What you need before you buy your first rental property
Real estate investing means buying property—residential, commercial, or land—to generate income through rent or resale. You do not need a license, a real estate degree, or a large inheritance. You do need three things: enough cash for a down payment (typically 15 to 25 percent of the purchase price for investment properties), a credit score your lender will accept (usually 620 or higher, though 680 and above gets better rates), and a clear understanding of your local market and the math of the specific property you are considering.
Most new investors start with a single-family rental or a small multifamily building (duplex, triplex, or fourplex). These are easier to finance than commercial property, and the rental income is more predictable than flipping. Your first step is not to look at properties—it is to look at your own finances and decide how much cash you can put down without emptying your emergency fund.
Key Takeaways
- You need a down payment of 15 to 25 percent, a credit score of at least 620, and enough cash reserves to cover vacancies and repairs without going broke.
- Start by learning the numbers: calculate the monthly rent, subtract the mortgage, property tax, insurance, maintenance, and vacancy loss to see if the property actually makes money.
- Most investors use a mortgage to buy, so you will need to show a lender that the rental income covers the loan payment—this is called the debt service coverage ratio.
- Your first property teaches you more than any course; choose a market you understand and a property that makes sense on paper before you fall in love with it.
- Real estate is not passive income—you will manage tenants, repairs, and taxes, or you will pay a property manager to do it, which cuts your profit by 8 to 12 percent.
How to calculate whether a property will actually make money
The most common mistake new investors make is falling in love with a property and then doing the math. Do the math first. For any property you are considering, write down the monthly rent you could charge (ask a local property manager or check what similar units rent for in that neighborhood). Then subtract every cost: mortgage payment, property tax, homeowners insurance, maintenance reserve (usually 1 percent of the property value per year), vacancy loss (assume 5 to 10 percent of annual rent will sit empty), and any HOA fees or utilities you pay.
If the number is positive, the property generates cash flow. If it is negative, you are paying money every month to own it. Some investors accept negative cash flow if they believe the property will appreciate enough to make up for it, but that is a bet on the future, not a business. For your first property, find one where the math works today.
The second number lenders care about is the debt service coverage ratio (DSCR). This is the monthly rent divided by the monthly mortgage payment. Most lenders want to see 1.2 or higher, meaning the rent covers the mortgage payment plus 20 percent extra. If a property rents for $2,000 and the mortgage is $1,500, your DSCR is 1.33—lenders will finance it. If the rent is $1,600, your DSCR is 1.07—you may struggle to get a loan, or the lender will require a larger down payment.
Financing your first investment property
You have three main routes to borrow money for an investment property: a conventional mortgage from a bank or mortgage broker, a portfolio loan from a smaller lender that keeps the loan on its own books rather than selling it, or a private loan from another investor or hard money lender.
A conventional mortgage is the cheapest if you may have access to. You will need a down payment of 15 to 25 percent, a credit score of 680 or higher for the best rates, and proof that the rental income covers the mortgage payment (the DSCR test). The process takes 30 to 45 days. A portfolio loan is slower and more expensive but more flexible—the lender cares less about the DSCR and more about your overall financial picture. A private or hard money loan is the fastest (sometimes one week) and the most expensive (interest rates of 8 to 12 percent or higher), and it is usually a short-term bridge while you renovate or wait for a conventional lender to approve you.
Start with a conventional mortgage if you can may have access to. Shop at least three lenders—a bank, a mortgage broker, and a credit union if you belong to one. The difference in rates and fees between them can save or cost you thousands over the life of the loan.
Finding and evaluating properties in your market
Most investors find properties through the MLS (Multiple Listing Service), which is what real estate agents use. You do not need an agent to buy—you can make an offer yourself—but agents are free to you as the buyer (the seller pays the commission). An agent who knows investment properties in your area can save you time by filtering out deals that do not pencil out.
Start by choosing a geographic market. This might be your own city, a neighboring county, or a state where you have family or friends who can help you manage the property. Do not buy in a market you do not understand. Spend a month looking at what properties rent for, what they sell for, and what the vacancy rate is. Talk to local property managers about which neighborhoods are stable and which are declining. Read the local news about jobs, schools, and development.
Once you have narrowed your market, look for properties that meet your criteria: single-family homes or small multifamily buildings in neighborhoods where the rent-to-price ratio is favorable (meaning the annual rent is at least 5 to 7 percent of the purchase price). Avoid properties that need major structural work unless you are experienced in renovation. Your first deal should be something you can rent out quickly, not a project that ties up your cash for a year.
Making an offer and closing on your first property
When you find a property that makes sense on paper, make an offer. Your offer should include a purchase price, a closing date (usually 30 to 45 days out), and contingencies—conditions that let you back out without losing your deposit. The most important contingencies are the inspection contingency (you can walk away if the home inspector finds major problems) and the financing contingency (you can walk away if your lender will not approve the loan).
Once your offer is accepted, you will order a home inspection (usually $300 to $500) and explore for a mortgage. The lender will order an appraisal to make sure the property is worth what you are paying. If the appraisal comes in low, you will need to renegotiate the price or bring more cash to the closing table. The inspection may reveal repairs—negotiate with the seller to fix them, reduce the price, or accept them as-is.
Closing happens at a title company or attorney's office. You will sign documents, transfer the down payment and closing costs (usually 2 to 5 percent of the purchase price), and receive the deed. The whole process from offer to keys in hand typically takes 30 to 45 days.
Managing the property or hiring a property manager
Once you own the property, you have two choices: manage it yourself or hire a property manager. Managing yourself means finding tenants, collecting rent, handling maintenance requests, and dealing with evictions if a tenant stops paying. It is time-consuming and requires knowledge of your state's landlord-tenant laws. A property manager handles all of this for a fee, usually 8 to 12 percent of the monthly rent.
Most new investors manage their first property themselves to save money and learn the business. This is reasonable if you have time and patience. If you do not, hire a property manager from day one. A good manager will find quality tenants faster than you will, handle maintenance more efficiently, and protect you from legal problems. The fee comes out of your cash flow, but it is worth it if it means you do not have to spend your evenings dealing with tenant complaints.
Before you rent the property, check your state's landlord-tenant laws. You will need to write a lease, set a rent amount, decide on a security deposit, and understand the eviction process. Many states require landlords to register with the local government or provide tenants with specific disclosures. Ignorance of these rules can cost you thousands in fines or lost evictions.
Building your portfolio beyond the first property
After your first property has been renting for six months to a year, you will have real data: actual rent collected, actual expenses, and actual vacancy. Use this to decide whether to buy a second property. Some investors buy one property every year or two. Others buy multiple properties in the same year if they have the cash and the market is favorable.
As you buy more properties, your financing options change. Lenders will look at your portfolio as a whole and may offer better rates if you have multiple properties performing well. You may also consider a portfolio loan or a HELOC (home equity line of credit) against your primary residence to fund down payments on new properties. These are more flexible than conventional mortgages but also riskier—if you cannot pay, the lender can foreclose on your home.
Many investors also explore other strategies: buying properties below market value and reselling them for profit (flipping), buying distressed properties at auction, or investing in commercial real estate or apartment buildings. These require more capital, more informed, and more risk. Start with a straightforward rental property, master it, and then expand into other strategies if you want to.
Understanding taxes and keeping records
Real estate generates tax deductions that can significantly reduce your taxable income. You can deduct the mortgage interest (not the principal), property tax, insurance, maintenance and repairs, property management fees, utilities you pay, and depreciation (a non-cash deduction that spreads the cost of the building over 27.5 years). These deductions often mean that even if you have positive cash flow, you have little or no taxable income.
Keep detailed records of every expense: receipts for repairs, bank statements showing rent deposits and mortgage payments, property tax bills, and insurance invoices. Use accounting software like QuickBooks or a straightforward spreadsheet to track income and expenses by property. At tax time, give this information to a CPA or tax preparer who understands real estate. The cost of a good tax preparer ($500 to $2,000 per year) is worth it—they will find deductions you missed and keep you out of trouble with the IRS.
Frequently Asked Questions
How much money do I need to start investing in real estate?
You need a down payment of 15 to 25 percent of the property price, plus closing costs of 2 to 5 percent, plus reserves for repairs and vacancies. For a $200,000 property, that is $30,000 to $50,000 in cash before you own anything. Many investors start with a property in a lower-priced market or partner with another investor to split the down payment.
Can I invest in real estate with bad credit?
Conventional lenders typically require a credit score of 620 or higher, though 680 and above gets better rates. If your score is below 620, you may may have access to for a portfolio loan or hard money loan, but the interest rate will be higher. Spend six months to a year paying down debt and making on-time payments to improve your score before you explore.
Do I need a real estate license to invest?
No. A real estate license is for people who sell property on behalf of others. As an investor buying for yourself, you do not need one. You can hire a licensed agent to help you find and negotiate on properties, but you are not required to.
What happens if a tenant stops paying rent?
You will need to file for eviction in your local court. The process varies by state but usually takes 30 to 90 days. You will need a written lease, proof of non-payment, and documentation that you gave the tenant notice to pay or quit. Eviction is expensive and time-consuming, so screen tenants carefully and use a lease that protects you.
Is real estate a good investment right now?
Real estate returns depend on your local market, the specific property, and your financing. In some markets, rents are rising and vacancy is low—good conditions for landlords. In others, rents are stagnant and vacancy is high. Do the math on the specific property and market you are considering, not on real estate as a category. A property that makes sense in one city may not make sense in another.