easier tenants. As you figure out leases, advertising, inspections, all the little annoyances you can add a property or two...or duplex as Greg suggested...and with inflation and debt paydown it slowly becomes well worth your time. Think of it as diversification.

Originally posted by @William Hutchinson :

It seems that rentals are only worth it when you can do the domino effect to get a bunch of houses and be on the line for a bunch of debt. I have a full time job, and can get a house for 50k and get about 9000 in rent per month. From calculations and other research, it looks like I’d make about 15%. That is good, but it’s a lot more work and risk than buying an index fund that should average about 10%. (Also the rent would be taxed around 25% because of my tax bracket, and it seems like depreciation and other write offs would only cover 3 or 4K each year)

Is my math off? Or is it silly to just have 1 rental property (paid in cash). The numbers just haven’t looked good enough (or about even) for the risk and extra work.



Over the long haul, index is more like 7%. Add bonds and you are at 5%, really good, zero effort, dividends, liquid, etc.

A tax bracket may be 24%, but that is not an effective tax bracket. Most Americans are at 14%. 

One property may not worth the hassle for the little money back. Try it as a test, but recall the recapture tax.  50k/900 month is good.

I don't think I'd just have one.   The learning curve of screening, leases, mgmt practices, move-out, law learning, being handy, etc?  No way.     

If I had 1 it would be a leftover house I use to live in.  I'd get a PM, cross my fingers and count on it costing me 14%/year. 

There has to be a first.  On top of the cash flow you have the loan pay down, depreciation, and if you buy right the property increases in value.  The more you do, the better you get, the better the returns.  

Then, after you hold, you can sell and 1031 the profits into a bigger property.  Tax savings.  

There are options if it's done right.  It's work, but so is just about anything that's going to bring financial freedom.

@William Hutchinson My first one I bought this year is a quad I put down about $50,000 plus a tiny bit extra for closing costs. So far it has averaged me 1 hour a month in work to visit it twice a month due to drive time to pick up coin op laundry. I manage it. I pay bills. I pay the mortgage and have been putting just a little extra towards the mortgage each month.

This month I had a tenant turnover so with cleaning and the screening of the new tenants, the old tenant referred the new ones to me, I will spend 3 hours total time on this. It has been the best property so far.

I’m up to 4 properties, 10 doors. I will get depreciation from the building, anything allowable from interest on the loan, and all of the expenses from workmen, vendors, contractors, and other expenses throughout the year. All in all it’s going to work out great.

I would have started with 1 door if it had worked out that way too. Then moved ahead with the next property that presented itself whether another one door or a multi. Anything to get started on cutting down my W-2 taxes, building equity, and building passive income for myself.

I have a single rental. I have no desire to expand, and I don't make much money off it monthly. But it's getting paid down for free. 10 more years and it will be paid off if I keep it that long. At that point it will pay my crrent mortgage. So I'm looking at it as 10 years until I'm mortgage free, for the cost of minor maintenance. 

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If you're OK with a 10% return on your index fund, why not stick with that? Many people have built wealth by investing in the market, to include people in low-income jobs that just consistently socked away small amounts for decades. You may earn less of a return than I do with my money, but you won't have to deal with the stress. Fortune favors the bold, but that doesn't mean you can't do other things with your money that are also wise.

Figure out what works for you. Real estate investing is not appropriate for everyone.

Originally posted by @William Hutchinson :

It seems that rentals are only worth it when you can do the domino effect to get a bunch of houses and be on the line for a bunch of debt. I have a full time job, and can get a house for 50k and get about 9000 in rent per month. From calculations and other research, it looks like I’d make about 15%. That is good, but it’s a lot more work and risk than buying an index fund that should average about 10%. (Also the rent would be taxed around 25% because of my tax bracket, and it seems like depreciation and other write offs would only cover 3 or 4K each year)

Is my math off? Or is it silly to just have 1 rental property (paid in cash). The numbers just haven’t looked good enough (or about even) for the risk and extra work.



I've told my kids that, IMHO, the easiest surefire way to financial security is to acquire 1 SFR per year financed with a 15 year mortgage. Do this for 15 years and your life is made.

After 15 years refinance the first one and pull out the cash tax free. Repeat this process annually. By the time you reach the end, the first one is paid off again. Using historical prices and inflation you'll be making huge gains completely tax deferred.

This process has to start by buying that first rental of which you speak.

BTW, I have 140+ doors and scale certainly makes life easier.

Respectfully,

Gary

It’s definitely worth it. Having that one rental helps diversify your streams of income.

There are two things you really need to keep in mind. First, the biggest power of real estate in wealth building is the power of leverage. You can borrow money at a low interest rate to obtain a much more expensive asset which boosts your overall long term return.

Second, a $50,000 house is likely to have more repair issues and more tenant issues. If you want the property to be low on the headache scale then make sure it is somewhere your wife or mother would live and the house is less than 30 years old. Owning an index fund is zero work, a rent house is not but can be very little work if you choose the right property.

Many of the people telling you it’s not worth it owned the wrong kind of property, did a poor job screening tenants and didn’t own it long enough. A nice property I bought 12 years ago rented for $650 a month back then and just broke even. Now the market rate rent on it is $1200-$1300 a month. I put $20,000 down on this property, someone else paid this property off for me, now it’s worth $150,000 or a little more, and I now get good cash flow for almost no work.

If this was the only property you owned, would it be worth it to you?

@William Hutchinson I understand where you’re coming from, and like several people have said, an index fund may be appropriate for what you’re wanting, it’s your journey and only you can decide what fits your goals. The dollar return isn’t everything; as alluded to, the time required to manage the investment and stress level should be taken into account. I would say though, that something to consider is actual return. True, the stock market has averaged around 10.4% since 1929, and this is what is commonly used as a benchmark. That being said, if there ever was a situation where “past performance is not indicative of or guarantee of future success” this is it. If you look at the analysts from the major investment firms, banks and hedge funds, many of them are discussing that a more realistic number for investors to expect in equities (stocks) for quite a long time will be closer to 7% and this is before the index fund expense ratio and inflation is factored in. So if they’re right, and considering their organizations spend billions every year on market research, and say we see even 8%, you then remove the expense ratio (we’ll use 0.15%) dropping your return to 7.85%, then say inflation manages to come under control and drops to 3% which will drop your realized return to 4.85%. Index fund values don’t really rise with inflation, but home prices and rents do; they rise with the tide instead of being overtaken by it. There’s a reason why throughout all of modern history more fortunes were created through or with real estate than anything else. Regardless, there’s so many ways to make money in this world, you do what’s best for you and that’s what matters. Good luck to ya.