Before you start looking
Most first-time landlords start by browsing listings. This is backwards. Before you look at a single property, you need:
- A budget: How much can you afford for a down payment (20–25% for investment properties) plus closing costs (2–5%)?
- Financing pre-approval: Talk to a lender about investment property loans. They're stricter than primary residence loans.
- A target market: City, neighborhood, and property type (single-family, duplex, condo).
- Investment criteria: Minimum cash-on-cash return, maximum purchase price, acceptable condition level.
Deal analysis basics
Run the numbers on every property. Don't fall in love with a house — fall in love with the spreadsheet.
- Gross rental income: What will it actually rent for? Check comparable leases, not listing prices.
- Operating expenses: Property taxes, insurance, maintenance (5–10% of rent), property management (8–12% if used), vacancy allowance (5–8%).
- Net operating income (NOI): Gross income minus operating expenses.
- Cash flow: NOI minus mortgage payment. Positive cash flow is the goal.
- Cash-on-cash return: Annual cash flow divided by cash invested. Target 8–12% minimum.
The inspection process
Never skip the inspection. A $500 inspection can save you from a $50,000 surprise. Focus on:
- Foundation and structural issues
- Roof condition and age
- HVAC system age and efficiency
- Electrical panel capacity ( knob-and-tube wiring is a dealbreaker)
- Plumbing material (galvanized pipes fail; polybutylene is uninsurable)
- Mold, pests, and water damage
Financing options for first-timers
- Conventional loan: 20–25% down, best rates, requires strong credit and income.
- FHA multi-family: Buy a 2–4 unit property, live in one unit, put just 3.5% down. Best first investment strategy.
- Portfolio loan: From local banks, more flexible but higher rates. Good for properties that don't qualify for conventional.
- Private money: From friends, family, or private lenders. Higher rates (8–12%) but faster closing and more flexible terms.
- Partnership: Pool capital with a partner. You bring the deal; they bring the money. Split profits 50/50 or negotiate.
Closing and beyond
After closing, the real work begins. Set up systems before your first tenant moves in:
- Landlord insurance: Higher liability coverage than homeowner's. Include loss of rent coverage.
- LLC formation: Consider holding the property in an LLC for liability protection. Consult an attorney.
- Bank account: Separate business account for all rental income and expenses.
- Lease template: State-specific, lawyer-reviewed lease. Don't download a generic template online.
- Tenant screening process: Written criteria, application, background check, and reference verification.
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