I'm looking into purchasing one or two modest houses (I have the budget for this), both on a mortgage, but renting out one of them. One of these would be a primary residence, and the second an "investment property" or secondary house.

I've seen several answers on Money.SE recommending against having a second house as an investment or holding it while moving. My question is: if I can rent out the second house (this is in a good rental market), wouldn't I come out better in any case?

For example, I've put up a sample calculation on calculator.net's rental property calculator, with the following assumptions somewhat similar to my case (not exact, but quite close):

  • $200,000 is the cost of the house
  • I would put in a 20% down payment
  • Market rate for mortgage, maintainence, etc
  • Property taxes (including school taxes) are a bit high in my area
  • Hold & rent for about 10 years, and then sell

In this scenario, I make about $113,000 after 10 years - so about $11,000 a year in profit (I had earlier put in a 15 year calculation and updated to edit this, apologies.)

What is wrong with this scenario? I understand that I have to deal with a tenant, maintenance, etc. but am I missing anything else?


if I can rent out the second house (this is in a good rental market), wouldn't I come out better in any case?

No - there are lots of things that can go wrong with a rental house, and houses are not guaranteed to go up in value (or even stay flat). What is guaranteed is that you'll be paying a mortgage payment every month. So you are essentially financing a risky investment with a fixed rate loan. Generally it only takes a few months of lost rental income to use up all of the profit when you have a mortgage.

so about $11,000 a year in profit

If someone offered you a part-time job making $11,000 a year (before taxes) maintaining a house, finding renters, collecting rent, would you take it? What if you had to buy all of the tools and materials for any repairs?

Now imagine you owned a $180k property outright, and you profits were $30k per year. Would you take it now? In 6 years you could buy another house and double your income to $60k, and in only 3 years buy another to make $90k.

Rental property can be a fulfilling way to build wealth. The problem is when you use up all of your profits on mortgage payments.

  • Thanks, this was really helpful - your two points helped me consider issues I hadn't actually thought through before. – Sam Mar 26 '17 at 18:40

You are probably assuming you can sell the property at no loss and that it will be fully rented the whole time at the price you imagine, both pretty big assumptions. You are also assuming that that the house is not lost to a flood or a fire. Rental units are much more likely to experience fires than owner-occupied homes. If you think "insurance" will protect you from a fire, read a few of the hundreds of forum posts by people who where dumb enough to think the same thing like this one.

You are also assuming you will not have an unrecoverable casualty. That is when something bad happens that is not covered by insurance. For example, if the sewer backs up and soaks all the wood floors with shit. Now you have sewage soaked into every wall and floor and appliance on the first floor and basement and insurance does not cover this. Hope you have $30,000 to fix that one. Here is another trick they use: your tenants start a kitchen fire that burns a wall. The fire department comes and hoses down the whole house. Now you have $5,000 in fire damage to one wall and $50,000 in water damage to the whole house. Guess which bill the insurance company will be paying.

There is nothing wrong with being a landlord, but being a twenty-percenter increases the risk substantially. Here is a short summary of the obstacles to making money:

(1) The property does not rent and sits vacant. You must come up with $2100 in mortgage payments, taxes, and insurance every month without fail or default.

(2) Unexpected expenses. A new furnaces costs over $5,000. A new roof costs $7,000. A new appliance costs $600 to $2000 depending on how upscale your property is. I just had a toilet fixed for a leaky plunger. It cost me $200. As you can see maintenance expenses can quickly get a lot higher than your estimates and not only that, if you fix things as cheaply as possible (as most landlords do), not only does that decrease the rentability of the property, but it causes stuff to break sooner.

(3) Deadbeats. Some people will rent your property and then not pay you. Now you have a property with no income, you are spending $2100 per month to pay for it, AND you are facing steep attorney fees to get the deadbeats evicted. They can fight you in court for months (or years if it is commie locality like the Northeast corridor or Santa Monica or something).

(4) Damage, wear and tear. Whenever a tenant turns over there is always a lot of broken or worn stuff that has to be fixed. Holes in the wall need to be patched. Busted locks, broken windows, non-working toilets, stains on the carpet, stuck doors, ripped screens, leaky showers, broken tiles, painting exterior trim, painting walls, painting fences, etc. You can spend thousands every time a tenant changes.

My advice is to use your money to pay the principal on your loan and minimize the term of the loan. The way to make money is to get out of debt, not into it. The happiest day of my life was the day I paid off my mortgage.

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