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As I understand it, rental management companies will handle finding and to some extent communicating with tenants, and will perform maintenance and repairs on the house. In the city and surrounding metro area I've been looking at houses the vacancy rate is very low, so it seems that having a house occupied would mostly not be an issue.

Assuming I have favorable fixed-rate loans, what would the catch be in buying, say, three houses and turning them all over to rental management companies? While it would be more than half my income (calculated off houses in a certain price range), I could feasibly pay the mortgage for all of them during a sustained multiple vacancy, but that seems unlikely.

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    You know those services aren't free, right? Depending on your market they might turn a near-breakeven cashflow situation into a monthly cash loss, meaning you would be exclusively relying on capital value increase to just breakeven. Feb 2, 2022 at 17:04
  • @Grade'Eh'Bacon I know they're not free, but I figured they would have to leave people using them in the green on average or else no one would use them
    – Gramatik
    Feb 3, 2022 at 16:24
  • well you've hit the nail on the head - in most markets to my knowledge, it is very rare for small-time investors to use these services because they frequently become cost-prohibitive. Feb 3, 2022 at 16:25
  • @Grade'Eh'Bacon it costs me £100 a month on a £1200 a month rental income - thats for full management, with additional costs for maintenance coming as needed. Given that covers a £800 a month mortgage, Im pretty happy! Onboarding costs for a new tenant dont even take me into the red.
    – user45974
    Feb 4, 2022 at 4:40

3 Answers 3

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The same thing that keeps everyone from investing in any "on average" profitable space - risk and opportunity cost.

Renting a house isn't always profitable, for a wide variety of reasons. Maybe you can't find tenants, maybe the house has unexpected maintenance costs, maybe you get into a costly legal battle with your tenants, or maybe the house is destroyed by a meteorite. There's simply no guarantee that the income you get from rent will cover the management fees, property maintenance, tax, and mortgage payments. How much margin do you have in terms of vacancy time and maintenance costs until your great investment turns into a money sink? Collecting rent that exceeds your usual costs is a great plan, right up until you find yourself unable to collect rent, or with additional unexpected costs, or both.

Even if you turn a profit, how much profit? Any dollar invested in a house is a dollar not invested elsewhere. If you spend $100k on a house to earn $1k profit per year, you have a poor return rate of 1%, which could easily be outperformed by even very low-risk investments. Even considering the value of the house itself, there's no guarantee that the property value will go up. Collecting rent that exceeds your costs may look like profit until you go to sell the house and find out it has decreased in value - although you've made some money in the short term, it's possible to lose even more in the long term if the asset depreciates. Earning $1k/year in rent profits is not helpful if the property falls in value by $1.5k/year.

On average, real estate investment and property rental may be a good investment, but it's certainly possible that you make less than you would have with other investments, or even outright lose money. A house is also typically a large investment, which could make up a large portion of an individual's asset portfolio, resulting in a loss of diversification and increased risk. Buying three beachfront houses in the same area, for example, could result in financial ruin if sea levels rise or the local beach shuts down. Investing that money in a well-diversified index fund, in contrast, would be much more robust to the effects of any individual, local event.

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The risks would be the same you would have with any other rental property:

  • Vacancies might be low now, but are they going to stay low for long?
  • Will you be able to consistently charge a high enough rent to cover mortgage and expenses?
  • Will tenants pay their rent on time, or at all?
  • Bad tenants trashing the property might be costly.
  • You might lose money on paper if the value of the property declines.
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The risky nature is already covered in other answers, so I'll just add:

While it would be more than half my income (calculated off houses in a certain price >range), I could feasibly pay the mortgage for all of them during a sustained >multiple vacancy, but that seems unlikely.

The bank will not like this answer. They do not lend based on your perception of what is feasible for you to pay. They lend based on their income formulas (ie. 50% maximum back end ratio) and they do not like making exceptions.

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