What's the catch in investing in real estate for rent?
"Several, actually: Maintenance costs. As landlord, you are liable for maintaining the basic systems of the dwelling - structure, electrical, plumbing, HVAC. On top of that, you typically also have to maintain anything that comes with the space, so if you're including appliances like a W/D or fridge, if they crap out you could spend a months' rent or more replacing them. You are also required to keep the property up to city codes as far as groundskeeping unless you specifically assign those responsibilities to your tenant (and in some states you are not allowed to do so, and in many cases renters expect groundskeeping to come out of their rent one way or the other). Failure to do these things can put you in danger of giving your tenant a free out on the lease contract, and even expose you to civil and criminal penalties if you're running a real slum. Escrow payments. The combination of property tax and homeowner's insurance usually doubles the monthly housing payment over principal and interest, and that's if you got a mortgage for 20% down. Also, because this is not your primary residence, it's ineligible for Homestead Act exemptions (where available; states like Texas are considering extending Homestead exemptions to landlords, with the expectation it will trickle down to renters), however mortgage interest and state taxes do count as ""rental expenses"" and can be deducted on Schedule C as ordinary business expenses offsetting revenues. Income tax. The money you make in rent on this property is taxable as self-employment income tax; you're effectively running a sole proprietorship real-estate management company, so not only does any profit (you are allowed to deduct maintenance and administrative costs from the rent revenues) get added to whatever you make in salary at your day job, you're also liable for the full employee and employer portions of Medicare/Medicaid/SS taxes. You are, however, also allowed to depreciate the property over its expected life and deduct depreciation; the life of a house is pretty long, and if you depreciate more than the house's actual loss of value, you take a huge hit if/when you sell because any amount of the sale price above the depreciated price of the house is a capital gain (though, it can work to your advantage by depreciating the maximum allowable to reduce ordinary income, then paying lower capital gains rates on the sale).  Legal costs. The rental agreement typically has to be drafted by a lawyer in order to avoid things that can cause the entire contract to be thrown out (though there are boilerplate contracts available from state landlords' associations). This will cost you a few hundred dollars up front and to update it every few years. It is deductible as an ordinary expense. Advertising. Putting up a ""For Rent"" sign out front is typically just the tip of the iceberg. Online and print ads, an ad agency, these things cost money. It's deductible as an ordinary expense. Add this all up and you may end up losing money in the first year you rent the property, when legal, advertising, initial maintenance/purchases to get the place tenant-ready, etc are first spent; deduct it properly and it'll save you some taxes, but you better have the nest egg to cover these things on top of everything your lender will expect you to bring to closing (assuming you don't have $100k+ lying around to buy the house in cash)." There are those who are knowledgable in real estate who offer rules of thumb: Don't pay more that 50X the rent for the house. Here, $972 x 50 is $48600. Assume half the rent goes to expenses. So from $972, you net $486, and after that mortgage, you have $111 in profit. Zillow usually assumes 20% down, here $20K. So you are seeing a 6.67% return on your 20K. (Plus appreciation and principal paydown.)  For the record, I just bought a 3 family, under renovation now. Expecting total cost to be $160K, and total rent $2500. I missed ratio a by a bit, but $1250 to go toward a $120K mortgage works out fine. $550 profit/mo on the 25% down ($40K). (By the way, a turnover of tenants can cost (a) a month of no rent, (b) a cost to the real estate agent, if you use one, and the cost to paint/repair. This is generally considered 10%. So if the 50% of rent seemed high, here's 10 of it.) The other thing to remember is seasonality.  Just because monthly rent is $900/month doesn't guarantee that you'll bring in $900/month.  Plenty of university towns have peak demand during the months of Aug/Sept when students are moving in, but you have to beg//plead//give discounted rent to keep units full during 'off-season' times.  Assuming vacancy during 3 months/year, your average monthly rent is only $675. ($900 * 9 / 12) This may change the economics of your investment. More possible considerations: Comparability with other properties.  Maybe properties that rent for $972 have more amenities than this one (parking, laundry, yard, etc) or are in better repair.  Or maybe the $972 property is a block closer to campus and thus commands 30% higher rent (that can happen).  Condition of property.  You know nothing about this until you see it.  It could be in such bad shape that you can't legally rent it until you spend a lot of money fixing it.  Or it may just be run down or outdated: still inhabitable but not as attractive to renters, leading to lower rent and/or longer vacancy periods.  Do you accept that, or spend a lot of money to renovate? Collecting the rent.  Tenants don't necessarily always pay their rent on time, or at all.  If a tenant quits paying, you incur significant expenses to evict them and then find a new tenant, and all the while, you collect no rent. There could be a tenant in place paying a much lower rent.  Rent control or a long lease may prevent you from raising it.  If you are able to raise it, and the tenant doesn't want to pay, see above. Maintenance and more maintenance.  College students could be hard on the property; one good kegger could easily cause more damage than their security deposits will cover. Being near a university doesn't guarantee you an easy time renting it.  It suggests the demand is high, but maybe the supply is even higher.  Renting to college students has additional issues.  They are less likely to have incomes large enough to satisfy you that they can pay the rent.  Are you willing to deal with cosigners?  If a student quits paying, are you willing to try to collect from their cosigning parents in another state?  And you'll probably have many tenants (roommates) living in the house.  They will come and go separately and unexpectedly, complicating your leasing arrangements.  And you may well get drawn in to disputes between them. There are several things that are missing from your estimate: The terms for the mortgage for a rental property will be different. You may be required to have a larger down payment. When approving you for the mortgage they will not count all the rental income as income, they will assume periodic vacancies. This difference may impact other credit you will be getting in the near future. There is a positive not being mentioned above: the depreciation vs your regular earned income. Disclaimer: I am not a tax attorney or an accountant, nor do I play one on the internet. I am however a landlord. With that important caveat out of the way: Rental properties (and improvements to them) depreciate in value on a well-defined schedule. You can claim that depreciation as a phantom loss to lower the amount of your taxable regular income. If you make a substantial amount of the latter, it can be a huge boon in the first few years you own the property. You can claim the depreciation as if the property were new. So take the advice of a random stranger on the internet to your accountant/attorney and see how much it helps you. It is easier to get a loan on a rental than a flip, which is a huge advantage to rental properties. Leverage allows you to increase your returns and make more money off appreciation and higher rents. I use ARMs to finance my rental properties that are amortized over 30 years. I have to put 20 percent down, but my portfolio lender lets me get as many loans as I want. Because I put 20 percent down on my rental properties and they still have great cash flow I can buy three times as many properties as I could with cash purchases.  Buying more rental properties amplifies the other advantages like cash flow, equity pay down and the tax advantages. Don't over analyze it - check with some local landlords that are willing to share some information and resources  Then analyze the Worst Case Scenarios and the likelihood of them happening and if you could deal with it if it did happen Then Dive In - Real Estate is a long term investment so you have plenty of time to learn everything..... Most people fail.... because they fail to take the first leap of faith !!!
Perhaps I can: my city is full of towers of Chinese investor owned condos that were purchased to gain EB5 visas.  These visas require a $500k investment in the US, in an economically depressed area.  The census tracts were gerrymandered together to make a nice part of town qualify.  They were sold with 30 year property tax abatements, and at the end of that period they will likely have to pay something like 50k/yr in taxes, which is likely about what they will be renting for.  These condos do not exist to be lived in, but have manufactured a huge bubble in property value because of the visa program.  Jared Kushner is a primary investor in this vehicle.  These will crash if there are changes to this program or any change that forces more units on the market.  Otherwise they'll crash in 25-30 years when nobody wants a timebomb with massive expenses incoming.    The other bubble is of course the huge real estate bubble China is creating within its own borders, which rivals the real estate bubble within US borders, both of which are driven by unsustainable low interest rates. It sounds like you plan to sell sooner or later. If your opinion is that there is still room for the housing market to grow, make your bet and sell later. The real estate market is much less liquid than other markets you might be invested in, so if you do end up seeing trouble (another housing crash) you may be stuck with your investment for longer than you hoped. I see more risk renting the house out, but I don't see significantly more reward. If you are comfortable with the risk, by all means proceed with your plan to rent.  My opinion is contrary to many others here who think real estate investments are more desirable because the returns are less abstract (you can collect the rent directly from your tenants) but all investments are fraught with their own risks. If you like putting in a little sweat equity (doing your own repairs when things break at your rental) renting may be a good match for you. I prefer investments that don't require as much attention, and index funds certainly fit that bill for me. "I don't know much about New Zealand, but here are just some general thoughts on things to consider. The big difference between buying a house and investing in stocks or the like is that it is fairly easy to invest in a diversified array of stocks (via a mutual fund), but if you buy a house, you are investing in a single piece of property, so everything depends on what happens with that specific property.  This in itself is a reason many people don't invest in real estate.  Shares of a given company or mutual fund are fungible: if you buy into a mutual fund, you know you're getting the same thing everyone else in the fund is getting.  But every piece of real estate is unique, so figuring out how much a property is worth is less of an exact science.  Also, buying real estate means you have to maintain it and manage it (or pay someone else to do so).  It's a lot more work to accurately assess the income potential of a property, and then maintain and manage the property over years, than it is to just buy some stocks and hold them.   Another difficulty is, if and when you do decide to sell the property, doing so again involves work.  With stocks you can pretty much sell them whenever you want (although you may take a loss).  With a house you have to find someone willing to buy it, which can take time. So a big factor to consider is the amount of effort you're prepared to put into your investment.  You mention that your parents could manage the property for you, but presumably you will still have to pay for maintenance and do some managing work yourself (at least discussing things with them and making decisions).  Also, if you own the property for a long time your parents will eventually become too old to take care of it, at which point you'll have to rethink the management aspect. So that's sort of the psychological side of things.  As for the financial, you don't mention selling the house at any point.  If you never sell it, the only gain you get from it is the rent it brings in.  So the main factor to consider when deciding whether to buy it as a rental is how much you can rent it for.  This is going to be largely determined by where it is located. So from the perspective of making an investment the big question --- which you don't address in the info you provided --- is: how much can you rent this house for, and how much will you be able to rent it for in the future?  There is no way to know this for sure, and the only way to get even a rough sense of it is to talk with someone who knows the local real estate market well (e.g., a broker, appraiser, or landlord).  If the property is in an ""up-and-coming"" area (i.e., more people are going to move there in the future), rents could skyrocket; if it's in a backwater, rents could remain stagnant indefinitely. Basically, if you're going to buy a piece of real estate as a long-term investment, you need to know a lot about that property in order to make any kind of comparison with another investment vehicle like a mutual fund.  If you already live in the area you may know some things already (like how much you might be able to rent it for).  Even so, though, you should try to get some advice from trustworthy people who know the local real estate situation." No. This logic is dangerous.  The apples to apples comparison between renting and buying should be between similar living arrangements. One can't (legitimately) compare living in a 600 sq ft studio to a 3500 sq ft house.  With the proposal you offer, one should get the largest mortgage they qualify for, but that can result in a house far too big for their needs. Borrowing to buy just what you need makes sense. Borrowing to buy a house with rooms you may never visit, not a great idea.  By the way, do the numbers. The 30 year rate is 4%. You'd need a $250,000 mortgage to get $10,000 in interest the first year, that's a $312,000 house given an 80% loan. On a median income, do you think it makes sense to buy a house twice the US median?  Last, a portion of the tax savings is 'lost' to the fact that you have a standard deduction of nearly $6,000 in 2012. So that huge mortgage gets you an extra $4000 in write-off, and $600 back in taxes.  Don't ever let the Tax Tail wag the Investing Dog, or in this case the House Dog.  Edit - the investment return on real estate is a hot topic. I think it's fair to say that long term one must include the rental value of the house in calculating returns. In the case of buying of way-too-big house, you are not getting the return, it's the same as renting a four bedroom, but leaving three empty.  If I can go on a bit - I own a rental, it's worth $200K and after condo fee and property tax, I get $10K/yr. A 5% return, plus whatever appreciation. Now, if I lived there, I'd correctly claim that part of my return is the rental value, the rent I don't pay elsewhere, so the return to me is the potential growth as well as saved rent. But if the condo rents for $1200, and I'd otherwise live in a $600 apartment with less space, the return to me is lost. In my personal case, in fact, I bought a too big house. Not too big for our paycheck, the cost and therefore the mortgage were well below what the bank qualified us for. Too big for the need. I paid for two rooms we really don't use. "Because the returns are not good. One of the big drivers in Australia is ""negative gearing"": if your investment loses money you can offset losses against your tax on other income. Institutional investors and corporations are in the business of making money: not losing it. Housing market investors are betting that these year to year revenue losses will ultimately be made up in a big capital gain: for which individuals get a huge tax break that is also not available to corporations. Capital gains are not guaranteed. Australia has benefited from 25+ years of economic, employment and wages growth: a result of good government planning, strong corporate governance and a fair slice of luck. If this were to end housing prices would plateau at best and crash at worst. A person who has negative cash flow investments has to sell them urgently if they lose their job. A glut of mortgagee sales and property prices could easily come off 20-30%. Rental yields on residential property in Sydney are about 4% with a capital gain of currently 10% but this has been flat or negative within the last 5 years and no doubt will be again within the next 5. Rental yields for residential property are constrained by mortgage rates: if it significantly cheaper to buy then to rent, why would anyone rent? In contrast, industrial and commercial property gets a yield of about 7% and gets exactly the same capital gain. This is because land is land and if the  price of industrial land doesn't grow at the same rate as the residential land next door eventually one will be converted into the other. Retail rentals are even higher. In addition commercial tenants are responsible for more outgoings and have fewer legal rights than residential tenants. Further, individual residential properties are horribly illiquid and have large transaction costs. While it is possible to bundle them up into property trusts so that units can be sold on the stock exchange it is far more common to do this with office and retail buildings. This is what companies like Westfield and AMP Capital do. Notwithstanding, heavily geared property trusts can get into deep water because of the illiquid nature of property as the failure of Centro  illustrates. That said, there are plenty of companies that develop residential houses and units for sale to owner occupiers or investors because that's where the money is." "First, let me mention that the reasons mentioned this far for renting are excellent ones. But, I disagree. Second, I would like to mention that I'm just a regular Joe, not an accountant, or a realtor. That said, I was in a similar situation not that long ago. I ended up renting, but I wish I hadn't. You should check out the ""offers"" in your area. You seem like you're willing to compromise on a more standard, or older home. If that is the case and you are willing to ""settle"" for an older town-home, or something similar, it might be in your best interest to do so.  In my area for instance, the urban areas are becoming a bit crowded. This is good news for the people who already own homes in those urban areas, but bad news for people who are looking to rent an apartment (which tend to be located in urban areas) or buy a house in these urban areas. The reason I say that is simple; there is only one thing there will never be more of: land. If people are moving into these areas, and there is limited room to build structures, the demand is going up while the supply is unable to keep up. This means an increase in prices. BUT, this can also be used to your advantage.  As the demand for those urban areas goes up, the rural areas around the urban areas are likely to be subsidized. For instance, near me, if you're willing to be 20 minutes from the nearest Walmart and you have a 550+ credit score and a stable income, you're able to acquire a government subsidized loan with 0% down. (I would recommend dropping at least SOMETHING, however, if possible.) Apartments of the size your family is going to require are going to be expensive. People who own apartment buildings are looking to make the most money per square foot. This means most apartment complexes are going to be filled with 1-2 bedroom apartments, but have very few if any 3+ bedroom apartments. (Again, this is my general experience, but it may be different where you're living.)  I suspect the apartment your family is going to need is going to end up being very expensive, especially if people are moving into your town. You might consider trying to get a lower-quality house as apposed to a rare and large apartment for a few pretty obvious reasons: Don't misunderstand me, though. A lot of people get infatuated with the idea of being a home owner, and end up getting into something they will never be able to maintain, and if that happens it's something that's going to follow you for the rest of your life.  As for your student loans, if you NEED to and you qualify you can apply for hardship. This would mean that you don't have to pay anything, or pay a reduced rate for some arbitrary approved amount of time, or until some arbitrary circumstance is met. However, do not take this lightly. While doing this might not necessarily accrue interest (depending on whether or not your loans were subsidized or unsubsidized and a host of other factors it might actually halt interest) these loans will follow you even into bankruptcy. Meaning if you get your student loans postponed and end up losing the house anyway, you have to make a fresh start with a bankruptcy AND student loans on your back.  Furthermore, you can't count your chickens before they hatch, and neither will the banks. A big part of qualifying for a loan is your proof of income. If you haven't had that steady job for 6 months to a year or more, you're going to have a tough time getting a loan. Suppose your wife-to-be DOES start making that income...it's still not going to make a difference to the banks until they can say that it's not just a month long fling.  Last, after reading all this I want to tell you that I am BIAS. I happened to miss the opportunity I'm explaining to you now, and that affects what I think you should do in this situation. Weigh the options carefully and objectively. Talk to your fiance. Talk to your friends, parents, anyone who is close with you. Come to an educated decision, rather than the decision that might be more exciting, or the one you WISH you could take.  Good luck." I would not claim to be a personal expert in rental property. I do have friends and family and acquaintances who run rental units for additional income and/or make a full time living at the rental business.  As JoeTaxpayer points out, rentals are a cash-eating business. You need to have enough liquid funds to endure uncertainty with maintenance and vacancy costs. Often a leveraged rental will show high ROI or CAGR, but that must be balanced by your overall risk and liquidity position. I have been told that a good rule-of-thumb is to buy in cash with a target ROI of 10%. Of course, YMMV and might not be realistic for your market. It may require you to do some serious bargain hunting, which seems reasonable based on the stagnant market you described. Some examples: The main point here is assessing the risk associated with financing real estate. The ROI (or CAGR) of a financed property looks great, but consider the Net Income. A few expensive maintenance events or vacancies will quickly get you to a negative cash flow. Multiply this by a few rentals and your risk exposure is multiplied too!  Note that i did not factor in appreciation based on OP information. Cash Purchase with some very rough estimates based on OP example Net Income = (RENT - TAX - MAINT) = $17200 per year Finance Purchase rough estimate with 20% down Net Income = (RENT - MORT - TAX - MAINT) = $7500 per year I've been starting to invest in real estate myself, and [this site](http://www.biggerpockets.com/forums/categories) has been incredibly helpful. It was started by a professional real estate investor who wanted to create a community for helping investors of all types and experience levels. You can learn a lot just by reading the various posts, but I highly recommend creating an account and introducing yourself to the community. There are many members with a lot of experience who are happy to help newbies.