The Financial Interest

The dangerous promises of easy money & passive income

So what makes investment properties an attractive idea in the first place? Some reasons are financial, and some are psychological. Remember to consider the bigger picture around these points.

Why you may want to invest in rental properties

What to keep in mind as the bigger picture

Real property is tangible. Most investments (and our money) are just numbers on a screen. Owning an investment you’re able to see and touch can feel comforting.

The ability to see your property in real life has no bearing on its investment potential. And a property is by definition not diversified since it exists in a single geographic location.

Investment properties pay an income stream and have the potential to gain value. Just as it feels comforting to own a tangible investment, it can feel even better if that investment pays you money every month until someday, you’re able to hopefully sell it for more than you paid.

Many investment properties offer mediocre returns after accounting for all future estimated costs; it’s just difficult to charge rents high enough to maintain strong positive cash flows without increasing vacancy rates.

Real estate can be leveraged. Mortgages are the easiest and largest leverage accessible to most investors. Leverage can increase returns if things go your way, because you’re able to capture all the profits on an investment you haven’t fully paid for.

Leverage goes both ways and can increase losses if you sell after the property loses value.

Physical real estate typically isn’t as volatile as the stock market. While home values do move up or down, this often happens with less speed than stocks.

While home values usually move more slowly than stocks, the flip side is that you can’t sell a property at the push of a button – it takes time. If prices have already fallen you may find that “low-ball” offers coming in are actually close to the current fair market value.

Rental properties may offer tax benefits.

The tax benefits of rentals are complex and often overstated. For example, depreciation recapture alone can turn into a very significant extra cost when it comes time to sell. And while tax benefits sound nice in theory, we don’t believe they should be the main reason to invest in a rental (especially without exceptional projected returns).