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I always hear about people purchasing rental properties, but most of the time it seems like the rental income is only about half the total cost (mortgage interest + HOA + taxes + repairs etc). How common is it to purchase rental property where this total cost is less than or at least very close to the rental income?

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    Don't forget that rental property also depreciates. Apr 22, 2023 at 4:00

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Total costs can mean different things in different contexts:

Cash Flow - Net cash increase/decrease from the rental activity. This would be calculated using the full mortgage payment and all other expenses against rental income. In many if not most markets right now financing a significant portion of a rental property is unlikely to result in immediate positive cash flow.

Rental Income/Loss (tax perspective) - For tax purposes your rental income/loss differs from cash flow calculation. You include depreciation expense and exclude mortgage principal.

Note that neither of the above includes equity. If someone borrows to buy a rental in a place where prices and rents are rising, then even if they have negative cash flow and losses for tax purposes they could have positive return on investment.

Your question can't be answered specifically without knowing how much people are putting down. Likely the best answer to your question would be had by evaluating the rent vs buy calculations for various regions. There are rent vs buy calculators and some articles that have aggregated this data, like: Fatherly - Two Maps Show Where It’s Best To Rent Versus Buy Right Now. If the rent vs buy calculation is strongly on the rent side, then financing to buy a rental property in that area is more likely to result in negative cash flow.

I always hear about people purchasing rental properties, but most of the time it seems like the rental income is only about half the total cost (mortgage interest + HOA + taxes + repairs etc).

If this is true near you, then it is significantly cheaper to rent than to buy in your region. This doesn't hold true near me. In my region rental income covers around 80% of mortgage payment (not just interest),HOA,taxes, repairs, etc. on a newly purchased rental with 20% down payment at current interest rates.

Many people count on appreciation over the long-term to offset near-term negative cash flow and rental losses.

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  • "people count on appreciation over the long-term" don't forget that you have to pay recaptured depreciation! That has bitten me and several others I know. Apr 22, 2023 at 15:46
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    @JaredSmith Definitely, depreciation recapture should be taken into account along with costs to sell. For most people the tax deferral via depreciation is an advantage, but if people aren't viewing it as a deferral then it can certainly sting.
    – Hart CO
    Apr 22, 2023 at 16:04
  • "In my region rental income covers around 80% of mortgage payment (not just interest),HOA,taxes, repairs, etc. on a newly purchased rental with 20% down payment at current interest rates." Which sounds like a great deal for landlords. They pay 20% of the property, and let tenants pay 80% of the rest, right? Apr 22, 2023 at 19:06
  • @JaredSmith with 1031 exchange and step up basis on death, many people end up avoiding that while creating generational wealth
    – littleadv
    Apr 22, 2023 at 21:38
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    @EricDuminil It can be, my quick estimate is based on my typical costs, a single property can vary significantly year to year due to major repairs/vacancies. If everything goes well being a landlord can be a fantastic way to build wealth, but it's not guaranteed.
    – Hart CO
    Apr 23, 2023 at 15:37
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How common is it to purchase rental property where this total cost is less than or at least very close to the rental income?

If you are buying a property just to be a rental property, then you are either:

  • calculating that the cash flow is positive each month. But remember the cost each month also includes the principal not just the interest.
  • calculating that incorporating depreciation and taxes into the equation will help cut the losses.
  • calculating that over many years the investment will be profitable due to the growth of the value of the property.

But if we are talking about a single family house, townhouse, or condo the property might be a rental because the owner moved to another property and converted the property into a rental. They didn't have to bring cash to the transaction for the mortgage, that happened years ago. The monthly rent is expected to be easily more than the monthly expenses because the bulk of the monthly expenses are linked to the existing mortgage.

There are locations and time periods where the cost to rent exceeds the cost to own. At other locations and times the opposite is true. It can even depend on the hosing type. Before you invest you have to do the research on the time, location, and the local market conditions.

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