Millions of people invest in rental property as a way to generate cash flow and work toward long-term gains. Even people who don’t invest actively have the sense that rental property investment is a valuable addition to your portfolio.
But what is it, exactly, that makes rental property such a valuable investment strategy?
Passive Income Potential
First and foremost, investing in rental property gives you a chance to take advantage of passive income generation. Assuming you choose the right property in the right area, you should be able to charge your tenants more in rent than you pay in ongoing expenses. Even accounting for your mortgage, property taxes, insurance, repairs, maintenance, and vacancy-related expenses, you can often generate a profit of a few hundred dollars per month per unit – sometimes even more.
Even better, this income is somewhat passive. As a landlord, you’ll be responsible for taking care of certain issues related to the property. For example, you may be responsible for fixing broken appliances, tending to the lawn, and handling complaints (like issues related to noisy neighbors). You’ll also have to manage the property when it’s vacant, fixing any damage and finding a new tenant. But these responsibilities, collectively, shouldn’t make rental property investing a full-time job.
Plus, if you want your rental property to be truly passive, you can always hire a property management company. Property management companies will take care of most of the responsibilities of managing a property, including marketing the property, screening tenants, handling requests, conducting maintenance, and sorting out late rent payments and evictions. For just a fraction of your monthly rent, you can make your rental property income completely passive.
Rental income is typically the most attractive feature of rental property investments, but there’s a secondary benefit as well: the potential for long-term appreciation. In popular areas, property prices tend to rise over time. If you choose a solid property in a hot neighborhood, the value of your property can multiply over the course of several years – representing significant gains in addition to what you make via rental income.
This isn’t a guarantee, of course. In some areas, property prices can actually go down over the course of several years. You can minimize risk in this area by diversifying your property investment portfolio, purchasing properties in many different areas.
Flexibility and Versatility
Rental property investments are also attractive because they’re flexible and versatile. You can choose to invest in different types of properties based on your current risk tolerance, your goals, and even your personal interests.
- Residential vs. commercial. Rental income doesn’t have to come from residential tenants. You could also consider buying commercial rental property, leasing your property to a business. Residential and commercial rental properties each have advantages and disadvantages, and you can also invest in mixed-use property, which offers the best of both worlds. Many investors balance their portfolios by investing in both residential and commercial real estate.
- Geographic considerations. You can invest in rental property practically anywhere in the world. If you don’t like the current conditions in your city, you can consider investing in a different city with a more favorable landscape. You can hire a property management company to extend your reach, so you never have to visit the property in person.
- Single unit vs. multi-unit. Single unit properties are simple and easy to manage, but if you have to deal with a vacancy, it can be a pain. Multi-unit properties allow you to generate more income and suffer less from vacancies, but they also tend to be more expensive and harder to manage.
- Property age and condition. You can invest in new properties, benefitting from low maintenance requirements and high tenant appeal. Or you can turn your attention to older properties, which may need more maintenance but have a lower barrier to entry.
Resilience to Market Changes
Some people turn to rental property investment because it’s a great alternative to the stock market. Investing in publicly traded stocks can be incredibly valuable, especially over the long term, but short-term volatility can spook even the most seasoned investors. Real estate prices and rental demand don’t fluctuate nearly as wildly as individual stocks, often making them the steadier, more reliable investment. And for people who don’t want to own property directly, you can always invest in real estate investment trusts (REITs).
Rental properties aren’t the right investments for every investor, nor are they “perfect.” But thanks to their versatility, the number of ways you can make money with them, and their passive income potential, they’re a valuable addition to most investment portfolios. Consider investing in rental property if you’re interested in building wealth, generating recurring revenue, or hedging your bets against the stock market.