To buy a house as a rental property, plan on putting at least 15% down from your own funds on a single-unit purchase, keeping six months of mortgage payments in reserve, and qualifying at a higher interest rate than you would pay on a home you live in. Lenders treat rentals as higher-risk loans because borrowers in financial trouble tend to default on investment properties before their own homes, and that risk shows up in every part of the process: larger cash requirements, tighter documentation, stricter ratios, and rate premiums baked into the loan.
Cash You Need Before You Can Close
Under current Fannie Mae guidelines, the minimum down payment on a single-unit investment property is 15%, and it rises to 25% for a two- to four-unit building.1Fannie Mae. Eligibility Matrix Every dollar of that down payment must come from your own funds. Gift money from family is not permitted on investment property purchases.2Fannie Mae. Personal Gifts
Beyond the down payment, you need cash reserves equal to at least six months of the mortgage payment on the new property, counting principal, interest, taxes, insurance, and any association dues.3Fannie Mae. Minimum Reserve Requirements If you already own other financed properties, the lender will require additional reserves for those as well. This is where many first-time investors get caught out: they budget for the down payment and closing costs and forget that tens of thousands more have to sit untouched in a bank account.
Origination fees on conventional mortgages generally run 0.5% to 1.0% of the loan amount. Sellers can help with closing costs, but investment property purchases cap those seller contributions at 2% of the lower of the sales price or appraised value.4Fannie Mae. Interested Party Contributions (IPCs)
Credit Score, Interest Rate, and Debt-to-Income
For a manually underwritten investment purchase with more than 75% LTV, Fannie Mae requires a minimum credit score of 680. At 75% LTV or below, the floor drops to 640.1Fannie Mae. Eligibility Matrix
Interest rates on a single-unit rental typically run 0.50% to 1.00% above what you would pay on a primary residence. Part of that gap comes from loan-level pricing adjustments Fannie Mae applies to every investment property loan, ranging from 1.125% of the loan amount at low LTVs up to 4.125% at higher leverage.5Fannie Mae. LLPA Matrix Most of that cost gets folded into your rate rather than charged at closing, but it raises your monthly payment for the life of the loan.
Your debt-to-income ratio matters just as much as your score. On manually underwritten investment loans, Fannie Mae caps DTI at 36%, stretching to 45% for borrowers with higher scores and reserves. Loans processed through the automated underwriting system can go as high as 50%.6Fannie Mae. B3-6-02, Debt-to-Income Ratios
To help you qualify, the lender can credit 75% of the projected rental income from the property you are buying toward your income. The remaining 25% is deducted automatically to account for vacancies and maintenance.7Fannie Mae. B3-3.1-08, Rental Income If that adjusted rental figure does not cover the full mortgage payment, the shortfall is added to your monthly obligations, which can push your ratio over the limit.
What You’ll Need to Document
Lenders require one to two years of federal tax returns depending on how your income is structured, plus W-2s covering the same period.8Fannie Mae. Standards for Employment Documentation Self-employed borrowers should expect to provide complete returns with all schedules plus profit-and-loss statements. Several months of bank statements prove both the source of your down payment and the presence of the required reserves. You will also need to disclose every other property you own, including current values and outstanding balances, on the Uniform Residential Loan Application (Form 1003).9Fannie Mae. Instructions for Completing the Uniform Residential Loan Application
Sizing Up the Market Before You Make an Offer
The numbers on the property matter less than the numbers around it. Pull the vacancy rate first. Below 5% signals strong demand; above 8% points to a glut that could leave your unit sitting empty. The U.S. Census Bureau publishes quarterly vacancy data by region, and local planning departments often track neighborhood-level figures.
Then look at rents. Compare asking rents across listing platforms and cross-check against local property management reports, then measure those rents against purchase prices to calculate a price-to-rent ratio for each neighborhood you are considering. Lower ratios generally produce stronger cash-on-cash returns, especially near expanding employment centers or major transportation corridors.
Property tax rates eat directly into net operating income. County assessor websites publish current millage rates and assessed values for every parcel. Check how often the jurisdiction reassesses too, because a county on an annual cycle can ratchet up your bill faster than one that reassesses every few years.
Crime statistics round out the picture. The FBI’s Uniform Crime Reporting program publishes incident data through its Crime Data Explorer, which lets you compare reported offenses across jurisdictions.10Federal Bureau of Investigation. Crime/Law Enforcement Stats (UCR Program) Higher crime suppresses rents, raises insurance premiums, and makes tenants harder to keep. Track average days on market for rentals as well. If comparable units sit vacant 30 or 40 days between tenants, work that lost income into your projections instead of assuming immediate occupancy.
The Appraisal Step That Trips Up Rental Deals
Investment appraisals differ from standard home appraisals in one important respect: the lender needs to know what the property can earn, not just what it is worth. For single-unit rentals, the appraiser completes a Single-Family Comparable Rent Schedule (Fannie Mae Form 1007) alongside the standard appraisal.11Fannie Mae. Single Family Comparable Rent Schedule The appraiser inspects the property, researches nearby rental comps, and produces an independent market rent estimate. The lender then applies the 75% rule to that number in your DTI calculation.7Fannie Mae. B3-3.1-08, Rental Income
Here is where deals quietly fall apart. If the appraiser’s rent estimate comes in lower than what you projected, the rental income the lender credits to you drops and your DTI worsens. In some cases the lender reduces the loan amount. The best defense is conservative rent projections from the start, backed by actual comparable listings rather than optimistic assumptions.
If Conventional Financing Doesn’t Fit: DSCR Loans
Debt service coverage ratio loans qualify you based on the property’s cash flow rather than your personal income. No tax returns, pay stubs, or employment verifications. The lender divides the property’s expected gross rental income by the total monthly debt (principal, interest, taxes, insurance, and any association dues) to calculate a ratio.
A ratio of 1.0 means the property’s income exactly covers the debt payments. Most DSCR lenders want at least 1.0, and 1.25 or higher unlocks the best terms. Ratios below 1.0 can still get funded but usually require 30% to 35% down and a much higher rate. DSCR loans generally carry higher rates than conventional investment mortgages across the board, which is the tradeoff for skipping income documentation. They tend to fit self-employed investors, borrowers whose tax returns understate cash flow, and anyone scaling a portfolio past conventional financing limits.
Insurance the Lender Will Require
A standard homeowners policy does not cover a property you rent out. Landlord insurance includes property damage coverage, liability protection for injuries on the premises, and lost rental income reimbursement if the property becomes uninhabitable during repairs. Premiums run higher than a comparable homeowners policy because landlord policies account for tenant-related risks. Your lender will require proof of coverage before releasing funds at closing.
The lender will also require a lender’s title insurance policy, which protects only the lender’s interest. It does not protect your equity. If a title defect surfaces after closing, the lender’s policy covers only the outstanding loan balance.12Consumer Financial Protection Bureau. What Is Lender’s Title Insurance? An owner’s title insurance policy, purchased separately for roughly 0.5% of the purchase price, protects you against liens, forgeries, and ownership disputes the title search missed. Skipping it saves a modest amount upfront and leaves your entire equity position unprotected.
Closing on the Property
Federal law requires you to receive the Closing Disclosure at least three business days before settlement.13Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs Compare every line against the Loan Estimate you received earlier. Discrepancies in fees, rate, or loan amount should go to your loan officer immediately, because some changes can restart the three-day clock.
Schedule a final walkthrough the day before or the morning of closing. For a rental purchase, you are verifying more than cosmetic condition. Check that the HVAC system, water heater, and included appliances work. Test every faucet, flush every toilet, confirm smoke and carbon monoxide detectors are in place, and look for water damage on ceilings and around plumbing. Any issue you discover after closing is yours to fix at your own expense.
You will wire your down payment and closing costs to the escrow account held by the title company in advance of the appointment. On settlement day, you sign the promissory note and the deed of trust or mortgage. The title company or settlement attorney runs a final public records search to confirm the property is free of liens and that the seller has authority to transfer it. After notarization, the settlement agent submits the deed to the local recording office. Once the deed is filed, you are the legal owner.
What You Owe as a Landlord Under Federal Law
Owning a rental triggers federal obligations that apply from the moment you start advertising for tenants.
Fair Housing Act
The Fair Housing Act prohibits discrimination in the sale or rental of housing based on race, color, religion, sex, national origin, familial status, and disability.14Office of the Law Revision Counsel. 42 U.S. Code 3604 It applies to advertising, screening, lease terms, and evictions.15U.S. Department of Housing and Urban Development. Housing Discrimination Under the Fair Housing Act Many states and cities add protected classes on top of the federal list, so check local law before drafting a listing.
Lead-Based Paint Disclosure
If the property was built before 1978, federal law requires you to disclose any known lead-based paint hazards to prospective tenants and provide an EPA-approved information pamphlet before the lease is signed.16U.S. Environmental Protection Agency. Lead-Based Paint Disclosure Rule (Section 1018 of Title X) Failure to comply can result in significant civil penalties.
Screening Applicants Under the FCRA
When you use a credit report or background check to evaluate a rental applicant, the Fair Credit Reporting Act applies. If you deny an applicant, raise the rent, or require a cosigner based even partly on information in a consumer report, you must provide an adverse action notice. That notice must include the name and contact information of the reporting agency, a statement that the agency did not make the decision, and notice of the applicant’s right to dispute the report and obtain a free copy within 60 days.17Federal Trade Commission. Using Consumer Reports: What Landlords Need to Know
Tax Rules That Shape Your Return
Depreciation
You can deduct the cost of the building (not the land) over 27.5 years under the Modified Accelerated Cost Recovery System.18Office of the Law Revision Counsel. 26 U.S. Code 168 On a property where the building is worth $275,000, that comes to $10,000 per year in non-cash deductions against your rental income. The deduction is available regardless of whether the property actually loses value.19Internal Revenue Service. Publication 527, Residential Rental Property
Passive Activity Loss Limits
Rental income is classified as passive, so losses from a rental generally cannot offset your wages or business income. If you actively participate in managing the property, you can deduct up to $25,000 in rental losses against other income each year. That allowance begins to phase out once your adjusted gross income exceeds $100,000 and disappears entirely at $150,000.20Office of the Law Revision Counsel. 26 U.S. Code 469 Married taxpayers filing separately who lived together at any point during the year face a much lower threshold, with the allowance phasing out between $50,000 and $75,000.
1031 Exchanges
When you sell, you can defer capital gains taxes by reinvesting the proceeds in another qualifying rental property through a like-kind exchange. The deadlines are rigid: 45 days from the sale to identify potential replacement properties in writing, and 180 days from the sale to close on one.21Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 These deadlines cannot be extended for anything short of a presidentially declared disaster. The exchange must run through a qualified intermediary, not directly between you and the other party.
Personal Name or LLC?
Many investors hold rental properties in a limited liability company. The main advantage is liability protection: if a tenant or visitor is injured on the property and sues, the LLC’s assets are at risk but your personal home, savings, and other assets generally are not. That protection holds only as long as you keep the LLC as a genuinely separate entity with its own bank account, records, and formalities. Courts can disregard the LLC and reach personal assets if you commingle funds or treat the entity as an extension of yourself.
Financing is the practical complication. Most conventional lenders write investment loans to individuals, not LLCs, and your mortgage likely contains a due-on-sale clause that technically allows the lender to demand full repayment if you transfer the property. Some investors close in their personal name and transfer to an LLC afterward, accepting the theoretical risk that the lender calls the loan. Others use portfolio lenders or DSCR lenders that will close directly in the LLC’s name. Make the call with a real estate attorney and your lender before you sign a purchase contract.
Ongoing Costs to Plan For
Property management companies charge roughly 8% to 12% of monthly rent collected, with 10% being a common benchmark. That fee covers rent collection and routine coordination. Most companies charge separately for placing a new tenant, often 50% to 100% of one month’s rent. Self-managing saves those fees but puts marketing, screening, maintenance calls, and eviction filings on you.
Many municipalities require landlords to register rental units and hold an annual operating license. Fees vary widely but typically run a few hundred dollars per year. Eviction court filing fees, when needed, add another layer that varies by jurisdiction. Build a reserve for these expenses alongside the mortgage reserves your lender already requires, because a single vacancy paired with an unexpected repair can wipe out months of positive cash flow.