What Are the Advantages and Drawbacks of Owning a Rental Property?

A rental property can pay you four ways: monthly cash flow, mortgage principal your tenant's rent pays down, appreciation, and tax deductions that include depreciating the building over 27.5 years. The drawbacks are vacant months, repair bills, liability for injuries, being on call, and money you cannot pull out quickly without paying selling costs. A rental fits your finances when it covers its costs at today's rent and loan rate with a cushion, and when you can hold it for years without needing to sell in a down market.

What are the advantages of owning a rental?

Rent income. Rent arrives monthly, but operating costs come out first. In the 2021 Rental Housing Finance Survey from HUD and the Census Bureau, the median rental unit took in $1,000 a month in rent, and the median operating expense was $380 a month per unit before any mortgage payment.

Mortgage paydown. Each loan payment includes principal. When rent covers the payment, the tenant is paying down your loan, and that equity is yours when you sell or refinance.

Appreciation. If the property's value rises, you keep the gain. It is not guaranteed, and the drawbacks section below shows how far prices have fallen in a past downturn.

Deductions. IRS Publication 527 lets you deduct mortgage interest, property tax, insurance, repairs, management fees, advertising, and travel for the rental against rent on Schedule E. You also deduct depreciation on the building (not the land) over 27.5 years. Depreciation costs you no cash in the year you claim it, so a rental can show a tax loss while it puts cash in your account.

A worked monthly cash-flow example

Assume a $300,000 single-family rental with $75,000 down (25%) and a $225,000, 30-year fixed loan at 6.75%. The land is worth $60,000, so the building is $240,000. These are example numbers; plug in your own quotes and local rent.

The math: $2,400 - $120 = $2,280 of expected rent. Subtract $1,459 + $300 + $150 + $192 + $150 = $2,251, which leaves $29 a month, or $348 a year.

The other returns in the first calendar year, assuming the property is first ready and available for rent on January 1:

• Principal paydown: about $2,398 of the year's $17,512 in loan payments goes to principal, so the balance drops to about $222,602.
• Depreciation: $240,000 / 27.5 × 11.5 / 12 = about $8,364 under the IRS mid-month convention, which counts January as half a month.
• Taxable result: $27,360 of rent, minus $15,114 of interest, $3,600 of tax, $1,800 of insurance, $2,304 of repairs, and $8,364 of depreciation, is a loss of about $3,822. The replacement reserve is not deductible until you spend it, and a new roof or furnace is depreciated rather than deducted.
• Appreciation: each 1% change in value is $3,000, or 4% of the $75,000 down payment.

Cash flow plus principal paydown is $2,746, or 3.7% of the down payment, before appreciation or tax savings. Small changes in the inputs move the result. A rent $100 higher adds $87 a month after the vacancy and repair allowances, and a rate of 5.75% instead of 6.75% cuts the payment to about $1,313, adding $146 a month. If the unit sits empty 7.3% of the year instead of 5%, the $29 becomes a loss of about $26 a month.

What are the drawbacks?

Vacancy. The Census Bureau put the national rental vacancy rate at 7.3% for the second quarter of 2026. While a unit is empty, the mortgage, tax, and insurance bills continue. Publication 527 generally allows deductions for mortgage interest, property tax, and insurance while the unit is held for rent, but not mortgage principal or the rent you failed to collect.

Repairs and replacements. Routine repairs are deductible in the year you pay them. A roof, furnace, or water heater replacement is an improvement under Publication 527: you pay the full cost now and recover it through depreciation over years, so the cash has to come from savings.

Liability. If a tenant or guest is injured because of a condition you were responsible for, you can be sued. A landlord or rental dwelling policy can cover liability, damage to the structure, and lost rent while covered damage prevents renting. Lost-rent coverage and its duration depend on the policy you buy. The Insurance Information Institute says landlord policies cost about 25% more than a standard homeowners policy.

Illiquidity and selling costs. You cannot sell part of a house to raise cash. To get your equity out, you sell the whole property or borrow against it. Agent commissions, transfer taxes, and closing costs come out of the price. In the example above, selling costs of 6% would be $18,000, almost a quarter of the down payment. On a sale, the IRS taxes the gain from depreciation you claimed or were allowed to claim (unrecaptured section 1250 gain) at up to 25%, and the rest of the gain at long-term capital gain rates if you held the property more than one year.

Market cycles. Prices fall as well as rise. The Federal Housing Finance Agency reported that its national house price index in March 2011 was 19.8% below its April 2007 peak. On the example house, a 19.8% drop is $59,400, leaving a value of $240,600. Selling costs at 6% of that value are $14,436, bringing the combined price decline and selling costs to $73,836, nearly all of the $75,000 down payment.

On-call time. Repairs, showings, and tenant calls do not follow your schedule. Being a part-time landlord covers how owners with full-time jobs handle emergencies and showings.

Loss limits. A tax loss from a rental is passive. Publication 527 lets you use up to $25,000 of it against wages if you actively participate, but the allowance phases out between $100,000 and $150,000 of modified adjusted gross income. Above that range, the loss carries forward until you have passive income or sell. For the depreciation rules in detail, see how long the depreciation period lasts.

Are you financially ready to own a rental?

Work through these before you make an offer:

1. Reserves after closing. On a Fannie Mae loan for an investment property, you must show 6 months of the full monthly payment in reserves after closing. Add your own fund for replacements and vacant months. The guide to how much cash to keep in reserve shows how to size it.
2. Positive cash flow at conservative numbers. Run the table above with actual rent comparables, a tax bill from the county, an insurance quote, and the lender's rate. If cash flow is negative, you are paying monthly in exchange for paydown and possible appreciation.
3. A long holding period. Selling costs and a possible price drop mean a short hold can lose money even when the property cash flows. Plan to hold long enough that paydown and appreciation exceed the cost of selling.
4. Tax fit. Check whether your income lets you use a rental loss now or carries it forward, and which rental expenses you can deduct.
5. Time and temperament. Screening, repairs, and enforcing the lease take regular hours and firm follow-through. The qualities a landlord needs page is a self-check.

For the full list of jobs that come with owning a rental, see the basics of operating a household rental business.