Jamie and I were just out in Colorado doing some hiking. We were staying in a small town, sitting at the only bar that seemed to be open on a Monday, and happened to strike up a conversation with another couple doing the same. They were in the middle of a road trip, coming from Tennessee, driving around the U.S. in their Sprinter van with their two golden retrievers. We exchanged pleasantries and the conversation drifted toward the fact they had just started their “soft-retirement”.
Apparently, Mike and Abby had accumulated a handful of rental properties. They had the cashflow to stop working and let their rental income cover their living expenses. Sounded nice, but it did come with some headaches. Mike was on and off his phone during much of our conversation, dealing with a new tenant trying to access one of their properties. And Abby mentioned not all their properties had been profitable. There were some learning opportunities along the way.
While I haven’t ventured into rental property ownership in my own financial planning, I do see why it’s appealing to some. The potential for tax savings that aren’t available to a W-2 earner such as myself, the opportunity for large property appreciation if you find yourself in the right location at the right time, and the allure of using a property in a desirable destination as a future primary residence or vacation home once it’s all paid off.
That last one is particularly exciting for Jamie and me. Just about every time we travel somewhere, we talk about what it would be like to buy and live there on a more permanent basis. Something about imagining it adds a new dimension to each trip. Grabbing a bagel and a coffee at a local shop brings up questions like: how long would it take before the person working the register recognized me, and would we be on a first-name basis?
Living in the DC area for the last couple of decades, I do find myself longing for that local feel and connection that often seems easier in a smaller community. But owning a rental there wouldn’t guarantee any of it. Some owners never visit their properties except when a tenant has an issue or repairs are needed. And in plenty of destination towns, there’s often angst between locals and the owners of short-term rentals. The welcome I keep imagining won’t just happen because I buy a place.
That’s when I noticed something about the daydream. It has nothing to do with the investment. When I picture the bagel shop, nothing in that picture involves occupancy rates or repair budgets. I’m pricing a lifestyle. The rental property fantasy bundles two very different purchases together: an investment that needs to earn its keep, and a story about who I might become. It’s easy to pay for the story while telling yourself you bought an investment.
Not every rental investor does this. Some buy commercial buildings or homes in markets they'll never live in, chosen because the numbers work and for no other reason. For them, the property is a business from day one. What follows is for the rest of us, the ones who catch ourselves pricing a lifestyle while telling ourselves we’re pricing an asset.
Strip the story away and look at what’s left. A rental property is a small business with a big, illiquid price tag. Rental income looks passive on a spreadsheet, but Mike’s phone kept lighting up at the bar. He and Abby stepped away from their careers and into a part-time job with no boss, no PTO, and the occasional tenant lockout on a Monday night. Some people genuinely want that job, and there’s nothing wrong with that. Abby’s comment about unprofitable properties fits the same picture. Small businesses sometimes lose money, especially while the owners are still learning the trade.
Once the investment case had to stand on its own, it didn’t win for me. It came down to three things.
1. What you’d need to know. Buying a rental means understanding a specific local market. What properties rent for, how many days a year they’re occupied, how quickly they sell, and whether future development or environmental issues could keep the property from appreciating or renting as anticipated. A broad-based index fund asks none of that of me. I just need the overall market to keep doing what it has historically done over long stretches of time.
2. Access to the money. A rental keeps a good bit of cash locked up for weeks, months, or even years before it can be turned back into dollars I can spend. It also demands cash reserves for extended vacancies, major repairs, or improvements. The money I invest in index funds mostly stays reachable if I need it. Try that with a down payment.
3. Taxes. Real estate has a powerful toolbox: depreciation deductions, deductible expenses, and 1031 exchanges that can defer gains when the rules are satisfied. Index funds offer a different kind of tax efficiency: low turnover, preferential tax rates, and the ability to hold them inside tax-advantaged accounts like 401(k)s and IRAs. It’s a question of which rulebook you’d rather learn, and I’ve already spent a good bit of effort on the latter.
In fairness, there’s one place where the rental math can genuinely pull ahead: leverage. Put twenty percent down and you collect appreciation and rent on the property’s full value. That’s one of the real engines behind most rental wealth stories, and it’s the honest answer to why some investors do far better with property than they ever would in an index fund. Of course, leverage runs both ways. A leveraged property that sits vacant or drops in value loses money faster than an unleveraged one ever could.
So I continue down what I consider the simpler path, while admitting the stock market can be made to look a lot more complex than buying and holding an index fund for the long run. I expect to keep revisiting this decision anyway. I have a bit of an obsessive personality and often beat a topic to death long after Jamie has tuned me out. Future me may feel differently than current me, and there’s nothing wrong with keeping myself honest about the why behind decisions this size.
Go back to that bagel shop. Index fund money can buy me the coffee there someday, with no tenant calling in the middle of it. What it can’t buy is the thing I actually wanted, which was to be a local. To be recognized and have the person at the register ask what we’re up to that morning and actually care about the answer. A visitor rarely gets that no matter how the trip was funded.
And here’s the harder truth: neither does the owner.
I could buy the property and still be an out-of-towner with a key. Even if we moved there for good, we’d be new locals, not people with a real history in the place. That feeling I was longing for was never for sale. It only comes from years of actually being somewhere, and no down payment shortcuts the years.
So strip away the life I’m imagining. Is what’s left something money can actually deliver, or have I been pricing a feeling that no asset was ever going to hand me?