Tired of watching your savings earn next to nothing while property values keep climbing?
Your friend bought a rental property three years ago.
Here's the truth: Real estate investing can build real wealth. But only if you avoid the expensive mistakes that cost most beginners thousands.
From calculating real costs to finding properties that can actually make money, this guide shows you exactly how to buy your first investment property without getting burned.
For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.
5 Quick Tips for Your First Rental Property
- Check if rent covers your mortgage + $200 (minimum).
- Start with single-family homes in stable neighborhoods.
- Keep six months of expenses saved for emergencies.
- Get pre-approved before you start house hunting.
- Calculate all costs you’ll face, not just the mortgage payments.
What Makes an Investment Property Different from Buying Your Own Home
The allure of a rental property is that someone else pays your mortgage. Your tenant's rent covers the monthly payment while you build equity.
You’ll also enjoy tax breaks you can't get elsewhere. It’s possible to deduct mortgage interest, property taxes, insurance, repairs, and even travel to check on the property.
You’re also looking at multiple income sources. You can get monthly rent, long-term appreciation, tax deductions, and equity growth. Not just one benefit—four working together.
Can You Afford an Investment Property?
The Real Numbers You Need to Get Started
Credit score: 620 minimum to qualify. But 740+ gets you better interest rates and loan terms.
Down payment: Plan for 20–25% on investment properties. That's $40,000–$50,000 on a $200,000 property.
Cash reserves: Save six months of total expenses. Include mortgage, taxes, insurance, and maintenance. Lenders want to see that you can handle vacancies.
Here's what a $200,000 property actually requires:
- Down payment (20%): $40,000
- Closing costs (3%): $6,000
- Reserves (six months): $9,000
- Total cash needed: $55,000
Don't have that much saved? You'll need more time—or a cheaper property.
Fix Your Money Situation First
Pay off any high-interest debt you have before buying your first investment property. Credit cards that charge 20% interest cost way more than your rental property will earn.
Look at ways to boost your credit score for six months. Pay bills on time. Keep your credit card balances under 30% of the limit. And don't close old accounts or open new ones.
Save an emergency fund separate from your down payment. Suddenly losing a job or facing steep medical bills shouldn't force you to sell your investment property at a loss.
Lastly, check your debt-to-income ratio—many lenders want this under 36%. Add up your monthly debt payments and divide by your gross monthly income.
Understand Your Local Rental Market
Whether you're interested in investing in quaint condos or sprawling multi-family homes, researching the local rental market before investing in rental property is vital. Awareness of average rent prices and vacancy rates, among other factors, can help you make an informed decision about your investment.
Average Rent Prices
Knowing the average rent price for a particular area will give you an idea of what kind of return on investment you can expect from your rental property. If you can collect monthly rent for a property around the same as the median rent price in your area or higher, chances are it's a good investment opportunity.
Vacancy Rates
Vacancy rates are another important factor to consider when investing in rental properties. A high vacancy rate indicates that there may not be enough demand for rentals in the area, which could lead to lower returns on your investment. The lower the vacancy rate, the higher the odds you can secure a renter without the need for excessive tenant retention strategies.
Other Factors
Economic conditions and population growth trends are some of the other factors to consider when deciding whether to or not to invest in real estate. Additionally, researching zoning laws and regulations related to renting out residential properties can help ensure compliance with your area's applicable laws and regulations. These regulations protect both landlords and tenants alike from any potential legal issues in the future.
Pick a Property That Actually Makes Money
Single-Family Homes vs. Multi-Family Properties
Single-family homes are generally easier to manage and sell. They can attract long-term tenants who stay put. Less turnover means less hassle.
On the other hand, duplexes and triplexes can earn you more income from one property. A single vacancy won’t bring you down because other units can still collect rent. But managing multiple tenants takes significantly more time and effort on your part.
Condos usually need less maintenance, but HOA fees eat into your profits. $300 per month HOA fees add up to $3,600 per year that you’re missing out on.
With these pros and cons in mind, think about starting with a single-family home for your first property. It’ll be easier to understand the numbers and should be less complicated overall.
Run These Numbers Before Making an Offer
The 1% Rule: Monthly rent should equal 1% of the purchase price.
- A $200,000 house should rent for $2,000/month, while a $150,000 house should rent for $1,500/month.
- Not gospel, but a good starting point. Properties below 1% probably won't cash flow well.
The 50% Rule: Assume 50% of rent goes to operating expenses (not including the mortgage).
- $2,000 monthly rent = $1,000 for expenses, $1,000 for mortgage and profit.
- This covers property taxes, insurance, maintenance, vacancy, and property management. Your mortgage payment comes from what's left.
How to Find Properties Before They Hit the Market
Where Smart Investors Actually Look
MLS access through a buyer's agent gives you every listed property. Professional real estate agents can see properties that regular people can’t.
Foreclosure listings (REO properties) sell below market value sometimes. Banks want them gone.
Rental listing sites can also help you find owners who are ready to sell. That "For Rent" sign might become "For Sale" with the right offer.
Outside of your online research, drive through neighborhoods and look for distressed properties—overgrown yards, peeling paint, stacks of mail. Owners might be ready to sell.
Wholesalers and investor groups can also connect you with deals before they go public. Consider joining local real estate investor meetups.
6 Things to Look for During Property Tours
- Foundation cracks or signs of settling may mean expensive problems. Explore the perimeter. Check the basement walls up close.
- Roof age and condition matter. Roofs cost $8,000–$15,000+ to replace. Ask when it was last done.
- Plumbing and electrical updates save you money. Old systems fail and cost thousands to fix.
- The age of an HVAC system tells you when a replacement is coming. Most kept-up systems last 15–20 years. Check the metal plate to find the manufacture date.
- Signs of water damage mean bigger issues. Stains on ceilings, musty smells, soft spots in floors.
- Deferred maintenance adds up fast. If the owner skipped basic upkeep, bigger problems are hiding.
Location Matters More Than the House Itself
Check neighborhood crime rates and school districts online. Free sites show you this data. Buy a promising investment property in the wrong area, and you may struggle to find good tenants.
You should try to find growing job markets. New employers moving in usually means more renters. Losing major employers in the area can mean more vacancies.
It’s also helpful to drive the neighborhood at different times. Weekday morning, weekend night, Saturday afternoon. Explore enough and you'll spot issues that don't show up in photos.
Calculate Your Real Costs (Not Just the Mortgage)
Monthly Expenses Most Beginners Forget
Property taxes vary wildly by county. Tennessee has some of the lowest property taxes in the country, but they still add up. Check the county assessor's website for exact amounts.
Insurance runs about $100–$200 per month for rental properties. Higher than your own home because of liability risks.
Your maintenance fund needs 1% of the property value every year. For a $200,000 property, that’s $2,000/year or $167/month. Roofs, HVAC systems, and water heaters all fail eventually.
Unless you're going the owner-occupied route, property management usually costs 8–12% of rent. $2,000 rent would mean paying $160–$240 per month to a management company.
HOA fees are another big one, so check before buying. These don't go away—in fact, they may keep going up.
The reality is that vacancies will happen. Plan for at least one month vacant per year, including lost rent, extra utilities, and marketing.
The Cash Flow Formula That Actually Works
Start with your investment property’s expected monthly rent. Call local property managers or check rental listings to get real numbers.
Subtract 50% for operating expenses. This covers everything except the mortgage.
Subtract your mortgage payment. Include principal, interest, and any PMI.
What's left = your monthly cash flow.
Real Investment Property Math:
Suppose you bought a $225,000 property with a 20% down payment ($45,000).
- Monthly Rent: $1,800
- Operating Expenses (50%): -$900
- Mortgage Payment: -$750
- Monthly Cash Flow: $150
- Annual Cash Flow: $1,800
- ROI on $45,000 down payment: 4%
This property makes money. Not a fortune, but a steady income stream that builds over time.
Get a Mortgage That Won't Crush You
Investment Property Loans Work Differently
Investment properties generally have higher interest rates than primary homes. Expect to pay 0.5–1% more.
You’ll also need a bigger down payment. Most lenders want 20–25% minimum for an investment property loan. However, this larger down payment means lower monthly mortgage costs, since you're borrowing less. That makes it easier to reach a positive cash flow.
There are stricter approval requirements, too. Lenders want proof you can handle two mortgages.
Cash reserves matter. Banks want to see six-plus months of expenses saved after closing.
Your Financing Options
Conventional loans are most common. Good credit and stable income get you approved. Rates aren't always great, but they're predictable.
FHA loans only work if you live in one unit. Buy a duplex, live in one side, rent the other. This is called "house hacking."
Portfolio loans offer more flexibility but higher rates. These can be good for properties that don't meet conventional guidelines.
Home equity from your current home can fund the down payment. Some buyers take a HELOC or cash-out refinance with their existing equity.
Make an Offer That Protects You
Don't Overpay Just Because You're Excited
Compare recent sales in the neighborhood. Similar size, condition, and features. What did they actually sell for?
From there, calculate what rent will realistically be for your property. Not your dream scenario. Not Zillow's estimate. The real-world amount. Call property managers who know the area.
Remember, you make money when you buy, not when you sell. Overpay now and you'll lose for years.
Low offer? Worst case, they say no. You can always negotiate up.
Contingencies That Save You From Disasters
A home inspection finds problems before closing. Structural issues, a bad roof, failing systems, and plenty more. With this clause, you can walk away or ask for repairs.
You can also look into a financing contingency that protects your deposit if the loan falls through. That way, you’ll get your earnest money back.
An appraisal contingency means the property must appraise for the loan amount. If it doesn't, you're not stuck paying the difference.
Finally, a rent-back option keeps the current homeowners in place, so there’s less hassle finding tenants immediately after closing.
Close the Deal Without Surprises
Closing Costs Add Up Fast
Budget 2–6% of the purchase price for closing costs. On a $200,000 property, that would be $4,000–$12,000 in fees.
Typical costs include things like the appraisal, inspection, title insurance, and legal fees. Plus lender fees and origination costs.
First-year property insurance and taxes are paid at closing. Lenders collect these up front.
Final Walkthrough Tips
Check that all contingencies were actually met. Repairs done as expected? Appliances still there? Nothing changed?
Be sure to verify that the repairs were done correctly. Don't just take the seller's word, either—look for yourself.
Test everything that should work. Faucets, toilets, lights, outlets, appliances, and HVAC, among others.
Don't skip this step just to close a little faster. It’s your last chance to catch problems before you own them.
Mistakes That Cost First-Time Investors Thousands
Overestimating Rental Income
Don't use Zillow's rent estimate as gospel. These are guesses, not reality.
Call local property managers for real numbers. They rent properties daily and know actual market rates.
Factor in vacancy rates for your area. Most markets average 5–10% yearly vacancy rates.
Some months you'll have zero income. Plan for it. Tenant moves out unexpectedly? No rent until you find someone new.
Underestimating Repair Costs
Budget 1–4% of the property value each year for maintenance. So, a $200,000 property would need at least $2,000/year set aside.
Major repairs are bound to happen. Roofs fail. HVAC systems die. Water heaters leak. Plan for $5,000+ surprises.
Tenants also cause damage beyond normal wear and tear sometimes. Security deposits aren’t always going to cover repairs and replacements.
Plan for the worst, hope for the best. Better to have extra money than scramble during emergencies.
Forgetting About Permits
Ensure all necessary permits are obtained before buying a rental property. This will ensure your rental meets all safety standards set by your city or county government so tenants can live comfortably without worrying about their safety or legal issues related to renting an unpermitted unit.
Your Tax Benefits
Deductions That Lower Your Tax Bill
- Mortgage interest on an investment property can reduce taxable rental income.
- Property taxes are deductible business expenses.
- Insurance premiums can also reduce taxable income. Homeowner's insurance and liability coverage both count.
- Repairs and maintenance are fully deductible. New water heater, painting, plumbing fixes, etc.
- Property management fees come off your taxes.
- Depreciation lowers taxes even when property value increases. It’s possible to spread the property's cost over 27.5 years and deduct annually.
- Travel to check on your property counts. Gas, meals, and a hotel if you stay overnight.
Talk to a Tax Professional
Investment property taxes get complicated fast.
Depreciation recapture happens when you sell. You'll owe taxes on the depreciation you took. 1031 exchanges defer capital gains. Sell one property, buy another, and delay paying taxes.
State-specific rules vary, though. Tennessee has no income tax, but other states do.
Pay a CPA who knows real estate. This can easily save you more than they charge.
Stay Ahead by Working With Professionals
When it comes to buying and managing a rental property, getting professional help is essential to ensure you and your tenants are protected.
Real estate agents are a great resource for finding rental properties. They have access to listings of homes on the market and can provide valuable advice about what type of home might best suit your needs. Additionally, they can help you negotiate a fair price when making an offer once you've found the right property.
Consider hiring an attorney to tediously review contracts and other legal documents associated with purchasing your rental property and explain any potential risks or liabilities. They will also be able to advise you on how best to protect yourself from things like tenant disputes or landlord-tenant laws that may apply in your area.
Working with a qualified financial advisor specializing in real estate can help ensure you make a sound investment. They can help you calculate all of your expenses, including mortgage payments, taxes, insurance premiums, maintenance costs, and more, so that you know exactly how much money you need upfront and what kind of profit is plausible.
As mentioned, Engaging a tax specialist can undoubtedly be beneficial when filing taxes at the end of each year. They are familiar with deductions related to owning investment properties and could help you save money. Working with a professional ensures accuracy while relieving some stress during a time when you may already be juggling your own personal tax season obligations.
For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.
It’s Time to Find Your First Rental Property
Real estate investing won't make you rich overnight. But it's a real path to building wealth that's worked for millions of people.
Start your search with single-family homes in stable neighborhoods. They’re generally less complicated than multi-family homes, and are easier to manage and sell. Make sure monthly rent covers all costs plus $200 minimum, and save six months of reserves before buying.
Start small. Run the numbers carefully. Don't rush into a bad deal just because you're excited.
The right investment property at the right price builds wealth for decades.
