Try doing the exercise yourself to be convinced. Check out zillow/redfin/etc for properties and then do the planning to buy and rent it. Consider all costs. Look at equivalent rents in that area. Can you make any profit? Probably not.
Source: been doing this spreadsheet exercise for more than a decade. Have never found a property I could buy and rent out at a profit.
This isn’t really a source though, it’s requiring the other commenter to prove the point you made.
Anecdotally, I know people who buy single family homes and rent them for profit. My 3 bed, 2 bath single-family home has a $3,000/monthly mortgage, I could easily rent it for more than $3,500 (closer to $4,000). Take out 10% for maintenance fees, and I net $200 a month.
> Anecdotally, I know people who buy single family homes and rent them for profit. My 3 bed, 2 bath single-family home has a $3,000/monthly mortgage, I could easily rent it for more than $3,500 (closer to $4,000). Take out 10% for maintenance fees, and I net $200 a month.
In other words, you could not make a profit.
You need to consider all costs, not just mortgage. Taxes, insurance, maintenance, repairs, downtime (when it sits empty between renters).
If your mortgage is $3000 and you can only rent it for less than $4000, you can't make a profit.
I go through this math often while daydreaming of renting my house and retiring somewhere cheaper. There isn't any scenario I can come up with where it would actually be profitable.
That shows exactly the point, 10% for maintenance isn't enough, doesn't cover taxes, insurance, and other costs, and netting $200/month on a (assumed) $450k+ house isn't great, that's less than the interest earned on a deposit of the same amount.
Even if you only count the downpayment, $2400 a year on $90k is a 2.6% return; you therefore are getting the majority of your return from appreciation.
To actually make a profit on the rental portion, you need to discount the appreciation. You can do this if you're paying into a mortgage from 20 years ago and renting at todays prices, but that's just ignoring the fact that you could sell the property.
The biggest risk that most small landlords don't account for is a bad tenant - they exist and they will quickly eat through your $200/net a month.
The final proof is no company anywhere is building single-family rentals. If there was money to be made there, they would; but you need to get to apartments and the cost-savings inherent in them before it makes sense.
You realize that a mortgage is a loan, right? You’re paying both interest and equity on it over time, which you need to take into account. The longer you pay it, the more of your payments are really going right back into your own pocket. Renters get zero equity in exchange for their rent.
And yes, I’ll agree that some portion of the ROI on a house is the expected appreciation, but we’ve setup a system where that’s effectively guaranteed in many locations and simultaneously unavailable to renters. There’s a reason “be a landlord” is now the go-to “get rich” strategy for a large number of people.
You seem to be assuming that a rental property is subject to a mortgage. I don't know how what fraction of the US rental property is covered by mortgages, but it is definitely not 100%. For those that are not, your math is totally wrong.
I've been a landlord of a non-mortgaged property and am about to become one again (reluctantly). We charge a below market rental rate, and typically make around 4-6% (pretax) of the nominal property value a year (we typically divert 1-2% of the rent into a maintainance fund).
> Even if you only count the downpayment, $2400 a year on $90k is a 2.6% return; you therefore are getting the majority of your return from appreciation.
I would also getting the increased equity in the house as each mortgage payment lowers the total loan amount.
Key word down payment. You put 200k down on the rental and get 200k in rent. You pay 1.6 million on a 800k loan and own the house at the end. Without appreciation, you are 600k in the hole
I don't understand where the 1.6 million came from. If you're talking about interest on the loan, the premise was that the rent covers the mortgage payment (interest and capital) plus maintenance plus returns some net cash. In that case, when the net cash has returned enough to cover the downpayment, you'd be richer by the entire value of the house even without appreciation.
So, for your 200k downpayment, you now have 200k * 1.047^35 = 1MM as the total house value that you own even without house appreciation, so almost a 5% rate of return.
This is known as liquidity preference. People would rather keep their property liquid, meaning they have the ability to decide what happens with the property with little delay. Renting out a property makes it less liquid, constructing a building on top of land makes it less liquid. People demand a compensation for giving up liquidity called liquidity premium. Rental payments must exceed that liquidity premium. If they do not, the land owner would rather keep his property liquid, i.e. ready to sell or rent out to someone whose rental payments exceed the liquidity premium.
The reason why liquidity preference exists is that land can be used for almost anything, is limited in supply and going up in value, making an early commitment can lose you a lot of potential profit. For example, a 10 year lease to a farmer could turn out to be a bad decision if 3 years into the lease, a power utility offers to build wind turbines on the land and you are still stuck with 7 years on that lease. The power company moves on and you lost your opportunity.
It turns out, a land value tax neutralizes liquidity preference.
