By Ben Gobel — Mar 5, 2024

How to Buy Your First Rental Property (Step-by-Step)

So, you want to become a real estate investor? Congratulations!

Systematically and steadily buying investment properties is the best way to create passive income and build wealth.

Rental properties can provide cash flow on a monthly basis, equity accumulation as the mortgage is paid down, and appreciation as the property goes up in value over time. Rental property owners also receive a number of tax benefits from expenses and depreciation that can help to reduce their tax bill.

The following is a step-by-step guide on how to buy your first rental property. If you have been looking for a one-stop resource that outlines everything from start to finish, you’ve come to the right place!

The process starts with building credit and saving up money for a down payment. From there, we’ll talk about analyzing rental properties to determine what constitutes a good deal in your target market. Next, we’ll walk through the process of closing the deal, managing the property, and growing your rental real estate business.

If you are ready to start on the journey of earning passive income and building wealth through real estate – read on!

Step 1: Get your Credit Right

If you are going to buy a rental property with a mortgage, there is almost nothing more important than getting your credit in great shape. As part of the process of applying for a mortgage, banks will want to see your credit report when deciding whether to give you a loan.

What Determines Your Credit Score

There are five (5) primary factors that determine your credit score: (1) payment history, i.e., do you make all of your payments on time; (2) amounts owed across all of your accounts, (3) credit history length, e.g., how long have you had credit cards or other types of credit, (4) credit mix, or the number of different types of credit you have (credit cards, student loans, car loans, or mortgages), and (5) new credit, or how recently and how many times you have applied for credit recently.

Missing payments or making your payments late, using too much available credit, applying for too much credit in a short period of time, and defaulting on accounts are all examples of things that can negatively impact your credit.

Checking and Monitoring Your Credit

To get started, you should request a complete copy of your credit report. Federal law allows you to obtain a free copy of your credit report once per year.

There are also a number of tools these days that will monitor your credit for you: (1) Mint, (2) CreditKarma, (3) SoFi Relay, and (4) Credit Card Companies, such as Chase, American Express, Discover, among others. It is a good idea to have at least one of these services set up to send you updates every month.

While every lender has different underwriting criteria, the traditional wisdom is that you need a credit score of 620, at a bare minimum, to obtain a mortgage. To obtain the best mortgage interest rates and terms possible, your score should be 740 or higher.

Finally, never pay for a “credit building” or “credit repair” service – these are almost all scams.

Step 2: Save for a Down Payment

The second step in the process of buying a rental property is saving for a down payment.

Saving up for a down payment is everyones’ least favorite part of the process of buying your first investment property.

How much money do you need to save for a down payment? It depends! The traditional advice is to put twenty percent (20%) down when purchasing a rental property. This twenty percent (20%) down payment benchmark is a great target to aim for because it will make you eligible for the best loan terms (i.e., a better interest rate); and you will not have to pay private mortgage insurance, also known as “PMI.”

Also, if you put twenty percent (20%) down, that will reduce your overall mortgage balance and your monthly payment, which will increase your cash flow. This can be beneficial as you are getting started with your real estate investment.

There are also several ways to buy a rental property with no, or low, money down. If you are planning to buy an investment property that you will also live in as your primary residence (e.g., a duplex where you use one unit as your primary residence while renting out the other), you may be eligible for a mortgage with a much lower down payment. If you owner-occupy your investment property, there are traditional mortgages available with down payments as low as five percent (5%), FHA loans that only require 3.5% down, as well as a few other types of loans that require no down payment whatsoever, such as a VA (veterans) backed mortgage.

Step 3: Organize Your Tax Returns and Financial Records

The third step in buying your first rental property is getting your tax returns and other financial documents in order.

Every bank or lender is going to need to review a number of your financial records to evaluate whether they are going to offer you a loan. The single most important document is your personal tax return.

If you have an employer, banks will also want to see your W2 from the past two (2) years, and they will want to see a few recent pay stubs. If you are self-employed, the lender will want to see at least two (2) prior years of returns.

Do not wait on getting your tax returns and other financial records organized – do it today! Having all of these documents organized in a single folder on your computer and ready to send to a lender is a great way of moving closer to buying a rental property.

It is also a great idea to get in the habit of updating this financial records folder regularly (at least once per year).

Step 4: Talk to a Lender to Get Preapproved

The fourth step in the process of buying a rental property is to talk to a bank to get preapproved for a loan.

Almost all new real estate investors want to rush out and start looking at rental properties to buy. While you will get there soon enough, it is better to start by talking to a bank to get preapproved for a loan.

You Need to Be Able to Act Fast in Real Estate

Real estate deals move fast, especially the good ones! If you find a great investment property to buy as a new investor, it most likely means that several other buyers have seen it too.

By getting preapproved, you will be able to better compete with these other real estate investors when making offers. You need to be able to act fast.

Additional Benefits of Getting Preapproved

Talking to a bank first also has the added benefit of letting you know exactly how much property you can afford. This will help to narrow your search, by setting an upper limit on the property value, so that you do not waste time looking at properties you cannot afford.

Banks will also provide you with estimated mortgage payments based upon the interest rate of their loan. This will help with your cash flow analysis discussed in Step 6.

Finally, if you are working with a real estate agent, most agents will not be willing to write offers for you until you are preapproved for a loan.

What is the best way to finance your first rental property?

At this point, you may be thinking something like this: “Should I be looking at other creative financing options like hard money lenders, private money, or seller financing when I’m starting out?”

While it is great to start to learn what is out there in terms of financing options, it is generally recommended that you stick with a traditional bank for your first investment property.

Hard money lenders, private money, seller financing, and even a personal loan, can all be used to help you scale your real estate business in the future. With that being said, they each add an additional element of risk to a real estate deal. You will get there, but if at all possible, stick with a bank for your first rental property loan.

Step 5: Start Looking for an Investment Property

The fifth step is to start looking at potential rental properties to buy – this is where it gets fun!

Start by looking at every property on the market, in your area, within your budget. It is also okay to look at investment properties that are listed for sale slightly above your budget – you may be able to make an offer below the asking price. Occasionally, if a property was listed at a price that was too high, the listing can become stale, which may be an opportunity.

The fastest way to start this process is to find a good real estate agent that works with real estate investors. Ask the agent for a list of every property on the MLS that meets your criteria and is within your budget. From there, also ask the agent to set up alerts for you so you receive an automatic message every time a new property that satisfies your criteria hits the MLS. Finally, set up your own search alerts on Zillow.

In addition to properties on the market, you should also begin looking for off-market properties. You can do this in a number of ways:

Wholesalers: Real estate wholesalers are people who scour their local markets for distressed properties. They get the properties under contract and then sell the contract to an end-buyer (like you). Start reaching out to wholesalers and tell them exactly what types of properties you are looking to buy – and be specific!
Driving for Dollars: This is a strategy where you drive around your target market looking for properties that have been neglected and are in need of repairs. The owners may be interested in selling these “problem properties.”
Door Knocking: This strategy is self-explanatory. You find a property you would like to buy, you knock on the door, and you ask the owner if they would be interested in selling. If a tenant lives in the property, ask for the owner’s contact information.
Cold Calling: Cold calling involves purchasing a list of properties that meet a certain set of criteria, e.g., absentee owner properties that have not been sold for ten (10) years or more, and calling the owners. There are many services out there these days that simplify the process of calling or texting property owners, but check your local laws.
Direct Mail Marketing: Similar to cold calling, direct mail marketing also involves purchasing a list of properties and then mailing a letter to the owner asking if they would be interested in selling.

Whether you are looking on or off-market, some of the best real estate investments to look for are multifamily properties. A multifamily property is a residential property that contains more than one (1) unit, e.g., duplex, triplex, or fourplex.

The simplest way to get started in real estate is to purchase a multifamily property and use it as your primary residence. This is commonly known as “house hacking.”

Step 6: Determine Cash Flow by Analyzing the Financials

The sixth step of the process of buying a rental property is to determine the positive monthly cash flow of a property by analyzing the financials.

Entire books have been written and year-long classes taught on the process of analyzing whether a piece of real estate will cash flow. With that being said, with just a few pieces of information, you will be able to get close enough to determine whether an investment property is worth examining more closely, or if you should move on to the next one.

Start by Calculating Rental Income

Start by estimating the gross monthly rental income that the investment property will generate. If the property is already rented, that will give you at least some idea of the current market rate for the unit.

Look around at other units that are available for rent in the area. Pay close attention to the size and quality of the units when determining how your prospective income property compares to what is already out there for rent.

You can also look at Zillow’s rent estimates, as well as services like https://www.rentometer.com. Do not rely solely on these estimates, but use the information as a part of your analysis in calculating gross rental income.

Calculate Operating Expenses

The more complicated part of the process is calculating operating expenses.

If you are purchasing a property with a mortgage, start by calculating your principal and interest payments. Your mortgage lender should be able to provide this information based upon the anticipated purchase price, but there are tools online that will calculate this as well.

Next, figure out your anticipated property taxes. Keep in mind that if you purchase a property that has not changed hands in many years, the property may be “reassessed” when it is sold. This has the potential to significantly increase your property tax bill. This is normal, but make sure to take the potential increase into account.

Next, determine your anticipated insurance costs. Start by contacting an insurance agent to get a quote on homeowners insurance. If you do not plan to live at the rental property, you will need a type of landlord insurance. Each insurance company has a different name for these types of policies, just make sure to be clear about how you plan to use the property.

Other common expenses include repair and maintenance costs, capital expenditures, utilities, and property management. Property managers typically charge between seven and twelve percent (7-12%) of gross rental income (ten percent (10%) is a safe estimate). Finally, make sure to account for vacancies, which will result in at least some lost rental income.

After you have calculated all of your expenses, simply subtract the operating expenses from the gross monthly rental income. This gives you an estimated net rental income.

Step 7: Repeat Step Six (at least) Fifty Times on Different Types of Rental Properties

The seventh step of the process is to repeat Step Six, by analyzing the cash flow of prospective rental properties, at least fifty (50) times.

Real estate investing is a hyper-local business. What constitutes as a good cash flow ratio in one city may be poor in another. The numbers on a vacation rental will be very different from a fourplex.

Also, it is harder to find cash-flowing properties in large, first-tier cities than it is in smaller cities and more rural areas. This is because the purchase prices for properties, relative to the monthly rent, is much lower in places like Pittsburgh than it is in Manhattan, for example.

This is why it is so important to analyze at least fifty (50) rental properties, before moving on to making offers. After analyzing a large number of properties, you will start to get a feel for what a good deal looks like in your area.

Similarly, what constitutes a good investment property for one real estate investor may not be a great buy for someone else. If you want to quit your job by creating passive income, a good rental property needs to have maximum cash flow. If you have a well-paying job that you enjoy, focusing on the appreciation potential may be more important.

Step 8: Focus on Properties that Need Minor Renovations

As a new real estate investor, focus on finding rental properties that need some minor repairs, but not major renovations.

One of the best ways to add value to a property is by improving its condition – this is called “forced appreciation.” In other words, you are forcing an increase in the value of the property by repairing and renovating it.

When you purchase a rental property that has just been renovated where everything is brand new, there is usually little room for you to add value. Generally, this is not ideal because as real estate investors, we should always be looking for ways to add value when buying rental properties.

While finding a property in need of some minor repairs and renovations is great, it is also best to avoid properties that need TOO much work. If a property has structural issues and cracks in the foundation, or if entire electrical or plumbing systems need to be replaced, it is usually best to steer clear for your first purchase.

As you get more experienced at navigating major renovation projects, targeting properties with these issues may turn into a great strategy. When buying your first rental, however, it’s best to keep it simple.

Step 9: Start Making Offers on Properties

The ninth step in the process of buying a rental property is to start making offers on investment properties.

In a competitive real estate market, you will most likely need to make several offers before one is accepted. That is why it is so important to start making offers.

Step 10: Do Thorough Inspections

Once you have a property under contract, the tenth step in the process is to conduct a thorough inspection. While it does not always happen, ideally, I like to conduct three (3) inspections of a rental property I am looking to buy.

First, conduct an inspection by yourself. Make a list of everything that you notice may be an issue. Start with the big “systems” in the house, i.e., plumbing, electrical, HVAC. Turn on every faucet, flush every toilet, check every outlet and switch, turn the HVAC system(s) on and off, inspect each appliance.

Now that you have your preliminary list of issues, hire a professional home inspector to inspect the property. Make sure you are present at the property during the entire inspection. Share your list of issues with the inspector and ask as many questions as possible. In addition to the systems, make sure the inspector assesses the roof of the property, any structural issues, and the foundation.

Finally, walk through the property a third time with a contractor who can provide estimates on the work that needs to be done.

Step 11: Calculate Closing Costs and Close the Deal!

The eleventh step in the process of buying a rental property is to calculate closing and escrow expenses and close the deal.

Closing costs are the expenses associated with real estate transactions, most of which are correlated to the purchase price of the property. These costs can include transfer taxes, title insurance, loan fees, and escrow expenses that need to be paid. A closing company should itemize these expenses for you on a “HUD Statement” or a “Settlement Sheet.” This is your last chance to double-check all of your calculations.

Finally, schedule the closing date with the seller and the closing company. The closing company will tell you exactly what you need to bring to the closing table. Typically, you will need a cashier’s check that covers your down payment and the amount you need to pay closing costs.

Step 12: Renovate the Investment Property

Now that you own the property, the next step in the process is to renovate it.

Focus on repairs that improve kitchens and bathrooms. These are the things that prospective tenants notice first. Making improvements to these rooms will also help increase your appraised value when you start the refinance process discussed in Step 14.

It does not (and usually should not) need to be fixed up with top-of-the-line materials and appliances. Focus on sturdy materials and reliable brands, but do not overdo it.

When deciding what materials to use, consider who your target tenant will be. If the property is located in a fancy, high-end area, it may make sense to use hardwood flooring and solid stone countertops.

If the property is located in more of a working-class neighborhood, vinyl, carpet, and synthetic countertops may be a better fit. There really isn’t a wrong answer, just make sure to take the area and your prospective tenant into account.

Failing to take these things into account is a common mistake rental property owners make with their first property.

Step 13: Rent out the Property

The thirteenth step toward buying a rental property is to rent out the property.

Post the property or unit on Zillow, Craigslist, etc. Also, share the listing with your friends and family on social media. This serves two (2) purposes. First, either a family member, friend, or someone they know may be looking for a place like what you are offering for rent. Second, it also lets everyone know that you are in the rental property business. This can be helpful if they hear of other investment properties for sale or renters looking for an apartment.

When you receive an inquiry from a prospective tenant, invite them to apply for your rental unit by completing an application. If you use a service like Apartments.com, when you invite prospective tenants to apply for your unit, they have to fill out an application. All of this information is collected from them and a simple, easy-to-read report is generated and sent to you.

When choosing a tenant, there are a few general guidelines to consider. First, look for someone who has a monthly income of at least three times the monthly rent you intend to charge. Second, ask for an employment reference that you can contact to verify employment and income. Third, make sure their credit score is at least 600+. Admittedly, I do make exceptions regarding their scoring criteria, particularly if the prospective tenant’s low score is due to a lack of credit history, rather than bankruptcy, for example.

Step 14: Refine Your Property Management, Refinance your Mortgage, and Grow your Portfolio

Now that you have bought and renovated your first rental property, it’s time to build out your property management tools and systems (or hire a property manager), refinance your existing mortgage, and grow your portfolio.

Property Management Systems

While finding great real estate deals is the most important part of the investing process, good property management is a very close second.

Even with your first rental property, treat it as a business and act as if you already own 100 properties. Set up a separate bank account to collect the rental income and make sure all of the revenue you receive from the property is deposited into that account first. Also, pay for all operating expenses out of that account, or open a new credit card that you only use for rental property-related expenses. This will simplify your bookkeeping and make your taxes a breeze.

Sign up for an online property management service like Apartments.com, and possibly an accounting program like Quickbooks.com. Collecting rent electronically through a service will simplify your life tremendously.

Depending upon your goals, ysou can also consider hiring a property manager. A property management company can handle everything from leasing and responding to maintenance requests from tenants, to turnovers and actually making repairs at the property. For a full-service property manager, typical property management fees can exceed ten percent (10%) of gross revenue, so it’s expensive. With that being said, a good property manager can make your life as a landlord much easier.

You are not going to get rich by buying a single rental property – you have to keep going and buy more. Having the proper property management in place, from the beginning, will make it so much easier for you to grow.

Refinance Your Mortgage

If you made repairs and renovations to the property that caused it to go up in value, it can be a great time to refinance your mortgage. Some mortgage lenders will require you to wait for a “seasoning period” before you can refinance, e.g., six to twelve (6-12) months from the date of purchase, but others do not depend on the type of loan.

Contact a few different mortgage lenders to obtain quotes. Depending on the type of loan product you are looking to refinance into, there may be a great deal of variation between the interest rates and the terms offered.

Refinancing your existing mortgage will cause your monthly mortgage payment to go up, but that’s okay. Just make sure the positive cash flow from the property can cover the new, higher mortgage payment.

Grow Your Rental Property Portfolio

Take the new money you were able to pull out of the property by refinancing it and use those funds as your down payment to buy your next property. Investment property financing gets easier as your business grows – so just keep going!

Conclusion

Congratulations on making it this far!

While I hope that covers everything, if you have any other questions about the process of buying rental property, leave them in the comments below.

TABLE OF CONTENTS