Our perceptions can be deceiving.
"There is a lot of idiosyncratic risk associated with rental income," said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School.
"That is the word that economists use for when a lot of things can go wrong, even if on average they don't go wrong very often," he said.
And if you're thinking about retirement, the income can serve as an inflation-adjusted annuity of sorts, since rents are likely to rise over time.
Should you decide to invest in a rental home, there are a variety of calculations you should make, and concerns and questions you should have ahead of time, several of which are sketched out below.
DO I NEED FINANCING?
Taking out a mortgage obviously increases your financial risk, even if you believe there is a healthy spread between what you can charge in rent and what you owe on the mortgage (and other expenses). In fact, what you're really doing is borrowing to expand the size of your investment portfolio, explained Mayer, which can be particularly risky for retirees who are no longer working.
"They can turn their $500,000 portfolio into $600,000 by borrowing, but if you told them you were going to borrow money to buy a REIT (real estate investment trust), people would say, 'Gee, that's really risky,' " he said. "Well, then why is it less risky to do that with a rental property?"
CAN I GET A MORTGAGE?
Not only is getting a mortgage on an investment property more difficult than getting a loan on your primary home, it also tends to be more expensive. Mortgages on investment properties tend to carry slightly higher interest rates - anywhere from 0.25 of a percentage point to a full percentage point - and may require higher down payments, according to Keith Gumbinger of HSH.com, a mortgage data firm.
"Things can also get more complicated where the income from the property is needed to support the loan," he added. "The purchaser may need to provide a rental history for the property, if any exists, or they may need to have a rental market analysis conducted."
AM I DIVERSIFIED ENOUGH?
If you have a $600,000 portfolio, putting $300,000 into one asset is a highly concentrated bet. "People tend to mentally compartmentalize their investments, but really, you should be looking at them together," Mayer added.
It may also be hard to tap any equity locked up in the property. Refinancing that involves taking cash out is hard to obtain, and home equity loans or lines of credit are hard to come by on investment properties, Gumbinger said.
VACANCY AND DISASTER PLANS
There are the traditional risks that come with being a landlord, like a prolonged vacancy, the possibility that the water heater will die right after you've installed a new roof, or that the tenants will lose their jobs or fail to pay for some other reason, which could lead to eviction.
But experts say not to ignore even more remote risks. For example, if your property was in an area ravaged by Hurricane Sandy, could you financially withstand several months of no rental income and the cost of repairs that might not be covered by homeowner's insurance? And how much insurance is enough and at what cost?
"You need to have a sizable reserve fund set aside to pay for expenses, whether it's to cover the mortgage for a stretch when the property is sitting vacant or to make repairs, which novice landlords tend to underestimate," said Kenneth J. Eaton, a financial planner in Overland Park, Kan.
CAN I MANAGE IT MYSELF?
Buying a rental property isn't solely a financial decision. You must screen tenants, run credit checks and get the water heater repaired at a moment's notice. That means you need to establish relationships with a variety of service people, or, if you have the time and ability, to do it yourself. So be honest about how big of a commitment owning a house will really be.
Rental income is taxed at ordinary income rates, but experts say you often can post a tax loss while still generating a profit. That's because you can deduct the depreciation of the rental - but not the underlying land - to account for wear and tear (the cost of improvements, closing costs and the cost of appliances are all depreciable, too).
In most cases, the building is depreciated over 27.5 years. So, if the actual structure is worth $200,000, you can deduct about $7,200 a year. Coupled with operating expenses, that is often enough to wipe out any profit on paper.
You're allowed to write off up to $25,000 of losses against any type of income, as long as you own at least 10 percent of the rental property and have substantial involvement in managing the rental. If you don't own 10 percent, the rules get more complicated, said Russell D. Francis, a certified public account and financial planner in Beaverton, Ore.
But that $25,000 benefit begins to phase out if you have adjusted gross income of $100,000 and it disappears for people with adjusted gross income of $150,000 or more.