This guide walks you through the process step by step \u2014 not just what to do, but what to watch out for at each stage, so you can make a decision with your eyes open.<\/p>\n\n\n\n
\ud83d\udca1Note: <\/strong>This guide focuses on buying your first rental property as a long-term, buy-and-hold investor. If you're interested in flipping houses, check out our comprehensive guide on house flipping for investors<\/a>. Whether renting out a property or flipping, both strategies can offer significant financial rewards.<\/p>\n\n\n\n <\/div><\/div><\/p>\n\n\n\n These steps will help you find and purchase a rental property that will deliver the best return on investment (ROI). If you need additional help, hiring an investment real estate agent<\/a> may be a good option.<\/p>\n\n\n\n Your first rental property can be a significant investment. Before you start touring properties, consider your goals to ensure you enter real estate ownership for the right reasons. It will also help you narrow down what type of property you want to purchase, such as single-family, multi-family, or commercial.<\/p>\n\n\n\n These questions can help you uncover your motivations:<\/p>\n\n\n\n Once you know why you want to buy an investment property, you\u2019ll be better able to determine the types of property that would match your goals. You\u2019ll also be able to set more realistic expectations for the ROI you hope to see.<\/p>\n\n\n\n It\u2019s essential to know what you can afford. Key considerations include:<\/p>\n\n\n\n You\u2019ll have other costs as well. For instance, the average home inspection cost<\/a> is $340; a home appraisal can run anywhere from $500 to $800 or more;[3]<\/span> closing costs are often 2\u20135% of the property purchase price.[4]<\/span><\/p>\n\n\n\n House hacking<\/a> is one strategy to reduce upfront costs. In this situation, you would purchase a two-, three-, or four-unit property and live in one of the units. Because the property would be considered a primary residence, you\u2019d potentially qualify for conventional loans that offer lower down payments and interest rates.<\/p>\n\n\n\n Cash flow is the rent and other income you receive versus the expenses of owning the rental property, such as maintenance fees and property taxes. A positive cash flow \u2014 more money coming in \u2014 ensures you make a viable investment.<\/p>\n\n\n\n A commonly cited benchmark is a cash-on-cash return of 8\u201312% annually, though this varies widely by market, purchase price, and financing terms. Some markets \u2014 like Midwest cities \u2014 historically yield higher returns; coastal markets often run lower. Use our rental property calculator<\/a> to model your specific numbers.[5]<\/span> If you buy a property for $350,000, the cash flow should be at least $28,000 yearly or about $2,333 monthly.<\/p>\n\n\n\n Use our rental property calculator<\/a> to get a detailed and accurate estimate of your cash flow. You can then calculate your cash-on-cash return, which is the money you earn on the money you've invested in a property. To do this, divide your annual pre-tax cash flow by the total cash you've invested.<\/p>\n\n\n\n Evaluating the real estate market before investing in a rental property is essential. You should look at population growth, employment rates, job growth, income levels, and rental and vacancy rates.<\/p>\n\n\n\n Consult a local real estate agent to see if your local market has positive cash flow potential. You might also join networking groups of other active real estate investors in your market. Speak with property managers to better understand your area's rental market.<\/p>\n\n\n\n You may need to look for investment opportunities in a different city or state. In this case, contact a professional agent to understand the market better. You\u2019ll need someone who knows that city's attorneys, contractors, and property managers. Clever<\/a> can connect you with an agent in any market you choose.<\/p>\n\n\n\n Pre-approval shows sellers that you\u2019re a serious buyer. It will also outline the details of your financing, such as what you can afford and the terms of your loan. This information can help you better estimate your cash flow.<\/p>\n\n\n\n To get pre-approval, the lender will request your financial information, personal details, and documentation verifying your income, identity, assets, and debts. For instance, statements for your bank accounts, loans, and retirement accounts, as well as rental history and bankruptcy or foreclosure information.<\/p>\n\n\n\n You can get pre-approved in as little as a day or up to a week or more. The lender will verify all your documents and pull your credit score. A credit score of at least 680 is ideal for a conventional loan.[6]<\/span><\/p>\n\n\n\n Lenders will also assess your debt-to-income (DTI) ratio. For investment property loans, most conventional lenders allow a DTI of up to 45%, though lower is always better. Some lenders also want to see at least six months of mortgage payments in liquid reserves.[7]<\/span><\/p>\n\n\n\n \u00bb<\/strong> Learn how long it takes to get pre-approved<\/a><\/p>\n\n\n\n When you\u2019re ready to start looking for properties, you generally have two options: on-market and off-market. <\/p>\n\n\n\n An investment real estate agent who knows the market can help you find on-market properties. In addition to their connections, they have access to the multiple listing service (MLS), a database of properties for sale in your area. If you\u2019re looking for a property out of state, an online auction may be a good source.<\/p>\n\n\n\n Finding an off-market listing requires a bit more legwork and research. You can drive for dollars, searching for distressed, off-market properties in your area. You can also contact your fellow investors and real estate agents to see if they know of any opportunities or exclusive listings.<\/p>\n\n\n\n Properties listed for sale by owner (FSBO) can also be good leads. You can also approach homeowners directly by sending out mailers or cold-calling them.<\/p>\n\n\n\n After you tour the property and evaluate the numbers, put your offer in. While you can represent yourself, an investment agent can help you create a market analysis. This ensures you get the best price.<\/p>\n\n\n\n Know how much you\u2019re willing to pay to stay on target. It\u2019s also helpful to know the seller\u2019s motivation so you can present an offer that meets both your needs. For instance, do they require earnest money? Who will pay for any needed repairs? What additional assets come with the property?<\/p>\n\n\n\n You may be able to negotiate on contingencies \u2014 conditions the buyer or seller must meet before the deal can move forward. Typical contingencies are a property inspection and appraisal, financing, or insurance.<\/p>\n\n\n\n A home inspection is essential to ensure the property is in good condition. It will uncover any potential issues so you can avoid unexpected expenses \u2014 and the costly repairs that can come with them.<\/p>\n\n\n\n More importantly, the inspection can provide leverage as you negotiate the sale price. It\u2019s essential to determine who will cover the cost of repairs. If you fall responsible, you may be able to pay less for the property overall.<\/p>\n\n\n\n \u00bb Learn how much a home inspection costs<\/a> <\/div><\/div><\/p>\n\n\n\n You\u2019ll need to gather an extensive list of documents for final loan approval. This might include:<\/p>\n\n\n\n Your lender will conduct a home appraisal to determine the property's value and ensure they aren't lending too much. The cost of an appraisal typically ranges from $500 to $599, but it can be $800 or more for larger properties.[3]<\/span><\/p>\n\n\n\n The entire process to obtain financing can take about 30 to 45 days.[8]<\/span><\/p>\n\n\n\n First-time rental property owners can greatly benefit from hiring an experienced property manager. Not only do these experts understand local laws and regulations, but they also understand the local rental market. This knowledge can be invaluable as you set rental rates and advertise vacancies.<\/p>\n\n\n\n Moreover, property managers bring expertise in tenant management, which includes screening potential renters, collecting rent, handling maintenance and repairs, and overseeing the eviction and turnover processes.<\/p>\n\n\n\n The property manager will work for you, so treat this like a job interview. Visit other properties they manage and review their work on lease agreements.<\/p>\n\n\n\n At the end stage, do a final walkthrough of the property to ensure any repairs were taken care of. Next, you\u2019ll sign the paperwork, likely virtually. Then, hand over the keys to the property manager.<\/p>\n\n\n\n Now, it\u2019s time to celebrate! Purchasing your first investment property is an achievement to be proud of. You\u2019ve taken a significant initial step to reliable passive income that you can reinvest and grow for years.<\/p>\n\n\n\n With one property secured, you can now expand your portfolio. For instance, it\u2019s essential to maintain your property and manage your tenants well. High tenant satisfaction often leads to lower turnover and vacancy rates. It also enables you to charge more in rent.<\/p>\n\n\n\n As you profit from your property, look for others to acquire. Leverage your network to gain insight into market trends and find off-market listings that may be lucrative deals.<\/p>\n\n\n\n You\u2019ll learn much during your first foray as a real estate investor and likely make a few mistakes. But if you stick with it and reinvest what you earn, you stand to see substantial gains in the long run. Learn more in our complete guide to real estate investing<\/a>.<\/p>\n\n\n\n Buying an investment property in 11 steps<\/h2>\n\n\n\n
1. Set your goals<\/h3>\n\n\n\n
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2. Determine your budget<\/h3>\n\n\n\n
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3. Forecast your cash flow<\/h3>\n\n\n\n
4. Choose a market<\/h3>\n\n\n\n
5. Get pre-approved<\/h3>\n\n\n\n
6. Start looking for properties<\/h3>\n\n\n\n
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7. Make an offer<\/h3>\n\n\n\n
\ud83d\udd0d Get the property inspected!<\/h4>\n\n\n\n
8. Lock in your financing<\/h3>\n\n\n\n
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9. Hire a property manager<\/h3>\n\n\n\n
10. Close on the property<\/h3>\n\n\n\n
11. Grow your portfolio further<\/h3>\n\n\n\n
Related reading<\/h2>\n\n\n\n
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