I hardly ever talk about this because, frankly, I’m still embarrassed by it. In my early 20s, while I was still in college, I bought a condo thinking it would be smart to rent it out. Boulder was a great market. What could go wrong?

A lot as it turns out.

My expectations were out of whack with the reality of owning and managing a rental. Expenses I never anticipated. Tenants who were twice my age and seemed responsible simply stopped paying the rent. (One was an accountant!) Being a landlord required more time and attention than I expected. Things just got away from me fast.

And it happened in a housing market where I should have made a nice profit, yet I didn’t make a dime.

Great lesson. And I guess I’m glad I learned it first hand. Fast-forward to today and I see people making some of the same assumptions I did back then. Now I want to help them avoid it.

Imagine you buy a rental property to earn some passive income and enjoy the long-term asset appreciation. And say you find a great tenant who pays you $2,500 a month. It’s really easy to look at that rent check and think: Wonderful, I now have a dependable $30,000 a year coming in.

Then the tenant moves out and it takes six weeks to find another one. Meantime, an appliance needs replacing. Your insurance premium rises, property taxes go up, you realize you need more landscaping, and suddenly a big chunk of that $30,000 income has evaporated.

The rent is easy to see. What you actually keep after paying those expenses tells you whether you really have a good investment.

And this year, you have less room for math mistakes. Rental property investors bought 6% fewer homes in the first quarter than a year earlier, according to Redfin, putting purchases at their lowest level since 2020. Financing is still stubbornly expensive, too: the average 30-year fixed mortgage rate was 6.65% as of August 20.

You can absolutely build wealth owning rental property. I might have had a very different ending to my own story if I’d gone in knowing then what I know now.

So what should you know? I asked Dave Rowan, CFP®, MBA, a fee-only advisor in my Wealthramp network who works with clients considering real estate investments, to walk me through it.

Start With What You Want the Property to Do

There are several ways to profit. But long-term rentals are different from short-term rentals, which are different from a house flip. These are very different businesses. Before you start looking at properties, Dave says, get clear about what you’re trying to accomplish.

Do you want to generate income now?
Are you mostly interested in appreciation over the next 10 or 15 years?
Are tax benefits part of the attraction?
Do you want one property or eventually a larger portfolio of properties?

Dave recommends developing a “buy box” before you start shopping: the type of property you want, the numbers that have to work, how much you can spend on improvements and the locations you’ll consider.

Otherwise, it’s too easy to find a house you love and start bending the numbers to justify buying it. Been there.

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What Has to Go Right to Make Money?

A rental can make you money through rent, appreciation, tax benefits and the equity you build as the mortgage gets paid down. The important part is knowing which of those you’re counting on.

A property with even modest cash flow in a growing market might make sense if you’re investing for appreciation over 15 years. It could be a terrible choice if you need reliable income today.

Run several scenarios before you buy. What if rents stay flat? What if appreciation is slower than you expected? What if you have to sell sooner? And keep cash in reserve. If the AC quits in July, your tenant doesn’t care whether it’s a convenient month for you financially.

A property manager can help, but you’re still the owner.

“Hiring a great property manager can take a lot off your plate as a landlord,” Dave says. “However, you’ll still need to keep good books, make calls on repairs and improvements, and deal with added complexity on your tax return.”

The Myth About Rental Property Tax Breaks

Rental property often gets pitched as a two-for-one: make money on the property and get valuable tax breaks. But how much are those benefits actually worth to you?

Depreciation can be valuable, but taxes get complicated quickly. Rental real estate is generally treated as a passive activity for federal tax purposes, and rules can limit whether rental losses can offset other income. Your income, level of participation and individual tax situation all matter.

That’s why I wouldn’t buy a mediocre property because somebody told you the “tax write-offs are amazing.” Start with whether the property itself is a sound investment, then have a CPA explain what the tax benefits actually mean for you.

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Put the Property to the Test

“Real estate can be extremely rewarding in terms of cash flow, property appreciation, potential tax benefits and doing something entrepreneurial,” Dave told me. “However, investing in real estate well requires significant time and effort. It is definitely not a passive activity.”

And the math absolutely can work. Cleveland is one example of a market where relatively affordable home prices paired with solid rents can produce attractive gross rental yields. But gross yield is the headline number. What you keep after taxes, insurance, vacancies and upkeep is what counts.

Dave has seen people buy their first property and sell within a few years because they underestimated what they were taking on. He tells first-time investors to expect to look at a lot of properties, possibly in several locations, before making an offer.

When you find one you like, stress-test it. Assume everything doesn’t go exactly according to plan and run the numbers again.

That’s the part I skipped in Boulder all those years ago. I bought with expectations instead of enough experience. It was a great lesson, and I never forgot it.

Rental real estate can be a terrific way to build wealth when you buy the right property for the right reasons. Just do the math first.

P.S. Check out the latest episode in my “Decoding Financial Advisors” series, now on YouTube!

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