Real estate has long been one of the ways people build wealth they can see and touch. A well-chosen rental can produce income, gradually pay down its own debt, and come with tax advantages that many other investments don't offer. It also carries real responsibilities and risks, and it isn't the right fit for everyone.

Tarus has been on both sides of the table -- as a real estate investor himself and as an agent helping clients buy residential and commercial property -- so he likes to start every investor conversation by looking honestly at both columns of the ledger.

The Potential Benefits

Cash Flow

When rent covers the mortgage, property taxes, insurance, maintenance and other costs with money left over, the property produces cash flow. Running the numbers realistically -- with allowances for vacancy and repairs -- is what separates a solid rental from an expensive hobby.

Principal Paydown

Each mortgage payment reduces your loan balance. When your tenants' rent covers that payment, they're helping you build equity month by month.

Appreciation Potential

Property can rise in value over time, but appreciation is never guaranteed, and values can also fall. Treat appreciation as a possible bonus rather than the reason a deal works.

Leverage

Financing lets you control a property worth much more than your down payment. If the property's value grows, the return on the cash you put in is magnified.

Tax Considerations

Rental owners can generally deduct ordinary operating expenses such as mortgage interest, property taxes, insurance, repairs and management fees. Depreciation lets you deduct a portion of the building's cost each year, even while the property may be holding or gaining value, though depreciation is generally recaptured and taxed when you sell. A 1031 exchange may allow you to defer capital gains tax by reinvesting the proceeds from an investment property into another qualifying property. These rules are detailed and can change, so review them with a CPA before relying on any of them. Our post on capital gains when selling explains how rental property is treated differently from a main home.

Diversification and Inflation

Real estate doesn't always move in step with stocks and bonds, so it can add variety to a broader portfolio. And because rents and replacement costs can rise over time while a fixed-rate mortgage payment stays the same, property may help offset the effects of inflation.

The Risks to Weigh

  • Vacancy. Every month a unit sits empty, you cover the costs out of pocket.
  • Repairs and big-ticket items. Roofs, HVAC systems, water heaters and foundations eventually need attention, often at inconvenient times.
  • Liquidity. You can't sell a slice of a house to raise cash, and selling the whole thing takes time and money.
  • Leverage cuts both ways. The same debt that magnifies gains also magnifies losses if values drop or rents fall short of expectations.
  • Landlord duties. The Texas Property Code sets landlord obligations for repairs, security devices and security deposits, and fair housing laws govern how you advertise, screen and treat applicants and tenants. Managing yourself takes real time; hiring a manager costs money.

Ways to Get Started

House Hacking a 2-4 Unit Property

Buying a duplex, triplex or fourplex, living in one unit and renting the others can open the door to owner-occupant financing, which generally requires less money down than an investment property loan. Rent from the other units helps with the mortgage, and you learn the landlord role up close. Lenders have their own rules for counting rental income, so ask early.

Single-Family Rentals

A single-family home is often the simplest first rental to buy, finance, manage and eventually sell. The tradeoff is that a single vacancy means no rental income at all until the home is leased again.

Small Multifamily

Properties with more units spread vacancy risk and can make professional management more practical. Buildings with five or more units are generally financed with commercial loans, which look closely at the property's income. Tarus works with investors across property types, from single-family rentals to multifamily, office, retail and mixed-use properties.

Some investors also look at fixer-uppers and foreclosures. If that interests you, read our overview of buying distressed properties first.

Start With a Plan

Before you shop, define your goals, budget, cash reserves and how hands-on you want to be. Get preapproved, learn what lenders require for the property type you're targeting, and talk with a CPA and a financial advisor about how real estate fits into your overall finances. This article is general information, not personalized investment advice.

For research, browse listings, check local market reports, and read our tips on finding value in any market. When you're ready to talk through your first or next investment, contact Tarus for a step-by-step conversation about your options.