By Nick Bartlett, Realtor and owner of Freedom Rental Property Management in Maple Grove, Minnesota.
I’m a property manager, Realtor and rental owner, not a financial advisor or CPA. The numbers in this guide are examples to help you run your own; your lender, CPA and actual rent comps decide your real return.
Short answer: Is rental property a good investment? For a detached 2 to 3 bedroom starter home in the Twin Cities, yes, as long as the rent covers the mortgage, taxes, insurance and upkeep with room to spare. These homes draw the largest pool of renters, post lower vacancy than large apartment buildings, and pay you four ways: cash flow, appreciation, mortgage paydown and depreciation. A mortgage under 4% makes the case even stronger.
Key takeaways
- A rental property pays its owner four ways: monthly cash flow, appreciation, mortgage principal reduction and tax savings from depreciation.
- Single-unit rental homes had a lower national vacancy rate than buildings with 10 or more units in every year from 2014 through 2025, according to the U.S. Census Bureau.
- Builders completed about 65,000 entry-level homes in 2020, down from an average of 418,000 a year in the late 1970s, according to Freddie Mac, so starter homes stay in short supply.
- With mortgage rates well above the 3% range of 2020 and 2021, a home financed below 4% is an asset that is hard to replace.
- Single-family tenants in Minnesota leases can be required to mow and shovel, a cost multifamily owners pay themselves.
- Luxury homes priced above the local rent range sit vacant longer; rentals at $4,000 a month and up post the highest vacancy of any rent range above $1,000.
Is rental property a good investment in Minnesota?
Rental property is a good investment in Minnesota when the home fits what most renters need, the rent covers every expense, and you plan to hold it long enough for appreciation and mortgage paydown to add up. The question I hear most is narrower than that, though. It comes from an owner who bought a new house, moved for a job or listed their home and didn’t get the price they wanted, and now asks: is my house a good rental?
That’s a different decision than buying an investment property from scratch. You already own the home, you may have a low interest rate on it, and you know every quirk of the furnace. If you’re still weighing a sale, read Should I Sell or Rent My House? and My House Won’t Sell. Should I Rent It? alongside this guide.
What are the four ways rental property pays you?
Rental property pays an owner in four ways, and most owners only count the first one. Here’s each one in plain terms.
1. Cash flow
Cash flow is the rent left over after the mortgage, property tax, insurance, repairs, vacancy and management are paid. It’s the money that lands in your account each month.
2. Appreciation
Appreciation is the increase in the home’s value over time. It’s the slow piece: Twin Cities prices can go flat for a year or two, and rental owners who hold for 10 years or more are the ones who collect it.
3. Mortgage principal reduction
Mortgage principal reduction is the part of each payment that pays down the loan. Your tenant’s rent covers that payment, so every month the tenant is building equity for you.
4. Tax shelter from depreciation
Depreciation is a yearly tax deduction for the wear on the building, spread over 27.5 years under IRS Publication 527. It shelters most or all of the rent from income tax even while the home is gaining value. I explain how depreciation and recapture work for a converted home in Turning Your Minnesota Home Into a Rental: The Tax Questions Nobody Warns You About.
Why is a single-family starter home a good rental investment?
A detached 2 to 3 bedroom single-family starter home is a good rental investment because it sits in the price range with the biggest pool of renters: households who want a yard and a garage but can’t afford to buy one yet. A bigger tenant pool means shorter vacancies and more applicants to choose from.
Who rents single-family homes?
Renters skew younger than owners. Zillow’s Consumer Housing Trends Report found that 26% of renters are Gen Z and 33% are Millennials, and that 28% of renters live in a single-family detached house. Among recent renters, Gen Z and Millennials make up 76%. Those are the households starting families, adding a dog and outgrowing an apartment, which is exactly who applies for a 3 bedroom house in Maple Grove or Brooklyn Park.
Why is renting more attractive than buying right now?
The math favors renting, which keeps demand strong. Since mortgage rates climbed out of the 3% range of 2020 and 2021, the monthly cost of buying a starter home has run ahead of the rent on one. Realtor.com’s rent-versus-buy analysis found renting a starter home cheaper than buying one in all 50 of the largest U.S. metros, as Scotsman Guide reported. The longer homeownership stays out of reach, the longer good tenants stay in rentals.
That demand reaches past starter homes. Freedom has leased 4, 5 and even 6 bedroom homes without much trouble, because families who would otherwise buy that house are renting it instead.
Single-family rentals sit vacant less
In the U.S. Census Bureau’s Housing Vacancy Survey, single-unit rentals posted a lower national vacancy rate than buildings with 10 or more units in every year from 2014 through 2025, by 0.6 to 3.9 percentage points. Census doesn’t break vacancy out by building type for individual metros, but the Twin Cities runs tighter than the country: the metro’s rental vacancy rate across all rental types ranged from 3.8% to 8.1% from 2015 through 2025 and sat below the national rate in 9 of those 11 years.
Lower vacancy means fewer months without rent. Each month a $2,400 rental sits empty costs the owner $2,400 plus utilities, so a home that rents in two weeks instead of six is worth real money every turnover.
Why aren’t starter homes being built?
Builders stopped making them. Freddie Mac’s research on housing supply defines entry-level homes as 1,400 square feet or less and found they made up 34% of new homes in the late 1970s, about 418,000 a year, but only 7% in 2019 and about 65,000 homes in 2020. Around the Twin Cities, the new construction we see is townhomes, large apartment buildings and 4 to 6 bedroom houses. The existing 1990s rambler or split-level is the starter home, and there won’t be many more of them.
Single-family home vs multifamily: which is the better rental investment?
Multifamily buildings produce more rent per building, but a detached single-family home wins on vacancy, upkeep, Minnesota property tax and resale. This comparison shows how they stack up for a Minnesota owner.
| Factor | Detached single-family home | Duplex, triplex or apartment building |
|---|---|---|
| National rental vacancy rate | Lower every year from 2014 through 2025 | Higher; 10+ unit buildings ran 0.6 to 3.9 points above single-unit homes |
| Lawn mowing and snow removal | Tenant’s job, written into the lease | Owner hires it out, more than $2,000 a year in my experience |
| Minnesota property tax class rate | 1% on the first $500,000, 1.25% above | 1.25% on the full value |
| Who buys it when you sell | Homebuyers and investors | Investors, who price it on income |
| Effect of one vacancy | All rent stops until it’s leased | Other units keep paying |
| Rent per building | One household’s rent | Several households’ rent |
Lawn, snow and property tax favor the single-family home
In a detached single-family home, we write lawn mowing and snow removal into the lease as the tenant’s responsibility, and the rent reflects it. In a duplex or fourplex, the owner hires those services, and in my experience that runs more than $2,000 a year once you add a Minnesota winter of plowing and shoveling.
Property tax tilts the same way. Under Minnesota Statutes section 273.13, a single-unit non-homestead rental is taxed at a 1% class rate on its first $500,000 of market value, the same as a homestead. A duplex or triplex is class 4b(1) at 1.25%, and apartments with four or more units are class 4a at 1.25%.
Tenant stability favors houses too. Invitation Homes, the largest single-family rental company in the country, describes its residents in its annual report to the SEC as less transitory than a typical apartment resident. Fewer move-outs mean fewer turnover costs and fewer empty months.
Multifamily still has a place. If you want more rent per building and can handle one tenant’s vacancy without the whole mortgage coming out of your pocket, a duplex or fourplex can work well. For an owner deciding what to do with the home they lived in, the single-family house is the simpler and lower-maintenance investment.
How do you analyze a rental property? A Minnesota example
To analyze a rental property, start with market rent, subtract every operating expense, subtract the mortgage payment, then add back the three returns that don’t show up in your bank account: principal paydown, appreciation and depreciation. Here’s an example for a 3 bedroom starter home in the northwest suburbs in its fifth year as a rental. These are example figures, not a quote for your home.
| Example item | Monthly | Yearly |
|---|---|---|
| Rent | $2,400 | $28,800 |
| Property tax | $350 | $4,200 |
| Landlord insurance | $110 | $1,320 |
| Repairs and maintenance (8% of rent) | $192 | $2,304 |
| Vacancy (4% of rent, about two weeks a year) | $96 | $1,152 |
| Property management | $125 | $1,500 |
| Lease renewal and annual inspection | $33 | $400 |
| Mortgage principal and interest ($260,000 loan at 3.25%) | $1,132 | $13,578 |
| Cash flow | $362 | $4,346 |
What the example rental earns in year five
The example home earns more than its cash flow suggests. In year five of a $260,000 loan at 3.25%, the tenant’s rent pays down about $5,927 of principal. If the $350,000 home appreciates 3% in a year, that adds $10,500 of value. Add the $4,346 of cash flow and the example rental returns about $20,773 for the year.
Depreciation then shelters the income. If $280,000 of the home’s value is the building, depreciation is about $10,182 a year. After deducting expenses, about $7,651 of mortgage interest and that depreciation, the example’s taxable rental income is about $91.
Why rental cash flow grows every year
A rental performs its worst in the first year. Year one carries the one-time leasing fee and setup cost, and the rent starts lower. After that, rent rises with the market while the fixed-rate mortgage payment never changes, so more of every rent check stays with you.
In the example, rent starts at $2,132 and rises 3% a year to $2,400 in year five, with taxes and insurance rising 3% a year too. Annual cash flow climbs from $1,344 in year one to $4,346 in year five. Counting principal paydown and 3% appreciation, the cumulative total return reaches about $92,660 by the end of year five.
| Example year | Monthly rent | Annual cash flow | Cumulative total return |
|---|---|---|---|
| Year 1 | $2,132 | $1,344 | $15,878 |
| Year 2 | $2,196 | $2,663 | $33,528 |
| Year 3 | $2,262 | $3,208 | $52,187 |
| Year 4 | $2,330 | $3,768 | $71,888 |
| Year 5 | $2,400 | $4,346 | $92,660 |
Why a low-rate mortgage is an asset
If you have a fixed-rate mortgage under 4%, treat it as one of the best parts of the investment. In the example, the 3.25% loan costs $1,132 a month. If someone bought the same house with 20% down and a $280,000 loan at a 7% rate, the payment would be $1,863, and the rental would lose about $369 a month instead of making $362.
The share of outstanding U.S. mortgages below 4% peaked at 65.1% in early 2022 and has been shrinking since as those loans are paid off, based on FHFA data summarized by Calculated Risk. Once you sell, that rate is gone for good.
Run your own numbers with real rent comps, your actual tax bill and a landlord insurance quote. Our management fee is in the example as $125 a month; How Much Do Property Managers Charge? explains what drives fees across the Twin Cities.
What makes a home a weak rental investment?
A home is a weak rental investment when its rent can’t carry its costs or when it appeals to only a sliver of renters. These are the warning signs I look for.
The home is too expensive for the area
A luxury home that would rent well above the neighborhood range has a small pool of renters, because households who can pay that much rent can afford to buy. Census vacancy data shows rentals at $4,000 a month and up sitting empty more than any other rent range above $1,000.
The rent doesn’t cover the expenses
If the rent barely covers the mortgage, taxes and insurance before any repairs, the home depends on appreciation to make money. That can work for a short hold while you wait for a better time to sell, but it isn’t a long-term investment. High HOA dues and a jump in the property tax bill are the two costs that sink the most otherwise good rentals.
The home needs big-ticket work soon
An original roof, a 20-year-old furnace and air conditioner, and failing windows can eat several years of cash flow. The opposite is also true: if you’ve put in a new furnace and AC, roof, windows or driveway in the last few years, you won’t recover much of that money in a sale, but it pays you back as a rental through years of low repair bills. Small low-maintenance upgrades like gutter guards help too, because a home that’s easy to live in is easier to keep rented.
The HOA restricts rentals
Many townhome and condo associations cap the number of rental units or require a minimum lease term. Read your association documents before you plan on renting a townhome.
Which local factors affect a Minnesota rental's future?
Jobs, migration, and city taxes and rules shape what a rental earns over the next 10 years. A rental near growing employers gains renters; a rental in an area losing people faces softer rents.
The Minnesota State Demographer publishes population and migration estimates that show which way the state and each county are moving. Closer to home, watch for large employers opening or closing near the property, new apartment construction nearby and changes to the city’s rental licensing rules. Each city in our service area has its own licensing, inspection and fee rules, and we cover them on pages like Maple Grove, Brooklyn Park and Otsego.
How you hold the property matters too. Our guide on holding rentals in one LLC or one per house covers ownership structure, and When to Sell an Investment Property covers the exit.
Frequently asked questions
Is a single-family home a good rental investment in Minnesota?
A detached 2 to 3 bedroom starter home in the Twin Cities is a strong rental investment when the rent covers the mortgage and expenses with room to spare. Census data shows single-unit rentals with a lower national vacancy rate than buildings with 10 or more units in every year from 2014 through 2025, and starter homes are rarely built anymore, which keeps demand high.
Is single-family or multifamily a better rental investment?
Multifamily produces more income per building, but a detached single-family home has lower vacancy, a larger resale buyer pool and tenants who handle their own lawn and snow. In Minnesota, a single-unit rental also pays a 1% property tax class rate on the first $500,000 of value, while a duplex or triplex pays 1.25%.
Should I keep my low-rate mortgage and rent out my house?
A mortgage below 4% is one of the best reasons to keep a home as a rental. In our example, the same house cash flows about $362 a month at a 3.25% rate and loses about $369 a month at a 7% rate. Check with your lender that your loan allows renting the home after you move out.
What are the four ways rental property makes money?
Rental property pays an owner through cash flow, appreciation, mortgage principal reduction and tax savings from depreciation. Most owners only count cash flow, but in our Minnesota example the other three add up to more than three times the cash flow.
How do I know if my house will rent quickly?
Homes priced in the middle of the local rent range rent fastest, because that is where most renters can afford to be. Census vacancy data shows rentals at $4,000 a month and up sitting empty more than any other rent range above $1,000.
Find out if your Minnesota home is a good rental
Freedom Rental Property Management manages rental homes across the Twin Cities, and most of the owners who call us started with the home they used to live in. We’ll tell you what your home would rent for, what it would cost to run and whether the numbers work, before you decide to sell or rent.
Request a free rental analysis or contact us to talk through your home.
