There’s no way we can teach you every single facet about the process to buy a rental property within a single blog post. Rather, our goal in writing this is to give you a detailed outline, point you to some great resources, give a few real life examples, and at the very least — load you up with ideas, encouragement and confidence to take the next step in your journey!
Buying your first rental property takes a lot of time and patience. Every investor starts with zero experience — so if you feel like you’re behind, you are not! The good news is, with every book you read, person you talk to, property you evaluate, you’ll slowly gain knowledge and unlock the necessary puzzle pieces to become a successful rental property owner.
OK, let’s get to it!
Why buy a rental property?
You probably know some of this stuff already, but it never hurts to review and remind yourself why you’re tackling such a crazy project in the first place.
1. Secondary income stream
One of the biggest draws to owning a rental property is having a steady stream of investment income. Ideally, rent paid by your tenants will show up every month, increase over time, and is somewhat “passive”.
**Take the term “passive” lightly, because owning a rental property will always require some ongoing effort and work on your part. Yes, you’ll get incoming rent each month… but rentals require nurturing and effort to run efficiently!**
2. Diversification
As you grow more wealth in life it’s smart to spread your investments across different asset classes. Not only does this protect you from having all your eggs in one basket, diversification lets you benefit from all the individual advantages different assets have.
Real estate is a steady, physical, limited resource. While stock and bond markets go up and down in value during economic swings, real estate has much milder volatility. Particularly for rental properties, because even in horrible economies most people still pay their rent!
3. Flexible retirement options
A house has many use cases — you can live in it, rent it out, borrow against it, change its characteristics. And there is always a market for buying and selling.
When you buy a rental property it adds a lot of flexibility to your portfolio. Whether you want a trickle of monthly income, or a big cash injection from refinancing or selling, both are possible.
As for retirement, a friend of mine once said it’s far easier mentally to collect a rent check than it is to sell securities in order to pay for living expenses. It’s mostly just a psychological preference but that matters when you’re retired and trying to live stress free!
4. Potential tax benefits
Owning a rental property comes with certain tax advantages. Like deducting expenses and mortgage interest, and even options to avoid or defer capital gains tax when you sell. But, we’re getting a little bit into the weeds at this point, and the value of tax saving opportunities is hard to quantify because they all depend on the property you buy and your current financial situation.
After you finally buy a rental property, an important step will be to investigate all the tax opportunities available to you. But until then, I suggest not concerning yourself with tax hacks just yet. They are a small side benefit. They shouldn’t be the main reason you’re buying!
On that note, let’s quickly talk about a few other reasons and situations when you should not get into buying rental properties…
Who should *not* buy a rental property
Being a rental property owner is definitely not for everyone. In fact, only about 7% of people in the US own rental properties! Why? They are hard work, and the responsibility shouldn’t be underestimated.
I’m sorry if this burst your bubble, but here are a few reasons you should probably not buy a rental property right now:
- FOMO: if you really want an investment property just because it seems like all your friends are buying them, that’s not a great reason. Rental properties seem more glamorous than they actually are, trust me!
- Unstable financial position: if you’re living paycheck to paycheck currently, you’re probably not in a good position to purchase a large investment. This doesn’t mean that you will never own rental properties!! But you’ve probably got to build wealth in baby steps, that’s why we created the seven money gears.
- Hoping for quick profits: if you’re looking for quick gains or short term wins, buying a rental property isn’t the answer. Landlords don’t think in years, they think in decades!
- If you have no time: The process to buy a rental property, and maintain ownership, is like having a part-time job. Real estate investing can become more passive over time. But it requires a hell of a lot more time/intentionality/sweat equity than socking money into FZROX inside of your Roth IRA.
You don’t have to buy a rental property to be wealthy in life. Plenty of people get rich without real estate! So if it’s not for you, that’s totally OK.
Types of Rental Properties
By far, the most common type of rental property in the US is a single family home. But no matter the property type (whether it be a condo, apartment, or even a duplex) rentals can have all different types of use cases.
The reason this is important for new investors to think about is because each rental type necessitates a different amount of time and effort. Also, your personality type and individual skills come into play depending on the type of landlord you’re gonna be.
For young folks with plenty of spare time and handyman skills, investing in a house hacking project might be a great fit! This is when you move into the property, renovate it a bit, and rent out bedrooms or detached spaces to help pay your living costs.
On the flip side, for folks with limited time who want a “hands off” approach to investing, perhaps a single family long term rental would be your best bet. Finding a turnkey rental (a house with tenants in place already that requires no renovations) with a property manager handling the operations would mean less work on their part.
Long-term rentals
For the purposes of this post, we’ll focus on how to buy a long term rental property. One you’re planning to keep for decades.
There’s a little less risk in buying and holding long-term, because you’re not relying on market timing. Most of the calculations you use to determine profitability are based on actual data and less by making assumptions. Also long-term rentals, when purchased and financed properly, can hold strong through economic downturns. Whereas short term investment attempts could come back to bite you if the market isn’t favorable.
One downside of having a decades-long rental investment is you probably won’t experience astronomical returns. Don’t get me wrong, you won’t be complaining when you’re older! Each property you buy today will be worth a small fortune in 30 years. But, if you have the expectation that you’ll double your money in just a few years, your outlook is probably unrealistic.
Short Term Rentals
Vacation rental platforms have exploded over the last 10 years, like Airbnb and VRBO. Property owners in popular tourist locations can rent to travelers on a short-term basis.
But while short term rentals can be very profitable, they come with a few added risks to consider. First, a quick change in local legislation can screw up your whole business! You may have heard what happened in New York City in late 2023… the city cracked down on short term rentals and essentially now prohibits Airbnb landlords to operate within the city. Chattanooga has slowed things down in a big way, too. Short-term rental regulations can be your best friend one minute and your worst enemy the next.
On top of that, high competition, inconsistent demand, constantly being on call, heavy wear and tear of your property, and being a slave to user reviews are also big downsides to think about with short term rentals.
We’re not saying they’re all bad. If you’ve got the time and knowledge, go for it! It’s just something to consider more carefully because it’s not the most “passive” investment out there!
House hacking
One of the biggest challenges when you buy a rental property is getting approved for a mortgage. Not only do you need to pony up 20% for a down payment, but the terms are a little less favorable with investment loans vs. primary home mortgages.
This is where house hacking comes in and helps solve that problem.
With the house hack, you are essentially purchasing a primary residence, with the plan to move into it and also rent a portion out. It lets you qualify for the best mortgage terms (lower down payments, lower rates) while also get some of your housing costs subsidized by a renter! It’s by no means a permanent solution, but a great way to get started in real estate investing.
Of course, not everyone wants to live with roommates. But, you could purchase a duplex, triplex, or fourplex and this would still qualify as a primary residence. You could live in one of the units and rent out the others. Also, many cities are approving ADU expansions too, which is when you build a separate unit or dwelling on an existing property.
So if you have a small down payment and are thinking about purchasing a primary home soon anyway, read our full post on house hacking. It’s truly one of the best ways to get started in real estate investing.
Multi-family rentals
We mentioned duplex, triplex and fourplexes earlier. Any property with 4 or less separate living spaces is considered a residential property. Once you get to 5+ units things get a little trickier and you’ll need to learn about the commercial world. Lending becomes a little harder, and competition more steep.
If you’re buying your first rental property, we recommend sticking with 4 units or under. It’s not impossible to buy an apartment complex right out the gate. But it’s a tall order that only some are able to accomplish.
Commercial real estate
A good friend of mine specializes in buying strip malls. One of the cool things about commercial properties is that the businesses you rent to are usually responsible for maintenance, modifications, and sometimes even property taxes!
The downsides of commercial properties are that they require mammoth down payments, private bank loans, and specialized knowledge in evaluating business tenants and commercial leases.
Again, for the purposes of this post we’ll focus on buying a single-family long-term rental property.
How to Buy a Rental Property
I moved to the USA when I was 22 years old. I knew nothing about real estate over here, had no connections, and my salary at the time was around $55,000 per year.
My grandpa had always told me rental properties were good investments. So I started learning everything I could, and began saving up to buy one.
Fast forward 11 years later, I was the proud owner of 7 rental properties. I’d love to tell you that every purchase has been easy and yielded killer profits, but the truth is investing in real estate is hard work. Very rewarding, but hard work. I’ve made a ton of mistakes in my journey, gotten lucky many times, and still have a lot more to learn.
Rental properties helped me and my wife become millionaires, and they’re a large component in our plans to retire early.
Anyway, enough about me! The reason I’m giving you some background is because some of the stories and examples in this post I’ll be pulling from personal experience.
Here’s a high level of the steps we’ll be going through…
Step 1: Learn as much as you can
I know it’s tempting, but don’t skip over this step! For every 1 hour of learning you do upfront, it will save you 10 hours of headaches fixing things after they’ve fallen apart. I’m not saying you need to know everything before you buy a rental property. But studying properly is the only way you’ll pass the exam.
The good news is: there are a million amazing resources (most of them free!) available for you to learn anywhere, anytime. Here are some of our favorites below. 👇👇👇
Books to read:
Good ol’ fashion books might be the most boring medium. But, what I love about them is they usually stand the test of time. At least the best ones do. Investing in a rental property isn’t a new phenomenon, people have been doing it for hundreds of years. So pay attention to the old school investing principles you find in books because they are usually just as true today as they were back then.
OK, here’s a list of books I recommend starting out with.
- The Small and Mighty Real Estate Investor, by Chad Carson. We are huge fans of Chad (aka “Coach”) and have interviewed him on the HTM podcast a few times too! He is a long term rental property investor with a very mature and conservative approach.
- The ABC’s of Real Estate Investing, by Ken McElroy. This book is part of the Rich Dad Poor Dad network, and covers the most basic tried and true concepts of successful rental property businesses.
- Investing in Duplexes, Triplexes and Quads, by Larry Loftis. This book personally changed my mind about buying a single family home and instead my first purchase was a duplex. I LOVE small multi-family properties because of the flexibility and added diversification.
- Long Distance Real Estate Investing by David Greene. If you’re interested in buying out of state properties (all my rentals are out of state) this book is a fantastic resource. David is also now one of the new hosts of the BiggerPockets Podcast.
Real Estate Podcasts:
Learning from podcasts is more fun because you get to hear multiple peoples opinions and experiences, not just one author. Also, shows that incorporate guest interviews are super encouraging because you get to hear from regular people who have done what you were trying to do.
- Bigger Pockets is probably the largest and longest running real estate investing podcast. They cover a myriad of property types and investing styles, so not every single episode will appeal to you. But, the broader the topics, the broader your knowledge will get. Regardless of what the episode covers you’ll usually walk away with a few great ideas.
- Real Estate Investing with Coach Carson is another great podcast. Chad has a huge rental portfolio personally, which has survived market ups and downs very well due to his conservative approach. Chad is one of the most humble, honest people we know and can’t recommend his content enough.
Networking & Meet-ups
Real estate investors love to share secrets and mentor each other. So there’s no shortage of local networking groups and opportunities to meet and learn from successful people. Buying someone a coffee and picking their brain for an hour can get you such a cheap and valuable education!
Browse through meetup.com and see if there are any real estate investing groups in your area. While you’re at it, see if there are any financial independence groups that meet regularly, too! These groups typically are made up of a younger crowd. And even if they’re not experts in real estate, they’ll probably have some other helpful money advice to share.
Leverage personal relationships
Another networking avenue not many people pursue is simply asking your network and anyone you talk to whether they have friends who are successful rental property owners.
This strategy paid off big time for me… After I had bought my first rental, I called my property manager every month for a quick “catch up” phone call. At the end of each call, I would simply ask “do you have any older clients who own a handful of rentals and wouldn’t mind chatting with a young dude like me about how to set up a successful rental business?”…
After about five or six times asking her this question she one day surprised me with an introduction to her father-in-law. This guy was in his 70s, had plenty of time on his hands, and loved to share his knowledge and experience buying and managing his large rental portfolio. Over the next few years we became good friends, and he made himself available to me many times for phone calls, questions, etc. (He even ended up selling me four of his rental properties, off market!!)
Anyway, I know it can be a bit awkward putting yourself out there and asking people for connections and introductions. But, I can’t emphasize enough how simply asking for help will get you connected to amazing people you never knew existed.
Beware of gurus and expensive courses
We’re certainly not against paying for education. Sometimes buying training courses can fast track your knowledge.
But, with the overwhelming number of get rich quick schemes and flashy yet shallow content creators out there, we don’t typically recommend spending money on real estate courses. Most of the information you can find elsewhere, for free!
If you do want to enroll in a course that teaches you how to buy a rental property, we encourage you to thoroughly vet the instructors. It’s important that you are learning from the people that your values align with most. Investigate their track record, course reviews (especially the bad ones) and get a feel for their real life experience.
Chad Carson actually offers a free course for beginners who are just getting started. Before sinking any dollars into a paid course, why not start with the free one!?
Step 2: Pick a location and property criteria.
Hopefully by now you’ve got an idea of what type of rental property you want to buy. And chances are you’ve got a few areas of interest. The more specific your search criteria, the more narrow your focus can be.
But if you’re starting from scratch and have no clue, that’s OK too!
Choosing a favorable real estate market
There’s a lot to research that goes into analyzing which cities and suburbs are the best to invest in. Keep in mind, there’s no one-size-fits-all, and each town has its pros and cons.
Don’t get discouraged if you can’t find the “perfect” city that meets every single ideal characteristic. No such place exists (if it did, EVERY person would be buying there). The point of researching this stuff is to know exactly what you’re getting into. You don’t want to be blindsided by factors you didn’t know about.
1. Steady population growth
Ideally, you’ll want to buy a rental property in a city that has faster than average population and job growth. Where are people moving to? (and where are they moving away from?) What new tech hubs are popping up? Are there any large job campuses being built in the immediate local area?
Back in 2014, I read a very interesting book about the state of Texas and the projected population growth. Did you know Texas is on track to have a higher population than California in the year 2050? That is a HUGE amount of growth projected over the next 20-30 years. This was music to my ears as a beginner investor, and the more I researched little cities in Texas, the more excited I got about investing there. In 2015, I bought my first duplex about an hour drive outside of Austin. Needless to say, it’s experienced tremendous growth since then, and has a bright future for the next couple decades!
You’ll see lists published every now and then showing “the fastest growing cities in America”… You definitely don’t need to buy in those cities (some of them boom and then bust shortly after). As you read and learn more, pay attention to the characteristics of fast growing cities and what is making people flock there. You can use that type of information when looking at potential growth in other towns.
2. Strong & diversified job market:
Imagine buying a rental property right next to a huge military base. At first glance it sounds pretty awesome because you’d have a healthy pool of good paying tenants (military personnel and their families) with low crime and steady rent growth.
BUT…. What if two years after you purchased this rental, the government suddenly announced plans to shut down that military base and move all the jobs to another facility. All the surrounding neighborhoods, houses, shops, restaurants, and local businesses would suddenly have less business. Real estate would drop in value because there’s too much supply, and it would take decades to recover.
The lesson here is that job and industry diversification is really important when you buy a rental property. If 40% of the town’s jobs are at a single employer, your business will be tied to the success (or failure) of that employer. Instead, aim to buy your rental property in a city with multiple growing industries.
Job growth and population growth go hand in hand. Look for cities and neighborhoods with low unemployment rate, rising wages, and low vacancy rates for housing. Much of this data can be found online via BLS.
3. Good rental trends
Look into long-term historical property values, rental income potentials and past growth, as well as vacancy rates if you can. All in all, you’re aiming for a place that has shown steady appreciation and healthy demand over time.
Real estate agents know a bunch of this stuff. A property manager might also have awesome insight into rental trends. After all, they are the ones actually working with tenants on a day to day basis. They know demand, accurate rent amounts, and even neighborhood crime data better than most.
4. Tax-friendly & landlord friendly environments
I never expected such insane property taxes when I bought my rentals in Texas. It’s my number one gripe with owning real estate there. That being said, Texas has very landlord-friendly real estate laws. It’s quite easy to evict tenants if they don’t pay, and the state also has no personal income tax.
Each city and state is different, with various pros and cons. Definitely research these things before jumping into buying a place, because lower taxes and fewer restrictions make for improved profit margins.
5. Demographic and lifestyle factors
You’ll want your rental to be close to good schools, parks, public transportation, cultural attractions, and diverse entertainment options. These types of neighborhood amenities make a city really attractive to renters.
Low crime rates and a strong sense of community also are important. The more satisfied the tenants are, the higher the occupancy rates! Again, property managers have the best feel for this type of vibe, because they talk with tenants regularly.
6. Where can you actually afford?
Your budget will also determine which areas you can afford to buy in and which might be out of your league. Extremely desirable neighborhoods might be simply too expensive – and that’s OK! You can still make excellent returns on cheaper properties, as long as you buy right.
When I moved to Los Angeles back in the day, I quickly realized that all the properties around me were way out of my league. California is expensive! So, instead of saving up to buy a single property in Los Angeles for $1M+, I decided to buy smaller properties in Texas for between $200 – $300k. This helped me step into real estate slowly over time, instead of putting all my eggs into a single very expensive rental property.
Expensive markets don’t necessarily mean the properties perform better. In fact, sometimes cheaper rentals perform even better because they cater to renters who can’t afford their own houses yet.
All in all, don’t feel bad if you have to search outside of your city or state to find a place you can afford to buy. Purchasing and managing real estate remotely isn’t too hard with today’s technology, and there are plenty of investors who take this approach with great success.
7. Cash-flow vs. Appreciation
If a city has low property values ⬇️, and high rental rates ⬆️, there’s a greater chance your property can achieve positive cash flow. What this means is the incoming rent could be high enough to pay for all of the monthly costs (mortgage, tax insurance, etc) and still have profit left over each month.
The states that cater to higher cash flow are Ohio, Tennessee, Maryland and Alabama. In these places it’s quite possible to buy a rental property that pays for itself as well as gives you a small stream of monthly income.
But while this sounds like an investor’s dream, high cash flowing areas typically come with slower appreciation. Meaning, the value of the house doesn’t go up as fast as other areas. What you gain in immediate cash returns, you forfeit in long term growth.
On the flip side, some locations have extremely high purchase prices and comparatively low rental rates. This means the incoming rent doesn’t cover all the monthly ownership costs, and the investor has to continually pay out of pocket each month to support their investment. While this might not sound ideal, locations like this typically experience faster appreciation rates. Think: California, New York, Washington or Colorado.
Ideally, we want you to buy a rental property that has both great cash flow AND steady appreciation. We’ll get into projecting these things when we talk about how to evaluate rental properties.
Step 3: Get Your Finances Sorted
OK, so hopefully at this stage you’ve got a rough idea of the type of property you want to buy and some ideal locations in mind. Also, hopefully you’re accumulating a decent amount of knowledge about real estate investing and getting smarter with all your research.
The next step is to get your finances sorted out and ready. This includes building up a downpayment, setting aside an extra emergency fund, and getting pre-approved for a loan. We’ll also talk about working with mortgage brokers and different loan options.
Down Payment Requirements
The downpayment you’ll need for a rental depends on the type of loan you are getting. And since you are buying a rental property (one that you don’t intend to live in personally), you sadly won’t qualify for any first-time homebuyer grants, FHA loans or most conventional financing.
**Again, if you are planning on house hacking – you can absolutely use conventional loans, FHA loans, or VA loans to qualify. This situation is perfect for duplexes, triplexes or fourplexes when you are planning to live in one of the units and rent out the others**
Keep in mind, having a low down payment doesn’t necessarily mean you’re getting a better deal. Paying less upfront means borrowing more, which can lower your overall profitability and also increase risk.
The sweet spot for a down payment on a rental property is about 20-25%. Most lenders will require it, but even if they don’t it’s a great goal to shoot for when saving up to buy your first rental.
Closing costs & emergency reserves
In addition to a down payment, there are a couple of other upfront costs you’ll need to save for.
“Closing costs” is an overarching term used to cover loan origination fees, escrow fees, title insurance, and a bunch of other once-off transaction costs. Some of these can be negotiated (we’ll cover that later), but for the most part they are usually all paid by the buyer.
The final closing cost amount varies a lot by the type of loan you’ll end up getting. But in general they end up being around 2-5% of the property purchase price.
As a safe bet to cover the highest case scenario, I’d recommend budgeting for around 5% of your estimated purchase price. While this might seem a little high, it’s always better to save too much, than not enough. You don’t want to get halfway through closing a deal and then realize you don’t have enough cash to close because you undershot your estimates.
In addition to closing costs, you’ll want to have a little war chest for property maintenance and emergency reserves. This isn’t optional – it’s a mandatory requirement from most lenders before they agree to give you a loan. Banks want to see you have at least 3 months of expenses saved up to cover your mortgage payment, tax, insurance at minimum.
Since you might not know your exact expenses yet, I’d say another 10 to 15,000 is a good number to shoot for.
Adding it all up, your estimated out of pocket costs needed might look like this:
Purchase price: $300,000
Downpayment (20%): $60,000
Closing costs: $15,000
Reserves: $15,000
Total Cash to Save: $90,000
How (and where) to Save Up for a Down Payment
First, don’t freak out. The $90,000 figure I used in the calculation above is just an example. You may need much less than that based on the type of property you’re looking at. In any case, I truly suggest overestimating your upfront costs. Run your own figures and set a savings goal.
Next, break that savings goal into monthly milestones that are realistic and achievable.
For example, let’s say you and your spouse can put away $1,000 per month each from your paychecks. This means you’re likely on track to build up $90,000 in cash in about 45 months (assuming you’re starting with $0). If you want to get there faster, you’ll need to start saving in other areas. Tax returns, work bonuses, gifts from parents, or even selling stuff around your house… The more you scrounge up, the quicker your savings will build.
Important note: While you’re saving to buy a rental property, try not to neglect other types of retirement savings. 401(k)’s, Roth IRAs, and any other tax-advantaged accounts typically trump real estate investing in the long run. Keep contributing to those, let them compound, and don’t be tempted to drain retirement accounts to come up with closing cash.
Investing vs. Saving Down Payment Cash
So… Where should you put your down payment savings while you’re building a cash pile? Should you store it all up in a savings account? Maybe invest it in a brokerage account?
For most people, we’d recommend a high yield savings account with an online bank. This will give you the lowest risk possible (savings accounts are FDIC insured), while providing a little bit of interest on your cash while you’re saving.
Good news: Right now in 2024 we have decently high rates for high yield savings accounts. You can earn 4-5% on your savings with the right account. If you’ve just got a plain old checking account right now with a big bank, read this post on how and why to switch to a no fee online bank.
Another option if you’ve got a very long savings horizon is to invest your down payment savings. But, this is a much more risky strategy because you could see big downtown in the stock market right before you need the money to buy a rental property. That being said, the longer you stay invested and keep saving, the more likely you’ll see a better ROI in the stock market.
So if your time horizon to save for a down payment is 7 – 10+ years, investing might be the right way to go.
Securing a Mortgage:
Every lender has slightly different requirements that you’ll need to meet before they will loan you money. Since rental properties are seen as having more risk than residential loans, they are a bit stricter than usual.
Here’s a quick overview of important factors to secure a loan…
Good Credit Score: A credit score of 700 or higher is recommended, but some lenders may require an even higher score.
Down Payment + Reserves: We covered this bit already above. But when you apply for a loan you’ll need to prove you have the funds. You’ll need to submit bank statements showing that you have all the cash saved.
Good Debt-to-Income Ratio (DTI): Lenders will assess your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying debts. A lower DTI ratio is better, because it means your not taking on too much debt for your salary to handle.
What is a good DTI ratio to shoot for? → Each lender is slightly different, but in general you’ll want to be below ~40%. This means if you make let’s say $10,000 per month, your total outgoing expenses should be under $4,000 per month.
Income Verification: Be prepared to show all your bank statements, paycheck stubs, and any forms of income you have to get a loan. For investment properties, you may be able to include the anticipated rental income as a source to qualify for the loan. This is BIG, and might mean the difference between getting approved or denied. Discuss this with your loan officer or mortgage broker!
Banks, Lenders & Mortgage Brokers
It can be a little intimidating talking to banks about getting a loan. But don’t be scared! Loan professionals do this all day every day, and there’s no harm in asking questions and getting multiple quotes.
If you’re not in the best financial position to qualify for a loan, that’s OK! At least you checked and tried. Unless a lender performs a “hard credit inquiry” (and they’ll absolutely give you warning before they do so), there’s no harm in applying for a loan to see if you qualify.
I’d recommend setting up an appointment with 2-3 banks or credit unions and 2-3 mortgage brokers to discuss what your realistic borrowing options are. They’ll likely just ask questions about your income, credit score, living situation and other debts… Then based on that info, they’ll give you a range of how much you can possibly get approved to borrow.
Another avenue, here’s a quick online calculator that can tell you your potential borrowing power. Enter your salary and current debt obligations and it’ll show how big of a property you might be able to afford.
In any case, all these discussions and estimate talks with mortgage brokers are kind of “unofficial”. The final process of underwriting and officially qualifying for a loan will come when you have a property under contract and officially apply for a loan to buy it.
So whether you’re ready to buy or not, it never hurts talking with mortgage brokers and lenders to get an idea of what you’ll qualify for.
Seller Financing & Portfolio Loans
There are a ton of ways to finance a rental property. And while these methods below aren’t that common, you might stumble into a situation when they are good options to look at.
Seller financing is when the person selling you the property acts as the lender. These can be great deals, because the seller might be more lenient in their financing requirements than a typical bank.
Personally, I’ve bought 1 property with seller financing. The experienced guy I mentioned earlier sold me a couple of properties, and one of them he wanted to “carry the note” on. Instead of selling the place and getting an upfront cash payment, he was happy receiving monthly mortgage payments. Seller financing is kind of a win/win, because the buyer usually gets an easy loan to qualify for, and the seller gets the interest that would otherwise go to a bank.
Portfolio loans are usually offered by regional banks. These are a bit harder to secure, because they typically require some type of personal relationship. It’s not just about the financing – the bank wants to know that you have real estate investing experience and that the project will be successful.
Personally, I applied for (and got approved for) two different portfolio loans with small Texas regional banks. But after searching other avenues, I didn’t end up pursuing those loans. Private banks tend to charge a bit more, and since I qualified for regular financing from a cheaper mortgage broker, I went with the cheaper option.
All in all, I would suggest trying to qualify for a regular investment property loan via a bank, credit union or mortgage broker. Other financing options should be a second resort.
Get a Pre-Approval Letter!
If you are absolutely ready to start shopping for properties (you have all cash saved and meet general loan requirements), then it’s time to ask for a pre-approval letter from a lender.
Basically, a pre-approval letter is just a 1-page document issued by a mortgage lender that indicates they have reviewed your financial information and find you eligible for a loan up to a certain amount.
Whilst it’s not a guarantee that you are 100% approved for a loan, it’s always good to have something in writing to show sellers that you are a serious and qualified buyer.
To get a preapproval letter, most lenders will need to hard-check your credit score, review all your income documents (like W2 and possible prior year tax returns, etc), and you might have to submit an official application form.
Again, having a physical letter saying that you are pre-qualified to borrow money is very strong when you start to bid on properties. Sellers want to know that you are 100% serious and are in a strong financial position to close on a deal.
Step 4. Time to go shopping!
OK, now it’s time to start looking at available properties and evaluating deals in your target area. You have full permission to scour Zillow, talk to agents, and go door knocking.
Looking at rental properties means running a lot of numbers and calculating potential ROI. And it can take a loooong time. You might need to evaluate 100 properties before finding 2-3 that are realistic candidates. Don’t worry, that’s normal.
The good news is, there are tons of “rules of thumb” and online rental property calculators to help you evaluate deals quickly to save you time.
Using the “One Percent Rule”
The one percent rule is a general guideline to quickly assess the potential profitability of a rental property. It lets you run the numbers in your head, really quickly, to determine if a property is worth investigating further.
Basically, the rule suggests that a property’s monthly rental income should be at least 1% of its total purchase price.
In mathematical terms: Monthly Rent ≥ 1% × Total Purchase Price
For example, if you’re considering a property that costs $300,000 to purchase, the one percent rule would imply that the monthly rent should be $3,000 or more.
If the rent is less than 1%, there’s a chance the property isn’t bringing in enough income to fully cover all the expenses. While this isn’t a deal breaker, it’s a key factor many investors are looking for.
Remember, the one percent rule is a massively simplified guideline. It doesn’t take into account all the expenses associated with owning and ongoing management. Or the current state of the property. So even if you find a property that meets the 1% rule, that doesn’t mean it’s an awesome deal by default. It just means it’s worthy of further investigation.
The 1% rule is also somewhat location-dependent, as it leans toward high cash flowing areas and doesn’t take into account areas with a bigger appreciation factor. Given the current housing market (in 2024) properties that meet the 1% rule might be hard to come by in most places. But it can certainly be a helpful indicator before you sit down and fully run the numbers.
Rental Property Calculators:
There are a handful of online calculators to help evaluate rental properties. These go into a LOT more detail because you can include a lot more inputs than just purchase price and incoming rent.
Here’s one of my favorites online: Rental Property Calculator
You just type in your own inputs and then it’ll automatically spit out profitability numbers.
Sometimes you won’t know all the numbers to input. If this is the case, try finding estimates online, or asking the seller’s agent to give some insight.
Usually, property taxes and insurance numbers are easy to get. Property tax rates are publicly available, and insurance quotes are quick phone calls. HOA fees should be always listed in the property listings. (Here are other things to consider when evaluating HOA properties!)
Maintenance is probably the hardest number to predict. It varies heavily from property to property depending on the age, location, and a million other factors. In general, I recommend estimating 1-2% of the property value for maintenance each year. So for a place that is worth $300k, you might want to estimate $3,000 – 6,000 in maintenance for at least the first couple years. Again, it’s better to overestimate than underestimate!
Don’t forget property management! If you’re looking to hire a property manager, they will typically take 10% of all incoming rent, plus a 1 month commission when placing new tenants. I know, it’s expensive! But, in many situations it is well worth it.
**Attention spreadsheet nerds: If you want to try the calculator I used to analyze all my personal deals, here it is for download: Rental Property Calculator. Just click File, then download as an xls spreadsheet. All of the inputs are in red cells.**
What a “good deal” looks like:
It’s a good idea to come up with some criteria for yourself about what a good deal looks like. Every investor has a different risk tolerance and unique goals.
For me when I first started, my goal was to buy a property that was at minimum cash-flow neutral for the first few years. I wanted all the incoming rent payments to fully cover all the outgoing expenses. That way, the investment would be self-sustainable, paying itself off over time and wouldn’t impact my personal cost of living.
Some folks prefer an immediate cash on cash return on their investment. They might have a goal to “collect at least $400 per month in positive cashflow” from a rental property. Deals like this might be hard to find, but they exist. Having excess cashflow is very desirable if you are planning to buy a bunch of rentals relatively quickly and retire early from the income.
On the flip side, some investors are happy to forgo cashflow altogether and don’t mind being in the red each month. They will happily pay out of pocket every month in exchange for *hopefully* cashing in on some big appreciation after many years of ownership.
My advice is to work out whatever is important to you, and set some narrow investment criteria. This will help you evaluate properties with a stricter focus. Each investor has a different personal finance situation, so you’ve gotta consider all the factors and what’s important to you!
Ugly vs. Pretty Houses
It’s super important to *remove all emotion* when looking at properties. Buying a rental is about numbers and return on investment, not feel-good vibes.
Pretty houses have usually been fixed up and are being presented in their best possible condition. Usually, that you’re paying top dollar.
Ugly houses frequently offer the best ROI. This is because at first glance they aren’t desirable and turn people off. The untrained eye sees bad carpet, damaged furniture, and a messy lawn… But a savvy investor knows that with $4,000 and a bit of elbow grease, these things can be easily fixed. The property value might even rise $10k after making those small improvements. And that quick profit accrues to you.
Obviously we don’t want you to buy a complete shit hole. But just don’t be scared off if it’s not a house that you would personally choose to live in. That just means it’s a fit for someone else at some other stage in life.
Finding Off-Market Deals:
Outside of the MLS, you can always hunt for properties that aren’t on the public market yet. These are known as off-market properties, and there’s far less competition for these because nobody else knows about them.
Here are a few ways to expose yourself to off-market deals:
- Get on a wholesaler list: Some agents specialize in offering properties offline, only to investors. By networking in your area you might be able to find private email lists with properties that pop up out of nowhere.
- Direct mail or door knocking: Yes, this is exactly what it sounds like. You head down a street, knock on each door, and ask the owner if they want to sell. Or, you get a list of addresses and write them letters. It’s a very old-school approach, but it still works if you do it long enough.
- Referrals: The more you network with rental property owners, the more exposed you’ll be to off market opportunities. Like my story earlier, I continued to ask my property manager for introductions to her other clients with big rental portfolios. Not only did I find great mentors doing this, but I also found deals through networking.
Ditch the idea that a great deal will just fall into your lap. You will probably need to go out and find it.
Remember, there’s no rush!
Let’s say you analyze 100 properties in your target area and none of them are a good fit. That’s OK! It’s way better to wait and find a good deal than get impatient and be stuck with a bad one.
Deals are like buses. If you miss one, there’s another right around the corner. Just be patient and things will happen.
BTW – 2024 is an extremely tough time to make rental property numbers work. You’re in the same boat as everyone else. High interest rates are making monthly payments balloon. And high asking prices are making things even worse. Again, be patient. Unlike dollar cost averaging via your retirement account, you’re looking for a diamond in the rough. A GREAT deal. Patience is key in order to secure a property that makes sense for the long-term.
On that note, there’s never any harm throwing out low ball offers. If the numbers won’t work for a property that is listed at $300,000, maybe the seller will accept $260,000. The worst they can say is no! That’s completely fine, too. But on the off chance they consider it, just asking the question might be worth it.
Step 5: Find a Property Manager (or learn to self-manage)
While simultaneously looking for deals, you should be thinking about property management.
At a glance, here are some pros and cons of using a property manager:
| Pros | Cons |
| Save You Time | PM’s Cost Money! |
| Tenant Management/Screening | Less Control over day-to-day operations |
| Legal & Compliance | Quality of Service may vary |
| Manage Maintenance | Communication Challenges |
| Market Knowledge | They may do nothing! |
If you buy an out-of-state rental property, you will almost always need a local property manager. Same goes if you’re buying a place that’s a really long drive away. Having local representation might be better for you, and your tenant, to quickly address any issues with the property.
One of the most understated benefits of property management is screening tenants properly, and knowing all the rules and state laws. Tenant rights should be taken very seriously, because if you enforce illegal rules (even if accidentally!) this can come back to bite you.
Keep in mind, you can always try a property manager out, and change your mind later. Same goes with self-management. If you find out you’re not cut out to be a landlord, you can always get a professional property manager later.
Personally, my property manager has saved me from buying some really bad investments. During the evaluation process and looking at potential properties, one of my checklist steps was to check with my property manager to see if she had any insight into the area/street… She would tell me things like “I’d stay away from that opportunity. We manage 4 properties on that same block and there is constant crime and tenant turnover”.
Property managers are the boots on the ground, managing the day to day operations of rentals. They understand how tenants think, know the good and bad areas of each street block, and offer invaluable advice on good vs. bad properties. It’s in their best interest to steer you into the best investment possible, because they’re the ones that will likely be managing it!
Pro tip: Here’s a full list of what to look for in a property manager.
Managing Tenants Yourself
If you’re a people person and good at enforcing rules, you might actually like being a landlord. But, you should know it’s not all fun and roses. Managing a rental property is like having a part time job.
At a glance, here are the things you’ll need to become an expert on:
Collecting Rent: Part of this is dealing with tenants who consistently pay rent late or fail to pay on time. You’ll also need the stomach to increase rent, and have uncomfortable money conversations.
Tenant Turnover: Finding new tenants and managing turnover, which can involve advertising, screening, and preparing the property for new occupants.
Maintenance and Repairs: This includes emergency response (rare, but it happens). Also planning and scheduling routine maintenance to keep the property in good condition.
Legal and Regulatory Compliance: Navigating the eviction process when tenants violate lease agreements or fail to pay rent. Also you should beef up on Fair Housing Laws to make sure you’re in compliance with local, state, and federal regulations.
Time Management: You’ll need to master the art of balancing the time and effort required of property management with other personal or professional commitments. This includes stress management!!!
Here’s a pretty thorough article that’s aimed at new landlords: Should I become a Landlord? It covers a bunch more things you might be exposed to, and resources to help.
Tools and Resources for Landlords
Here are a few resources we’ve to help you manage a rental property based on our experiences:
Background & credit checks – Matt and Joel used to use TransUnion’s SmartMove. Also you might find some property management software platforms include background checks as part of their service too. Zillow Rental Manager now does a great job on this front too.
Software – This might only be necessary if you manage a number of rental properties… Apartments.com and RentRedi are both great platforms to stay organized.
Laws & regulations – It’s important to know your local state laws and how they govern landlords and tenants. American Apartment Owners Association has a great state by state map with all the laws listed. The Law Depot also is a great resource for landlords.
Lease Forms – You can Google to find templates for lease agreements that are compliant for your state. Or, BiggerPockets has a list of Lease Agreement by State (but each one costs $99 😥) You can ask another landlord in the area what sort of lease they use as well!
General Landlord Support – The National Association of Realtors has a plethora of info tailored towards managing rental properties. Also, for support with custom issues and situations, you might find the Bigger Pockets Forum a great place to get answers and share ideas!
Lastly, Matt and Joel dedicated a whole podcast episode to effectively managing rental properties. They own several rentals each and have great experiences to share. It’s def worth a listen!
Inheriting Existing Tenants
If you’re buying a place that’s already being used as a rental, chances are there could be tenants already in it! This is almost always the case with duplex/triplex/fourplexes, as some of the units will already be rented out.
You might be thinking, “woohoo! I don’t have to find new tenants and I get rent from day 1 after buying the place!”
But – You must understand that when you inherit tenants, you also inherit ALL of the problems and issues that come with them.
So when you get very close to buying a particular property that has tenants inside it, be sure to vet them as part of your due diligence. You will be 100% responsible for what happens after closing on a property, so it’s best to find out any issues with tenants before you buy it!
Personally, I inherited a lot of tenants when I bought my fourplexes. For each purchase, I had my property manager run new background checks on all the tenants to make sure we were ok managing them going forward. We did have minor hiccups and eventual evictions, but all in all we knew what we were getting into.
Step 6: Close on a Property and Stabilize It!
Hopefully, at this point you’ve evaluated loads of rentals and you’re speaking fluent REI lingo!
Now you’re ready to get a property under contract, navigate escrow, close on your loan and take the keys to the property!
Bidding and negotiation tips:
Sadly, putting in lowball bids is kind of par for the course when trying to buy a rental property. It might seem rude or offensive from the outside. But, everyone does it, and it’s a great negotiation tactic to get a good deal, especially in a softer market.
Here are some other quick tips as you negotiate sellers and lock in a deal:
Market Research
Going back to step #1… the more you know about the market, the less chance you’ll have of someone pulling the wool over your eyes. Knowing more details makes you a better negotiator.
For example, if a realtor says “you can easily rent this place for $3,000 per month!”, you can counter by citing your research. “Nope, the max rent in this area for this type of property is $2,700 and seems to be declining, so it’s worth less than you think. Here are the reports…”.
Stick to Your Numbers
Especially if you’re a newbie, realtors might try to bully you into accepting offers or agreeing to things you’re not really comfortable with. While it’s OK to be flexible, never buy something you’re not 100% in on. It’s your investment, and your decision.
Be Mindful of Timing
Understanding the seller’s timeline and motivations will give you more of an edge. If a seller is motivated to close quickly, you have more leverage.
Question Your Realtor
Since they’ve been through this a thousand times, it’s easy to just follow everything they say and trust them. But, it’s important to throw in your 2 cents, and ask as many questions as possible. They are humans, they make mistakes, and they work for you. Don’t just blindly follow their advice. Many realtors just want to close deals and get paid, so they’ll recommend a solution that moves the deal along. Your goal is to only move forward if it’s right for you.
On that note, it actually helps if you have a real estate agent who *owns rental properties themselves*… If they themselves are landlords, they think like you and will be easier to work with to find a suitable investment property.
Thorough Due Diligence
Even after your bid has been accepted, the negotiation continues! Doing a property evaluation will give you leverage because the report will show everything that is wrong with the property. Use this information to ask the seller for some concessions. Most of the time the seller doesn’t know what’s wrong with the property (or else they’d have to disclose it upfront, legally). So making them aware of the issues is a strong negotiation tactic.
Property Inspections
As mentioned above, property inspections give amazing insight into what’s really wrong with a house.
In addition to a general house inspection, it might also be a good idea to get a separate roof inspection, HVAC inspection, or even a pool inspection if the property has one! All of these inspections will cost you money upfront. But, they are absolutely necessary.
If inspections come back and reveal crippling damage that you don’t want to take care of or can’t afford to fix, you are able to cancel the contract and back out of the deal. But if there are things on the list that you are comfortable fixing, ask the seller to chip in on the repair costs. It’s not unusual for sellers to lower their price after they’ve entered the initial contract.
For example, I entered a contract once to buy a duplex in Texas. I ordered a house inspection, which revealed about 40 x minor issues (things like sticky door knobs or loose light switches) as well as 2 major issues. The major issues were that both HVAC systems were on their last legs because of years of neglect, and the roof was showing old age and needed replacement soon…
After learning these things, I considered backing out of the contract. But my agent advised that I should instead try to ask the seller if they could cover some of the replacement costs. Low and behold, a couple of negotiations later the seller agreed to a $10,000 reduction in purchase price, as well as $5,000 in closing credits to put towards new A/C units.
Again, property inspections are amazing negotiation tools. Don’t skip over them or take them lightly!
Entering Escrow
When you’re “in escrow”, that means you’ve got a house under contract, and have a certain window of time to close. Usually it’s 30-45 days to finish due diligence, and finalize your loan.
You’ve likely got ~7-10 days to perform inspections and complete due diligence, after which it’s time to solidify your financials and get ready to close.
Lenders are usually the biggest hold up in the closing process. You’ll need to stay on top of your loan officer and really push them towards closing. They will ask for many documents for underwriting, so try to get everything to them in a timely manner.
At some point, your loan officer will give you a draft Closing Disclosure or Settlement Statement. It will be full of numbers and line items showing your costs, as well as the sellers. Review this document very closely, and note that there are some points that are negotiable. Sometimes banks throw in all types of fees for no good reason – so question every single one of them.
For example, once I noticed a $350 line item in my closing costs for “notary fees”. Since it’s necessary to get documents notarized, the bank set up an appointment for me to sign the closing docs in their office, and was charging me $350 to do so! I protested this (because I can get a local notary to witness signatures for $20 at the post office) and told them to remove that charge because it’s not necessary.
Actually here’s a cool article with a bunch of junk escrow fees to watch out for. It never hurts asking the loan officers if they are absolutely necessary, and if they can be reduced or eliminated.
Personal Liability Insurance
Quick note about insurance… When you sign and buy your insurance policy, consider adding additional personal liability insurance also. It’s cheap, and it’ll protect you against getting sued for various things.
Standard rental property insurance might include a few hundred thousand in personal liability coverage. But it’s limited to liability for the rental property only. If your net worth is high, it’s worth protecting everything you have by buying umbrella coverage.
Some folks think owning a rental property in an LLC is a better approach for personal protection. But the truth is, it’s a pain in the ass to get a loan under an LLC, maintaining completely separate books and filing business tax returns sucks, and personal liability insurance accomplishes most of the same goal. My 2 cents!
Stabilizing & Managing Cash Flow
Don’t expect a completely smooth ride once you finally buy a rental property. The job is only half done! Now you need to switch your mindset into managing the property as efficiently as possible.
Over the first few years of ownership, there will be hiccups as you experience new events. Being a landlord aint’ easy! But don’t freak out, these events will eventually become second nature. I remember the first time I had to evict a tenant, I was absolutely crapping my pants and worried about every detail. (I also felt extremely sad for the person I was kicking out, as they don’t have the luxuries that I have in life). But looking back, it was just a short stressful 25 day period of my life. I handle evictions now with ease, because I’ve got more experience.
Same will be true for you after owning a property for a while. In fact, after closing on your first place, you’ll soon start wondering how to buy a second!
Which brings me to my last point.. Using cash flow and profits from the first property is likely what will help you buy the next. You’ll be able to accomplish the second purchase faster than your first because of the experience you’ve gained, as well as owning a healthy cash flow being generated from that first investment. If you buy a new rental property every few years it will help you grow a mini-empire that isn’t too much to handle!
Lastly, make sure you keep ample funds on hand for emergency repairs. At minimum, keep a few months of mortgage payments up your sleeve (helps when you have vacancies), as well as an emergency fund at least the same size as your maximum insurance deductible. That way you’re set for any major disasters.
Tips for long-term success:
Here’s a few bonus tips to keep in mind as you embark on this crazy mission to buy a rental property…
1. Remain patient!
Massive profits won’t come overnight. You gotta be patient and let things with your property stabilize. It may even take a few years after you close on the property to become fully cash flow positive and see maintenance costs normalize.
If you sell too quickly or change strategies too often, you’ll fall victim to paying extra transaction costs and lose more money. The hardest part about owning a rental property is “sitting and waiting”.
2. Manage the manager
Many people buy a rental property, hire a property manager and then magically expect all their problems to be solved. Well, let me tell you, a property manager is just a middleman. The ultimate responsibility for all issues relies on YOU to solve. You can outsource “tasks”. But you can never outsource overall responsibility for your rental.
While the goal of passive income is to put in as little work as possible, you can never completely turn your back. That’s when things can fall apart. My recommendation is to set up monthly phone calls (reduce to quarterly after a while) with the property manager to keep a pulse on what’s going on with your business.
3. Keep an eye on local news
I took my property manager’s advice and joined a local real estate group in the city where I bought my first rental. Even though it was in another state, they send out meeting notifications and notices of what’s going on in the local area.
To my surprise, one day I heard about some city rental laws being changed. The changes mostly applied to single family homes (I own multi-family), but still it was startling to all the other rental property owners. If I had never been a part of that group, I would have never caught wind of this type of legislation change. They can be fatal to some rental property owners.
Rules are changing very fast so it’s important to keep a pulse on what’s going on. Weather events, local trends, etc are always good things to know about!
4. Always maintain an emergency fund
As an owner of multiple rentals, I keep a lot of cash on hand. Like, upwards of $50k at any point in time. And it’s kind of annoying… Because I wish that money could be invested and growing/compounding with the stock market over the years.
But, when COVID came along, I was soooo thankful to have a fully stocked emergency fund. Whilst many of my tenants were still able to make rent, some weren’t! March 2020 was the scariest time of my life. But, I knew 100% that I could pull through tough times because I had a proper emergency fund.
Keeping cash on hand is just part of the game when you buy a rental property and invest a lot in real estate. Thankfully, as you buy more cash flowing rentals, managing a big emergency fund becomes easier and easier. Plus, it gives you a lot of “dry powder” to jump on new deals quickly if you hold enough cash.
Get professional tax help
Tax professionals know the ins and outs of claiming the best deductions and taking advantage of all the benefits real estate has to offer. While it’s not impossible to figure out taxes yourself (math nerds might love it actually!) seeking help is often worth the extra money.
Paying ~$600+ to a tax pro to handle everything might sound expensive… But if they save you that $600 in taxes (or save you from making a costly mistake with the IRS), then they’ve already paid for themselves.
Always follow the rules
Not gonna lie – It’s tempting to skirt the rules as a rental property owner. There’s so much red tape in the real estate industry so when nobody’s looking, you might feel it’s OK to “think outside the box” and be a little selfish… A tiny bit of un-permitted construction, unclaimed earnings on your taxes, some under the table dealings with contractors… Ideas will come into your mind that you’ve never thought before.
But I promise, any illegal things you do will come back to bite you. They always do.
My advice: Make sure the business you build is all above board. Build a rental property portfolio that your grandparents would be proud of. Follow the rules, do right by your tenants, and don’t be greedy. You’ll sleep better at night, and the karma forces will be on your side for the long run 🙂
The Bottom Line:
Every rental property investor starts with zero experience. So if you’re completely new, have no money, and no contacts, that’s OK! You can (and will) one day buy a rental property if you commit to following the right steps.
Learn as much as you can, save up the proper downpayment and reserves, and stick to your investment criteria when evaluating properties. It can take a long time to find the right deal, so be patient and remember that no deal is better than a bad deal.
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