Get Rich With: Owning Rental Houses

We’re diving into a fundamentally new field here – the field of actually increasing your income, which is quite different from the cutting your spending I usually advocate.

For most people, the cutting works much better because they already have a shortage of free time, and a surplus of income compared to what is actually needed to live a reasonable life.

But for those rare people, perhaps the young and ambitious, or those without children who need all of your free time, it is possible to raise your income considerably while keeping your day job by using the time-honored method of becoming a landlord.

To some people, it sounds like a hassle not worth even considering. To others who have read the Get Rich books on the topic or met a self-made multimillionaire who became wealthy using rentals, the idea is intriguing and desirable. As a small-time landlord myself who has rented out four houses over the years and still has one rental today, I would say the truth is somewhere in between.

Here is a real-world example with some numbers showing the fundamental reason that these things make you money:

– In my town, I can buy a 3-bedroom house in a fairly good neighborhood for about $200,000. I would put $40,000 down on it, and because of of today’s insanely low interest rates, my monthly costs for the $160,000 loan including insurance, property taxes, and a few bucks for maintenance would be about $950/month.

– At local rates, I can rent this house out for about $1200/month.

So every month I am getting this benefit:
$250 of actual cashflow from the rental
$230 of principal on the mortgage gets paid off.

The net profit is $480/month, or $5760 per year. That is a 14.4 percent return on my $40,000 investment, right? Double the MMM official figure for stock market returns?!

But no, it’s not quite the same, because you actually have to do WORK to buy the house and take care of the tenants. I find that if you do a good job getting nice responsible tenants, the total amount of work required for each rental house averages about 1 day per month, or 96 hours per year.

So your hourly rate of pay is about $60 per hour, right? Well, again not quite, because you would have made half of that money if you had just put the $40k into an index fund at an average of 7%. Accounting for that, you’re getting $30 per hour for managing the property, which is still reasonable pay for anyone who is willing to work for $60k or less per year.

But I’ve left out an important part of the equation: Appreciation on the rental house. Because you only put 20% down on the house, you basically own an investment that is leveraged at 5-to-1. That is potentially risky, as many US landlords found out when the property values dropped in recent years. But on average, the statistics say that over the long run your rental house value will go up with inflation: 2-3% per year. So let’s re-run the numbers using a conservative amount of appreciation:

Cashflow and Mortgage Payoff: $5760 per year
Appreciation on House ($200,000@2%): $4,000 per year.

Now you’re getting paid $9760 per year in exchange for investing $40,000 and putting in 96 hours. Doing the same stock-market-equivalent subtraction above, you are earning about $72.50 per hour. Unless you make more than $144,000 in your day job, this should start to sound pretty exciting to you. And if you have the skills to expand your empire to include multiple rentals, you can put in quite a few hours at your new $72.50 rate.

If you collect several houses, you can even quit your day job and have a more-than-full-time income for less-than-full-time effort. At $72.50 per hour, you can earn a comfy $40k family living wage with about 10 hours a week of effort.   Several people I know have already done this.

If your area DOES ever have a property boom and home values go up faster than inflation, you can make some even bigger chunks of easy money. In my best experience, I made about $50,000 in appreciation over five years on a rental house, and in my worst experience, I lost about $10,000 over five years on another one (I bought that one in the 2005 housing boom and had to sell in 2010, still part of the current slow period).

And if your area has a higher rent-to-price ratio, sometimes referred to as the “cap rate”, the plan can be even more attractive. In the example above, the rent of $14,400/year divided by the $200,000 price gives a cap rate of 7.2%.  In expensive cities, the cap rate is much lower, making rentals a bad idea. But in some cases you can get a much higher cap rate – it usually works out better the less expensive the dwelling is, which is why condos make good rentals. This economy of scale continues all the way to the ultimate rental tool – the apartment building, which can have cap rates over 12%.

The bottom line is, it’s just another way to trade time for money. But if you have the enthusiasm for knowing the good neighborhoods in your own city, finding a good deal on a house, doing minor renovations and maintenance, and interacting with tenants who you reel in with an expertly-crafted Craigslist ad, it can possibly be the highest wage you’ll ever earn – and thus the fastest way to get from Enthusiastic Young Office Worker to Retired Senior ‘Stash.

This is just an introduction to the topic. There are loads of books about this in the library if you want to learn more, or if you want to hear more details from me, think up a question for the comments section!



  • Steve May 23, 2011, 9:41 am

    It takes a certain type of person to manage rental property. Here’s a good way to determine if you are this sort of person. Lend some money to your most deadbeat friend or family member.

    Now try to get it back. That means repeated calls or visits…”Do you have my money yet? When am I going to get my money?

    If that doesn’t work, it’s time to type up something official. “If I don’t get my money, I’m taking you to court.”

    Anyway, from my experience, rental income is good income per time spent. However, the dead beats and the picky people are a pain from the beginning but drag on you mentally more and more the longer you are in the business.

    Here are a few of my general rules.

    Old people on a fixed income are GOLDEN
    If they start out with a problem, they are a constant problem
    No pets!

    • MMM May 23, 2011, 4:04 pm

      Yeah, very true. I’ve had perhaps 20 sets of renters over the years and it seems about a third are absolutely golden, a third are medium-but-okay, and the bottom third have been either very negligent about taking care of the houses, super-fussy (can you change the light bulbs and smoke alarm batteries for me?!), deadbeats and/or scam artists (two evictions even!). But looking back, the bad experiences were preventable if I had been picky about people having good credit scores instead of good excuses for their bad credit.

      My favorite type of person to do business with is young nerdy professional couples who just sold their previous home, and moved here for a fancy job and will move on to buying a house of their own after a year.

      • Grizz August 15, 2013, 10:49 am

        What is the minimum credit score you would accept? Any advice on evaluating future tenants?

        • Brian @ upmisnow December 15, 2013, 3:55 am

          I personally don’t usually look too hard at credit scores, I look at people’s situation they are in. I.E. Why are they renting my place out? If they have bad credit, I look at why? If it is a job transfer, I evaluate the industry the person works in and lastly I make sure I list my properties slightly below market to get a glut of applicants to choose from.

          Hope this helps.

  • Riley May 23, 2011, 1:18 pm

    Hey Mr. Mustache!

    Great post again…..I love how the blog is starting to shift into income producing territory. I also really enjoyed the beer post because being in college, things can definitely get out of hand financially when drinking.

    Getting into real estate seems intriguing but I almost feel as if it might be better just to sock money into an REIT index fund to get exposure to real estate while receiving monthly dividends (pretty much rents checks) without dealing with banks or renters. However the return would probably quite a bit lower right?

  • MMM May 23, 2011, 4:15 pm

    Hey there Riley,

    REIT funds are a good way to speculate on the real estate market and benefit if it has unexpectedly high price or rent growth in the future.

    I personally do believe US housing will appreciate faster than inflation over the next ten years since the prices are irrationally low (many houses cost less than construction cost even assuming a land price of zero), and the population is growing which should eventually use up the underpriced housing and cause prices to rise.

    However, if my theory is wrong, or if REITs are already trading at higher prices anticipating this future growth, then you can expect only market-level returns from an REIT investment – just like a more volatile version of an S&P500 index fund, so you can assume 7% or so after inflation.

    But rental houses are a little bit different, because they are a way to get even higher returns on your investment in exchange for more labor. It’s similar to taking on a side consulting job at $72.50 per hour or so, which is also a great idea if you feel energetic and want to get ahead quickly.

    The cool thing about doing extra work is that you put in the effort ONCE, save the money, and you benefit for life from the extra employees. As soon as you’re done the work, the effort fades away in your memory, but the money is still there for you to enjoy forever, providing investment returns.

    As long as you save the money of course, rather than just buying a bigger car.

  • Liz Tee May 24, 2011, 10:14 pm

    I kind of fell into being a landlord backwards and it didn’t work out so well. I had just bought a house in 2007, and about 18 mos later I moved in with my boyfriend-then-husband who also owned a house. I rented mine out.

    I bought at the height of the market and didn’t put much down. My PITI was about $1700 and I could only rent it for $1250. I couldn’t deal with managing it so I hired a property manager for another 10% off the top. No problem, I’ll get some back in tax deductions, right? Nope, because I wasn’t managing the property myself so NO deductions for me. Lose, lose, lose.

    Now, however, is a much better time to buy houses, and IF you have $$ to plunk down so that your PITI < rental income, and IF you manage the property yourself, you can make money on it.

    Otherwise, I don't recommend it.

    Good news (actually, it's kinda bad news) is that I am moving back into that house next month, so the hemorrhaging will stop. If I stay in the house maybe 5 more years I might even be able to sell it and break even.

    Timing is everything in the housing market, and hindsight is 20/20. Foresight, however, sucks.

    • MMM May 24, 2011, 10:35 pm

      Hi Liz,

      Yeah, a good cautionary tale. Your situation is definitely common – even my rental houses were mostly places I had formerly lived in. But they were all cashflow-positive… and even would have been so if I had 100% mortgages on the homes. That’s where the rent-to-value ratio comes in. If a person is actually looking to “Get Rich with Owning Rental Houses”, it’s essential that the place starts paying for itself right away – without depending on tax deductions, an unusually large downpayment, or any future appreciation.

      This favorable ratio tends to happen more in cities where good family-ready houses are less than $200,000 – since it is common to find young renters able to pay $1200 in rent – as opposed to cities where the houses are $1.4M – where the rent would have to be $8400/month just to produce the same rent-to-price ratio! So it’s not for Silicon Valley Mustachians, unless they want to manage a rental quite far from home.

  • Rainbow Rivers May 25, 2011, 8:52 am

    Just found your blog and really enjoying your posts and really enjoyed this post. However not everyone with a bad credit are bad tenants, especially if they have a long history of paying rent on time despite a bad credit score.
    We have rented places with up to 5 dogs and our landlords have always loved us as much as we loved them, paying rent ALWAYS on time, doing our own repairs and being extremly responsable with our pets. I always found my kids could do a whole lot more damage to a rental than our dogs.

    However I also have seen those with pets and bad credit that would be a NIGHTMARE to rent to. I would think a long rental history would speak much louder about the character of a renter than a credit score or owning a pet could say about a person.

    Keep up this wonderful blog, look forward to following your inspiring posts!

  • Daniel May 25, 2011, 9:19 am

    A Fundamental aspect of the equation is the tax benefits of being a landlord and being able to deduct your mortgage interest (and mileage to manage the property, and for that matter any other expenses involved int he management of the property) from your taxable income. Since someone else is paying the mortgage anyway, this can add up to substantial savings (several thousand per year per property if leveraged appropriately).

    • MMM May 25, 2011, 8:50 pm

      You are very right – I figured I may get to write more about it if readers seem interested in rental properties. I definitely love my landlord tax deductions! Also there is of course the 3% per year depreciation you get to claim on the building itself, which is several thousand more. You do have to pay it back when you sell the place, but it is still a nice cashflow booster – effectively like an interest-free cash advance on the eventual appreciation of the property.

      • Matt C June 25, 2013, 8:25 am

        Tax deductions are great unless your earned income is above a certain level or you are not spending >750 hours doing material activities related to the homes you are renting.
        The laws changed a bit in 2007 so if you are a high income (family or single) wage earner, you cannot claim real estate losses as they are considered passive losses. Deductions must be accrued for when the place is sold. We ended up giving the IRS back about 30K for 2008-2010. The legal headache of handling the IRS, lawyers etc… cautionary tale, do your due diligence!
        That being said our CPA should have identified the change in the law in 2007.
        Details of the law are IRS SS 469 Reg, SS 1.469-5T(f)(4)
        Outside of that, I concur that rentals are a great way to build streams of cashflow. My spouse religiously chooses tennants with a high credit score and proven income as these criteria can be more important than getting $200 more dollars in rent.

  • Tina B May 25, 2011, 9:51 am

    A few years ago we made our first attempt at being landlords. We bought a fixer upper but it wasn’t in the best part of town. That was our first mistake because we couldn’t atttract the best kind of renters. We had renters in it for a year (nagging monthly for partial/late payments). My husband hated it but I thought we did ok. They moved out w/o paying the last month but we had the deposit and there was no damage. They had painted a room w/o permission and replaced an outside light with a motion sensor light.

    Now we have paid off our mortgage and are debt free. I am ready to try again but my husband has cold feet. This time we could build a small house in our own neighborhood. It should attract good renters and we could keep an eye on it. I wll screen carefully this time around and set the rent low enough that we get plenty of applicants.

  • Steven May 25, 2011, 11:23 am

    Hey Liz Tee, are you sure about this:

    “I couldn’t deal with managing it so I hired a property manager for another 10% off the top. No problem, I’ll get some back in tax deductions, right? Nope, because I wasn’t managing the property myself so NO deductions for me. Lose, lose, lose.”

    I have a property manager, and while I think there may be a limit I still get plenty of deductions. Did you have a tax professional do your filing?

    • Kevin M May 31, 2011, 2:27 pm

      @Steven – I think she’s referring to the “active participation” rules for deducting rental real estate losses. I don’t think hiring a management company necessarily rules out “active participation” but it is a good idea to read up on it before deducting a loss and getting a love note from the IRS.

      • Everett October 28, 2013, 2:43 pm

        I thought the same thing. I was even going to recommend to Liz that she file an amended return, but if you move back into the house that changes everything. Plus a MAGI over $100k or owning through an LLC would also prevent being able to claim passive losses.

        per the irs, “As long as a taxpayer participates in management decisions in a bona fide sense, he actively participated in the real estate rental activity. There is no specific hour requirement. However, the taxpayer must be exercising independent judgment and not simply ratifying decisions made by a manager.”

  • J May 25, 2011, 12:51 pm

    What about the returns if/when the bubble finally PROPERLY pops? Not getting back into this one, myself :)

  • G.L. June 2, 2011, 12:49 pm

    How about doing this on a larger scale? I heard of people who own giant apartment complexes (dozens or even hundreds of apartments!) and can live off the passive income. I assume that they outsource all the management to, well, a property management company in exchange for a small cut of the profits. Have you heard anything about this, MMM? The risks and the initial investment on something like that would be a lot bigger (unless you could pull a Trump and buy with no money down), but the payoff would be tremendous as well. :)

    • MMM June 2, 2011, 1:07 pm

      Hi G.L.!

      I certainly have heard of it. One of my neighbors is rocking a 300-unit, as mentioned in one of my earlier articles about The Millionaire Next Door. And years earlier in my office worker days, there was another coworker that secretly had hundreds of apartments as well. Apparently to qualify for a loan on one of these buildings, the top factor considered by the bank is the performance of the apartment building itself (rental income, vacancy rate, historical costs, etc.). As opposed to the size of the income of the buyer.

      Many people work their way up by starting with just 1-4-unit buildings. There is one particular 6-apartment building for sale right now in my own town that brings in $4200/month (the appts bring in $700 each), yet is listed at only $349,000. That’s a gross cap rate of 14.4% – twice as good as the best rental house I’ve ever had!

      But for now I’m content with my existing free time/passive income balance, so I have to avoid the temptation to start trading time for money again, unless it is time spent doing something I really enjoy, like building things.

      • GL June 3, 2011, 3:16 am

        Ahh, so you were the one with the 300-apartment neighbor! My bad. If you read a lot of PF blogs (or a lot of anything, really), it all starts to blend together. :) Is there any chance you can convince your neighbor to do a guest post and explain the intricacies of his business model?

        • MMM June 3, 2011, 7:53 am

          Good idea. He doesn’t seem like the guest posting type but maybe I can actually interview him instead! The man is very keen on giving financial advice so it could be fun.

      • jDeppen June 14, 2011, 7:59 pm

        We own 5 properties (8 units, one being commercial) and things are going well. We’re working on getting out of debt before acquiring more. The tax benefits have been amazing. I’m a real estate agent so my property manager gives me a break by only charges 5%.

        If the 6-unit is a great deal, wouldn’t it be worth it to hire a property manager?

        • MMM June 14, 2011, 10:17 pm

          Wow, very impressive rental setup, Mr. Deppen! You are right that a property manager is a good idea for those wanting some relief from the day to day work of landlording.

          On the other hand, sometimes the work is rewarding. Like today, for example, when a highly qualified tenant called me personally and asked to get in line to rent my house when the current folks move out in two months. Didn’t even need to put up the craigslist ad this year.. Woohoo!

  • Carlos E September 12, 2011, 10:40 am

    Nice post MMM! I already own a flat with a cap rate about 10% and appreciation of 50%… i think I just had luck, but looking forward to expand my own little empire.

  • AM December 2, 2011, 3:15 pm

    Hi MMM,

    I myself rent a SFH in SF east bay area. I’m looking for a condo as a rental property where I will not live in. I see reasonably priced condos (1/1 or 2/1) near by public transportation, shopping, schools. I can afford to pay 20+ % down payment and the rent will generate positive cash flow from the beginning given that finding tenant in this area is not that difficult. Given my job situation and my wife’s , we can pay off the condo in 5 years. I am thinking of going for 5/1 ARM. However, I’m not clear about the tax implication in that kind of arrangement. If you can cover this scenario that would be really helpful.


  • engin33r December 19, 2011, 12:15 pm

    This post is well timed since I just got to place my first check into the business bank account from a property we bought a month or so ago.

    Exciting to see it’s working for others. Our cap rate is currently 14.8% but it took a long time to find :)

  • J.M. February 28, 2012, 11:28 am

    What do you do about assest protection, in case you were to be sued? Have to consulted a lawyer regard LLCs, Umbrella insurance, etc.? Or do you just hope for the best? One lawsuit and you could lose your properties on simply defending yourself.

    Thank you for your article,

    • Mr. Money Mustache February 28, 2012, 12:26 pm

      There is some good discussion of this over in the MMM forum. It looks like the most savvy landlords place each property (or a small group of them) into a dedicated LLC, then they set up a standard and umbrella insurance policy to cover them. I’ve got appropriate coverage through my low-cost homeowner’s policy.


      As your rental portfolio grows, so does the risk of lawsuits. But this risk is still extremely small – remember, to be sued you either have to do something seriously wrong to your tenants (which you won’t do), and/or have a seriously dickheaded and opportunistic tenant who wants to abuse the law. I am not saying these people do not exist, but I am saying they are very rare.

      It is much more profitable to lead your life based on integrity and trust, rather than fear of highly improbable events. The fear will paralyze you and you’ll never take any risks, meaning you’ll never succeed in business.

      After being through a few court cases locally and learning about mindset that judges use to evaluate the validity of claims, I don’t worry about lawsuits, for anything, at all.

      • EWW (Early Withdrawal When?) September 5, 2014, 12:01 am

        A cheaper way to effectively do the same thing is to use what is called an Illinois Land Trust for each property and then name the beneficiary to be an LLC. This way you only pay to upkeep one LLC instead of one per property which could get costly. I share this and more at my blog that is very similar to yours! Your influence has made this Mustachian who he is today!

  • Brian Royston May 1, 2012, 8:48 pm

    Good post. I just came across it.

    The SFH portfolio has just recently been recognized as an asset class by institutional investors. Three PE firms just a couple of months ago announced that they have pledged a total of $2.5B to buy up SFHs. My guess is that in the next couple of years you will see the first SFH REIT. (A few years ago I wondered if there was a SFH REIT out there. I found out there were none.)

    I have a 55 SFH portfolio in TX, and I was just contacted this week by a firm that seeks to create a SFH REIT. I was also contacted today by a Canadian investor that is circling money to build a SFH portfolio. A few weeks ago, a firm in LA contacted me for the same purpose.

    What this means to the small investor is that there will likely be an “exit” for people who build small SFH portfolios…they may be able to sell their portfolio of homes to institutional investors.

    More details on my take: http://bit.ly/zvbP6Y

    Happy investing!

    • Mr. Money Mustache May 2, 2012, 1:46 pm

      Wow, you have FIFTY FIVE single family homes? Nice work. That’s a pleasant and profitable business, taken to the extreme. I kind of hope the institutional investment side doesn’t get too strong, because I like the fact that these small local opportunities exist in every town and city, allowing local entrepreneurs to benefit. I view it as a way of leveling the economic playing field for the little guy, since even owning 2-3 rental houses is plenty to provide for a spending-efficient person in retirement.

  • superbien July 31, 2012, 12:23 pm

    I’m really interested in this post, and would love some advice on my situation if anyone has advice to share! I live just outside Washington DC but am about to take a job inside the DC border, with a miserable awful commute (by car 20 minutes, plus or minus 2 hours; bus/metro train 1.5 hour; biking not an option b/c deep ghetto) across one of only 2 bridges. When my current lease ends I’m looking at moving into DC…. but I’m noticing that I could buy a 2-bedroom condo for less than renting a 1-bedroom or even studio, within bike commuting distance of my new job. I think a lot of neighborhoods in DC are right at the cusp of gentrifying and having the prices skyrocket – I’ve watched it happen in two neighborhoods (Navy Yard and parts of SW Waterfront) – so I think it’d be a good investment. Even better I could have a roommate to cover (at a minimum) the $1k monthly mortgage, so I could apply my “rent” to principal and kill the mortgage as fast as I can manage. Over time I think it would seriously appreciate, and in the meantime I’d be paying well below market rates on rent.

    This is all in theory (well I’m talking to a realtor, getting preapproval, and touring neighborhoods) – has anyone done something like this? Any cautions or heads up on hazards?


    • stachenator May 19, 2013, 10:27 am

      superbien – I wonder if you pulled the trigger on buying the condo in DC. You’re probably right about the property values in the city being close to exploding. The DC job market is strong, and I think that the younger generation moving there will value living in the city (especially after watching their parents suffer through that plus or minus 2 hour commute for 20 years).

  • Y.L. October 29, 2012, 10:13 pm

    Thanks for the post MMM. I have a question regarding whether to pay the mortgage down to $0 for a rental property, or should I leave a mortgage on it since I can deduct the interest on Schedule E? At roughly $10,000/year mortgage interest, the tax saving is significant–with it I have a loss on paper, as I’m sure you have had the experience of. Should I resist the urge to pay the house off? Most of the getting-rich-with-rentals blogs would say leverage as much as possible… Keeping taking money out of the equity and buy more. Such an aggressive attitude seems un-considered to me. Would be very interested in your thoughts.

  • Mrs. J November 19, 2012, 5:12 pm

    My husband and I rented out his Grandmother’s house to 2 different people before moving back into it and eventually selling. We went through a TON of people, asking all sorts of ridiculous questions like “Can you build a fence around the yard so my 3 large dogs can play outside?” (Umm, no.) “I want to rent this house so I can run a daycare out of it.” (Umm, no.) We even had one woman drive up in a $50,000 SUV, telling us she can’t pay the security deposit. (Umm, no.)
    It is FAR BETTER to have the house empty for one more month, to try to find the right candidate, than to rent to the first person who shows up, who then must be evicted, which takes loads of time, time that you are not receiving rent payments. We did a credit check on every single person. Yes, there are people who have bad credit but will still pay their rent on time, but why risk it?

    When you find a good renter, do what you can to keep them. Don’t raise rent next year, if they will stay. Buy them an inexpensive present at Christmas.
    I have also heard of offering them a rent-to-own deal. If they think they might be purchasing it, they will take better care of it, even if they have no intention of purchasing the place. Let them paint the walls pre-approved colors. Tell them you will buy the paint.

    I agree with the no pets thing. Animals pee on the carpet, leave little presents. If you rent to someone with a cat this time, next time, you won’t be able to rent to someone who has allergies. Better to be pet free.

    MMM, I love your blog!

    • Oh Yonghao April 4, 2014, 3:45 pm

      “Don’t raise rent next year, if they will stay.”
      We have to thank our landlord for raising it, gave us plenty of motivation to get the hell out. It was decent rent at first, but going from $700 to $775 in one year and lying about the reasons (taxes went up, bull shit, I looked it up on the county website, their taxes went down that year, and they went from every other week mowing to once a month if we were lucky). They were flabbergasted as to why we wouldn’t sign another one year lease with an 11% rate hike. We were good tenants, never a complaint, quick to report water leakage, paid on the first every single month, no kids, pets, and don’t smoke or host parties.

  • Matt March 22, 2013, 7:49 am


    Love the blog, love this article, but I think I found a mistake in your math! You take appreciation into account and assume it is equal to inflation, which is fair. The problem is that you then compare it to an expected 7% return in the stock market, but that 7% is AFTER inflation. An apples-to-apples comparison would require you to compare the cashflow + mortage payoff + appreciation to a 9% return (assuming 2% inflation). You still end up ahead due to leveraging, but now you’re earning about $64.15 per hour, not $72.50.

  • Aussie Investor July 11, 2013, 8:06 pm

    In Sydney we have this thing called Negative Gearing, which was marketed as the ultimate tool to evade tax, has inflated the property so much that these properties that actually provide positive cashflow that you all seem to talk so matter-of-factly about is all but a myth here.

    • aussie anna December 18, 2013, 10:07 pm

      Aussie investor, we have three rental properties here in oz, all positive cash flow. Takes a lot of research and tonnes of “running the numbers” sessions, but it is possible. Not sure if you have already, but it is worth checking out Margaret Lomas’ books/website/tv shows on this subject. Definitely possible.

  • marc August 28, 2013, 8:10 pm

    great post. . i am a newbie here and am trying to do some math – but it is late and I am not confident in my findings.

    Say I have $200,000 to buy a rental house for. What is better, buying ONE $200,000 house in full . .

    Or buying 4 houses, each worth $200,000, by putting down $50,000.

    So either option above I am out of pocket $200,000.

    Which gives me the potential to earn more? Or does it even out?


    • Mr. Money Mustache August 28, 2013, 9:02 pm

      You’d probably earn more with the four houses – as long as the rental income was high enough to properly cover all the mortgage payments and still deliver a positive cashflow after all expenses. This is still possible these days due to very low interest rates and fairly cheap houses here in the US.

      Four houses (or more) is a quick way to get wealthy, although there is some risk and hard work involved.

      • BrianT January 31, 2014, 2:21 pm

        I agree four houses works better. The landlord gig is very much a compounding game. The earlier you start with more, the more time you have for those seeds to grow.

        You can also think of it as spreading out your risk. If you own four and only one tenant is late, you’re out only 25% of your gross rent income. If you only have one house…you’re out 100%.

        One thing you can try doing is a hybrid approach if the market permits. Take the $200,000 cash and buy a $200,000 house. keep saving your money and wait a few months. Then re-fi just enough so that you’re comfortable AND the rent still covers all expenses on the home. Repeat for house 2, 3, 4, etc….

  • mrs begonia August 29, 2013, 6:37 pm

    I know are many tips on how to find great renters on landlording sites. I’m wondering, what are your tips on finding great tenants? We have a duplex type situation so it’s essential to us that the tenants are clean, quiet, & respectful neighbors. Messy tenants attract pests that crawl through the walls to our place and we can obviously hear the 2am parties. We have been craigslisting it up without any luck. Would love to hear any suggestions you might have.

    • Tawny August 8, 2014, 12:35 pm

      Mrs Begonia,
      I know this response is almost a year late (I just found the MMM blog) but we also own a duplex. When we purchased it 3 years ago it came with an amazing tenant. When she moved out of state we needed to start looking for a new tenant. We casually mentioned it to a few friends and before we knew it we had a professional couple in their late 20’s look at it. They snatched it up before we even needed to advertise in any way. Two years later and they are super quiet, pay rent on time and want to stay. We just increased rent as our taxes went up but we split the difference as we did not want them to move.
      Our view is to keep the place nice enough where it attracts good tenants (but not too nice where we worry about damage) and then just advertise via word of mouth or facebook. I would rather rent to a friend of a friend than to a stranger through craigslist. Good luck!

  • Chreechree September 24, 2013, 11:19 am

    Hello. New to the blog and am thoroughly enjoying reading it from the beginning. The attitude of MMM and posters is great, and I’m looking for ways to save more and more.

    A military town is a great place to own a rental property. We are an active duty military family, and we own (well, the bank says otherwise) two houses, one we’re living in and one we lived in previously and now rent out in a different state. Many people in the military don’t want to live on base and don’t want to buy when they won’t live there very long, so they rent. There’s a constant flow of new potential tenants coming to the area near a base. You might not want to rent to very young enlisted folks as SOME are not quite as responsible as you might like, but mid-career enlisted (sergeants and above) or officers are usually a safe bet. Plus, you have recourse through the military member’s command if there’s a problem with your tenant. It is not acceptable for military personnel to not pay their bills, take care of your property, etc., and their bosses will take such negligence very seriously. We rented out a house in FL for 7 years to multiple military tenants with zero problems before we sold it.

    We hope to keep our current rental (likewise rented to military personnel) until my husband leaves the military. We would then use proceeds from the sale towards purchasing our “forever” house. If the market is still bleak at that time, we’ll just keep it and let tenants continue to pay down our mortgage until it appreciates enough for us to sell at a nice profit. For now, we receive enough rent to cover our mortgage (paying an extra $115/ month on principal), taxes, insurance and still have more left over that we save in a separate account for repairs/ unexpected vacancies (hasn’t happened yet). Good luck, future landlords!

  • LookingIntoOptions... January 14, 2014, 2:15 pm


    My husband and I live overseas. We have a nice little nest egg sitting in a bank account doing nothing for us. We’d like to make it work! We will be out of the US for 3 more years. Should we buy a place outright and start renting it out? We were thinking a $200k condo. However, we will probably want to sell in 3 years to buy a family home. Is that reasonable? Ours is a unique situation–just trying to figure out the smartest decision…

    • EWW (Early Withdrawal When?) September 5, 2014, 12:33 am

      I too have plans to move overseas! Well, not entirely, but half time in the states and there. Living in a cheaper country across the pond is also a superb way to grow ones ‘Stache while experiencing a new culture! Couple good suggestions off the bat is Thailand and Philippines.

  • Scott January 18, 2014, 12:43 pm

    First, THANK YOU MMM! I found you today via Andrea Coombs’ Marketwatch article and am gobbling up your posts from April ’11 onwards. Many of the subjects have either got me thinking or rang my self-recognition bells, and a few have even made me feel like a mini-mustache. This one above hits home – my wife and I are traveling for the past year and a half, I retired (at 53) in July ’11, and we’re pretty sure we’ll eventually find a place outside the US where costs are much cheaper and life feels like an adventure again. We rent out our half-paid-for house in Santa Cruz CA, and my calculations regarding its investment-worthiness go like this: after subtracting all house expenses (mortgage, property tax, HOA, insurance, utilities, avg maintenance & repairs) from rent, we net about $12k per year, which is 6k in income and 6k in paid-down principal. We have about 300k net equity in the house, so I see it as a 4% annual return on investment. Add in the 2% valuation increase and it’s 6%. First, am I thinking about this correctly? Second, after traveling for so long, we’ve evolved somewhat beyond our emotional attachment to the house, so in your opinion is it well-advised to remain in a somewhat-risky 6% return (e.g. future tenants might be a nightmare; property values could dive again, etc)? The stock market return is certainly higher this past year, but may be overvalued and due for a downturn. Curious to hear what your thinking on this would be…

  • JR January 24, 2014, 7:21 pm

    Great blog! I have gotten 4 properties 2 duplexes and 2 houses in the last three years. From my experience you can make a great return paying cash. Finding homes that need a new roof and can not get financing are great for investors with cash. You can make a 10-20% return if you are aggressive. The duplex I just bought for 51k was bought back from the bank for 60k three months earlier. It needs a new roof and zillows for 83k right now. The roof is going to cost 8k and with another 10k I will have a great rental bringing in 1300 a month from a property I will have around 70k into. Search the market especially in the blue collar neighborhoods for good deals with high cash flow. These properties are bought for cash flow not appreciating values.

  • BrianT January 30, 2014, 12:35 pm

    Very interesting post. I like how you wrote this post because it resonates more with what main street folks are comfortable with. There are many seminars and books that promote creative ways of buying RE, but many times it’s over the heads of average folks that don’t have the appetite for extreme measures.

    I own rental properties with the intention of holding forever, and using it as a source of cash withdraws via refinance for other investments (but only take out money to a point where rent still covers all the expenses plus a comfortable margin).

  • ESP January 31, 2014, 12:43 am

    I’ve managed our rental property for 25 years, and even rented out our primary residence for five years while we traveled. Only had two problematic tenants, and both had problems on their credit report. They had good explanations for the credit glitches, but my gut said not to rent to them. Because I was under pressure and they were the best of the bunch, I rented to them against my better judgement. And in both cases, they were late with rent, lied about pets, and left the house in bad shape. So my rule is to select tenants using the credit report, even if it means keeping my house vacant for many weeks longer than I wish.

    • BrianT January 31, 2014, 1:41 pm

      ESP – funny you mention this story. I had the exact same problem when I first got into the landlord business. Most of my tenants were just fine and always paid on time. However, when the recession hit most in 2008/2009, I had one tenant that I had picked because she was the best one out of the bunch I interviewed. Lesson learned big time – she was constantly late for rent, broke many rules, and constantly lied about not breaking rules. She always would eventually pay, but it got tense at the end of each month before rent was due. And yes, I took her in becuase I was bleeding cash, but looking back I had more than enough in my reserves to weather out the bad tenants.

  • Abdul J February 3, 2014, 1:07 pm

    Hey MMM,

    I ended up on your blog for the first time today. I am 31 and have a little money saved up, although I have some debt like school loans and a car payment.

    Could you please elaborate on the calculations of your returns on the rental situation you shared earlier. The one with $200,000 down payment. If the property is rented out for about $1200 and the expenses on the property are about $950 per month, how do you have $480 net profit per month?

    When you say you are making $250 cash flow per month, and $230 on the principal per month. Are these exclusive, or are you taking from the $250 cash flow to make payments on the principal.

    Please help as I am considering making a similar investment.

    • Mr. Money Mustache February 4, 2014, 12:10 pm

      You got it: in that example you get $250 cash in your pocket each month, plus $230 of your normal mortgage payment automatically goes to pay down principal. Total of $480 profit, not counting additional house appreciation which you get to cash out when you eventually sell it.

  • Geoffrey Hall March 25, 2014, 12:42 pm

    Great post MMM. I’ve just started to read through your blog HARD CORE from the beginning. I live in a duplex I bought a few years ago, and while I know it’s a good investment, I’d never really done the math properly as above.

    I’m feeling better than ever about the income it produces and the ratios I figure I’m getting. A better deal than I previously thought.

  • Lauren March 26, 2014, 11:48 pm

    I have a question about cash flow. I am just about to buy a rental, and if I do a 10 year mortgage, it will have a slightly negative cash flow … Maybe $100/month depending on repairs, nothing I cannot cover. Positive cash flow with a 30 year note. I know conventional wisdom is always have positive cash low immediately, but I would rather get the property paid off sooner, and then have $700/cash flow/month. Thoughts?

    • BrianT March 27, 2014, 2:17 pm

      My thoughts are it might be a bit risky. Theoretically if you’re losing money each month on the rental, it’s no longer an investment, but instead a liability. However, at the same time paying off the mortgage sooner is great for the reason you had mentioned. What you can try doing instead is getting the 30 year note, and with whatever money you make as the monthly cash flow, put that back into the mortgage payment as extra principal pay down. Work out the math on a spreadsheet and you’ll see clearly how long it’ll take to pay off the loan.

      I recommend this method because if for some reason there is a personal cash flow issue, you have the option of paying only the normal mortgage amount and not having to worry to pay the difference that would be there on a 10 year note.

      In the end, go with what you feel more comfortable with. Personally I don’t like liabilities so I would go the route just described.

  • Momma of Many April 9, 2014, 5:11 pm

    We currently rent out our old house, which is fully paid for, so that rental income goes straight onto the mortgage of our new house. An easy $1100/mo

  • Dan April 17, 2014, 1:11 pm

    Good article. RE has some great benefits. There can be even more money to be made when you buy properties with more units. I got started with a 6-unit building and that is what I am looking for going forward. More units will usually equal more cash flow.

    The key to being a landlord is tenant selection. With good tenants and 100% occupancy, it can be a pretty hands off investment most of the time.

  • Sasha May 3, 2014, 12:31 am

    This blog is wonderful. So much good info. I live in an overpriced area which makes it impossible to find a rental property that I can put 20% down and achieve positive cash flow. I have a 401k, company stock, an IRA, and some cash I was going to use for a down payment on a rental property. I live with my boyfriend in a house he owns and I don’t pay rent. The plan was I would use the money I saved by not paying rent to buy a rental property that would eventually be cash flow positive in our retirement years (once it is payed off or at some point if I refinanced) even though it wasn’t cash flow positive in the beginning. But do you think I should just forget about owning property and just stash all my savings in a vanguard fund instead? I was a little worried about relying completely on stocks/bonds for retirement which is why I was considering rental property. I plan on being with this guy for the long haul but we all know things don’t always work out as we plan so I may find myself in retirement with no house and just my stock/bond investments. Do you think that would be okay?

    • Mr. Money Mustache May 3, 2014, 7:37 am

      Hi Sasha – Yes, a good old-fashioned collection of index funds makes for a fine retirement too. Rental houses should be considered only in rental-friendly areas. You’d want more than just “cashflow-positive after 20% down”.. A good rental should be strongly positive even with 0% down. Heck, even if you outsource property management with 0% down it should be positive – that is your payment for being the one doing the property selection and taking on the risk.

      Larger units (multi-dwelling units) might have better returns in your area, if you do decide to look for local rentals later on.

    • BrianT May 5, 2014, 10:06 am

      Hi Sasha,

      If you decide to put down money, try to look for an ROI of anywhere between 5 to 10% of the total money you put down up front – down payment, rehab costs, closing costs, inspections, and anything else you had to spend in order to prepare the property for rental. When calculating your ROI, make sure you deduct all recurring expenses (mortgage, property tax, home warranty, insurance, property management, etc), and also put a padding in for unexpected maintenance. Be extra conservative. If the numbers don’t match up to your liking, walk away.

  • Jess September 18, 2014, 3:23 pm

    6 months ago I purchased my first home because throwing away around $2k/month on an apartment+parking+pet rent just seemed insane. My mortgage turned out to be slightly more than the cash I was shelling out in my 5th floor 2×2, but for it I got a 3000 sq ft home in a great neighborhood with four rentable rooms in addition to my own living space, plus an unfinished mother-in-law over the two car garage+shop.

    I now have a house family of super cohesive people paying my mortgage for me, so that I can put my employment income towards my debt and finishing that rentable space over my shop. I’m not sure if I have the bandwidth to manage a property separate from where I live, but renting in general seems to be working for me quite well to cut down on debt and boost savings.

  • Nathan October 17, 2014, 2:39 pm

    Dear MMM,
    I read this, made some spread sheets, got excited. Then remembered Uncle Sam and I got to wondering… When you rent out a place, do you have to pay income tax on the entire rent check you recive(minus interest of course). That really cuts into profits and decreases the actual return on investment!

    Also i have almost payed off my house, would it be a good idea to aggressively pay off the principle on a rental house?

    • Everett October 19, 2014, 6:39 pm

      For the most part you only pay taxes on the NET income, after insurance, taxes, management, and depreciation. Depreciation can actually make it appear as though you are losing money on a positive cash flow property. Useful for your high income years, but then the government gets it back if you ever sell.
      – Everett

  • Slow & Steady November 12, 2014, 12:49 pm

    MMM, I really enjoyed reading your blog and all the great comments. Over the last 16 years my wife and I have been slowly acquiring and building up our rental portfolio. We are both 45 years old and the long term goal is to have these investments paid off by the time we are 60. I just wanted to comment that our rentals require time from both my wife and myself but it is very rewarding. My wife and I also handle different portions of the business. For us working together as a team helps us accomplish managing 8 single family rentals. When everything is rented it is on auto pilot. When there is a service call or someone moves out then we know it’s time to roll up our sleeves and get to work. If you decide to manage your rentals be prepared to work during evenings and weekends on occasion. Management companies provide a convenient service but you will pay for that time. We have decided to save our profits and trade our time to manage them ourselves.

  • Beth November 17, 2014, 1:07 pm

    Any thoughts on Airbnb?

  • Adam December 28, 2014, 11:08 am

    Hi Mr MM
    I hope you still answer here, 3 years after you posted.
    In an extreme situation of low cap rate would you recommend of renting a place instead of buying (for living not investing yet)?
    My specific example is that-where my parents live a house of 120-160 sq meters on 500 sq meter of land would cost 500k-650k (converted from N.I.S). To rent the same place would be 750$-1150$ (again converted from N.I.S).
    So if I understood correctly from your page the best case scenario is a cap rate of less than 3% and as low as 1.8%
    It is considered a low price, to buy or to rent, in Israel for such property. Plus as a mustachien wanna be it would be a walking distance from my work (my dad’s winery).

    • Mr. Money Mustache December 29, 2014, 10:54 am

      Hi Adam,

      WOW! Yeah, with those numbers I would gladly rent for a lifetime instead of buying. Even if rent were 300% that amount it would be preferable to rent. I am amazed that anyone would offer such expensive properties for such low rent.

      • Bruno Avilla February 3, 2015, 11:36 am

        I am facing the same problem as Adam, altough it´s not the cap itself that makes impossible to have a positive cash flow.
        Cap is close to 5%, but taxes on mortgages are close to 11% per year.
        If I bought a USD 200k property im my neighbourhood with 40k I would end up with a monthly 1500 mortgage in an house I can rent only for 1000 dolars.
        Its just not worth it…
        I searched for houses all around the city and even in cities close to mine, but is the same.
        We had a huge boom over the past 5 years, wich boosted 300% the prices. So, no landlording for me here.
        Its a shame, because I like the idea of renting houses and studied about tricks to spend less on maitainence and other stuffs for the house, laws of the field and all kinds of stuff about it.
        Buth the math is king. Can´t do it right now.

  • Steve December 28, 2014, 11:10 am

    Wow – lots of great, real life info from members which is so appreciated. Thank you. I have a situation that has been perplexing me for 3 months now. I inherited a paid for tract home (3+2) right next door to mine. It’s worth 375k & is in A-1 condition. I owe 175k on mine @ 3.5% and have 18 yrs left on loan. I’m wrestling over whether to simply sell the inherited house & pay off mine and invest remaining $ in some sort of mutual fund or keep it and rent it out. Rental income would be $1,900/ month. I’m 46, married with a household income of 80k & absolutely no debt aside from my mortgage. I truly want to make the decision that is financially beneficial in the long run, not one that is simply easiest. I sincerely thank you in advance for any thoughts, advice or suggestions.

  • Ben March 10, 2015, 2:28 pm

    MMM, what is your thoughts on owning investment/rental property away from where you live (say 10 hour drive or 1.5 hour flight)?

    I am in Vancouver, B.C. and prices are insane. $200,000 will barely get you a studio/bachelor unit with a parking stall if you are lucky. Tack on a property transfer tax per purchase of 1% on the first $200K and 2% on the balance and things start to add up.

    However, there are areas in our Province that have much lower prices; for example Prince George B.C. up north you can get a nice single family home in a college town (great idea for supply of renters I hear) for around $250K; renting the full house for around $1,400/mo or split it into suites up and down.

    To do this, it would be difficult to manage personally, so therefore hiring someone to manage the property locally is an option; they would do monthly checks on the property, collect rent, deal with any issues that will arise (there are always issues)… but that eats into the income.


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