More than ever, online discourse feels saturated with content about rental properties as a fast track to wealth through passive income. Whether it's someone selling courses on investment properties or social media influencers showing off an expensive watch paid for by their short-term rental empire, it seems like everyone is saying real estate investing is easy.

But real estate investing is definitely not easy, and there’s nothing passive about it. An investment property is a business you’re in charge of running, with costs and risks involved just like any other business. If an investment property doesn’t go as planned, you could find yourself stuck with a money-losing asset that you’re unable to sell without taking a big loss.

There’s no such thing as passive income unless you happen to write a hit song or strike oil on your land. If you want returns higher than the yield on a bank account, you need to take risk and you need to pay money to make money. As the old investing adage goes, “There’s no such thing as a free lunch.” You can’t get something for nothing.

5 reasons (and responses) for investing in rentals

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.

Costs to keep in mind

Effectively operating investment properties can be both challenging and time-consuming, with numerous external factors potentially impacting both your overall returns and your peace of mind.

Rental property investors should carefully consider the total costs involved, including the impact of any surprise increases in those costs over time. For example, if a property is cash flow positive right now, what would happen if taxes and insurance costs went up by 20% in one year while rents didn’t keep pace?  Many parts of the country are seeing this happen firsthand, and in some cases, costs have gone up by a lot more than 20%.¹

Even if the property were still cash flow positive each month, would the income be enough to pay for large repairs that become necessary all of a sudden? Rising property values usually lead to higher taxes over time, while inflation in building material prices can increase insurance premiums considerably.  Some other variables and risks to consider include:

• Interest rate moves affecting home values and rents
• Tenant-friendly laws that in some cases can prevent evictions, even if the tenant hasn’t paid rent in years
• Destructive or litigious tenants
• Elevated vacancy rates
• High unexpected maintenance/repair costs

The bottom line

Ultimately, finding an outperforming rental property is similar to identifying any other investment that can potentially achieve above-average returns – it's difficult.   While gems do exist, finding them may take some work and it’s important to be realistic about estimating rents and costs long into the future before making a commitment.  If the projected income on a property is low enough that rising costs could mean you’re actually paying money every month just for the privilege of owning it, that may not be a good investment.

If you’d like to learn more about evaluating real property investments or managing risk through a diversified portfolio, consider talking with one of Empower’s financial professionals. Qualified individuals are eligible for a free review of their financial life.