How to Buy Your First Rental Property

Buying your first rental property takes seven steps: set a cash budget, choose a loan, pick the market and property, test the numbers, make an offer with contingencies, close, and lease the unit or hire a manager. For a home you will not live in, a conventional loan needs at least 15% down on a single-family house or 25% on a 2- to 4-unit building, and Fannie Mae requires six months of the new loan's payments in savings after closing. If you will live in one unit of a 2- to 4-unit building, FHA allows 3.5% down with a credit score of 580 or higher. Before you make an offer, check that the rent covers the mortgage, taxes, insurance, vacancy, and repairs at the rate a lender actually quotes you.

Step 1: Set your cash budget

You need cash for three things:

• Down payment. Freddie Mac caps a conventional loan on a property you will not live in at 85% of its value for one unit and 75% for two to four units, so the minimum down payment is 15% or 25%. With less than 20% down, you also pay private mortgage insurance (PMI), usually as a monthly premium.
• Closing costs. Lender fees, title insurance, recording charges, and prepaid taxes and insurance. Ask each lender for an itemized fee estimate so you can compare offers line by line.
• Reserves. Savings that must still be in your accounts after closing. Fannie Mae requires six months of the new loan's full monthly payment (principal, interest, taxes, insurance, and any association dues). If you already own other financed properties besides your home, it adds 2% to 6% of those loans' balances.

The down payment also changes your price. Freddie Mac charges the lender a one-time fee on each rental-property loan it buys: 2.125% of the loan amount at 25% down, 3.375% at 20% down, and 4.125% at 15% down, plus a separate fee for lower credit scores. The Federal Housing Finance Agency (FHFA), which regulates Freddie Mac, says lenders typically pass upfront fees like these to the borrower as a higher interest rate. Before you settle on a budget, ask each lender to price the loan at every down payment you could make, such as 15%, 20%, and 25% on a single-family rental.

Step 2: Choose the loan

FHA's low down payment comes with conditions. At least one borrower must move in within 60 days of closing and intend to stay at least a year. Mortgage insurance costs 1.75% of the loan upfront plus an annual premium that lasts for the life of the loan when you put 3.5% down. A 3- or 4-unit building must also pass a self-sufficiency test: the appraiser's market rent for all units, minus at least 25% for vacancy and maintenance, has to cover the monthly principal, interest, taxes, and insurance. On 3 or 4 units, you also need three months of those payments in reserve.

Lenders count only part of the rent when they decide how much you can borrow:

• A rental you will not live in. Fannie Mae counts 75% of the rent the appraiser's rent estimate supports, then subtracts the property's full monthly payment. A shortfall counts as a debt in your debt-to-income ratio (DTI), your monthly debt payments divided by your gross monthly income. A surplus counts as income only if you have at least 12 months of experience managing rentals; with less, it can only offset the property's own payment. The lender must also document what you pay now in rent or on a mortgage before it uses any rental income.
• A 2- to 4-unit home you will live in, with FHA. When the property has no rental history, the lender adds 75% of the lower of the appraiser's market rent or the lease rent to your income and counts the full mortgage payment as a debt.

Rental property financing options compares these loans with VA, portfolio, hard money, seller financing, and home equity lines of credit.

Step 3: Pick the market and the property

Choose the market before the house. For each market you consider, collect:

1. Rents. Three to five comparable rentals listed or leased in the past few months with the same bedroom count, condition, and neighborhood. If you use the rent to qualify, the lender's appraiser estimates market rent independently, and the lender uses the rent that estimate supports.
2. Costs that vary by place. Property tax rates, insurance quotes that reflect the area's wind, hail, fire, and flood risk, and any association dues.
3. Local rules. Rental license or registration requirements, rental inspections, rent regulation, and your state's rules on security deposits, notices, and evictions.
4. Reach. Whether you can get to the property for showings and repairs, or whether property managers serve the area.

Then narrow the search to properties whose price, rent, and condition fit the budget from Step 1. How to analyze a rental property market covers population, job, and rent trend data.

Step 4: Run the numbers before you offer

Test every property with the full monthly cost, not just the mortgage. Example: a $300,000 single-family house that rents for $2,400 a month, bought with 25% down. Freddie Mac's weekly average for a 30-year fixed loan on a home the borrower lives in, with 20% down, was 7.32% on October 22, 2026. The example assumes 7.75% for a rental loan, and the tax, insurance, vacancy, and repair figures are assumptions to replace with your own quotes.

What the example shows:

• Cash needed: $75,000 down, about $9,000 in closing costs (an assumption), and reserves of 6 x $2,062 = $12,372, for about $96,400. At 25% down there is no PMI.
• The lender's view: 75% x $2,400 = $1,800, minus the $2,062 full payment, leaves -$262 a month, which the lender adds to your debts.
• The decision: this house loses about $94 a month before any management fee. It breaks even only if rent reaches about $2,515 ($2,062 divided by 0.82, the share of rent left after the vacancy and repair allowances). Offer less or move to the next property.

How to calculate rental property cash flow walks through each line, including capital expenses and management fees.

Step 5: Make an offer with contingencies

A contingency is a contract clause that lets you cancel or renegotiate, usually with your earnest money returned, if a condition is not met by a set date. Your contract sets each deadline, so put every date on a calendar the day the seller accepts. Ask for:

• Inspection: time to inspect and to cancel or renegotiate based on the findings.
• Appraisal: the right to renegotiate or cancel if the appraisal comes in below the price.
• Financing: the right to cancel if the loan is not approved by the deadline.
• Insurance: the right to cancel if you cannot buy property insurance at a workable cost. An inspection contingency does not always cover this.
• Seller documents: current leases, a rent roll (each unit's tenant, rent, deposit, and lease end date), and 12 months of operating expenses and utility bills.

For a home built before 1978, federal rules require the seller to give you EPA's lead pamphlet, disclose known lead paint and any reports, and allow 10 days for a lead inspection, unless you agree in writing to a different period or waive it. The rental property due diligence checklist lists what to verify before each deadline.

Step 6: Close and insure the property

Your lender will ask for proof of property insurance before closing. For a home you will not live in, buy a landlord policy, also called a dwelling policy, rather than a homeowners policy. Rental property insurance explains the policy forms and how much liability coverage to carry.

Ask for the settlement statement, the itemized list of every charge and credit at closing, a few days early and compare each fee with the lender's estimate. If tenants are in place, check that it credits you with their security deposits and the rent for the rest of the month, and collect signed copies of every lease.

Step 7: Lease the unit or hire a manager

If you manage the property yourself, you set the rent, advertise, screen applicants, sign leases, handle repairs, and collect rent. Two federal rules apply as soon as you rent it out:

• Fair housing. The Fair Housing Act bars discrimination in renting because of race or color, religion, sex, national origin, familial status, or disability. Write your screening criteria down, apply them the same way to every applicant, and check your state and city fair housing laws as well.
• Lead paint. For a unit built before 1978, give the tenant EPA's pamphlet and a disclosure of known lead paint and hazards before the lease is signed, and keep the signed disclosure for three years after the lease begins.

A property manager takes over these tasks for a fee under a management agreement you sign. Self-managing vs hiring a property manager compares the costs, the tenant screening rules, and the duties each option leaves with you.