Many new investors struggle with their first rental property purchase because they skip the fundamentals and end up confused about what’s really important. As a result, they either overthink every detail and never buy anything, or they rush into deals without understanding the numbers and end up losing money.
Here's what often happens: You see a property that "looks good" on Zillow, make an offer based on gut feeling, and discover months later that your monthly expenses exceed your rental income. Or you spend months analyzing the same three properties while a more confident investor would have made offers or moved on long ago.
The truth is, many successful investors follow a proven process that removes much of the guesswork from the property acquisition process. This guide shows you some compelling ways successful investors evaluate and purchase rental properties, and includes specific examples you can use immediately.
Is rental property the right choice?
Before diving into the ideas explored below, stop to consider whether rental property investing is actually appropriate for your current situation.
Real estate investments require active involvement and a certain level of risk tolerance. Even if you hire a property management company, you'll need to authorize repairs, review financial statements, and make decisions about how to handle problem tenants. Let's say you have a tenant who stops paying rent three months into their lease. This situation can sometimes lead to weeks spent managing the eviction process while you also cover the mortgage payments out of pocket.
Despite these responsibilities, a profitable rental property can deliver three key benefits, among many others: monthly cash flow, potential property appreciation over time, and tax deductions for mortgage interest, repairs, depreciation, etc.
Evaluate your readiness by asking yourself:
Do I have 6-12 months of mortgage payments saved as reserves?
Can I handle a 3am call about a broken water heater?
Am I comfortable with the possibility of extended vacancies?
How to become a landlord and buy your first rental property
Once you've decided rental property investing is right for you, you can explore these six steps:
1. Arrange financing
Investment property financing differs significantly from securing a mortgage for your primary residence:
Down payment requirements:
Single-family rentals: 20-25% of purchase price
For example, a $200,000 property purchase will often require $40,000-$50,000 down
Credit and income requirements:
Credit score of 720+ for best rates (though you can qualify with lower scores)
Documentation: Tax returns, bank statements, proof of income
Some lenders require 2-6 months of mortgage payments in reserves
Financing options may include:
Conventional loans through banks and credit unions (sold to Fannie Mae/Freddie Mac). This is the most common route new investors take.
Portfolio lenders who keep loans in-house instead of selling them. These local banks and credit unions often have more flexible underwriting standards and may approve deals that conventional lenders reject. For example, they might finance a property that needs repairs or accept lower credit scores in exchange for higher down payments.
Private lenders (individuals or companies) who lend their own money for faster closing. Private lenders can typically close in 1-2 weeks versus 30-45 days for traditional loans. Expect higher interest rates (8-12%) but you typically gain speed and flexibility. Private lenders can be helpful when you find a great deal that needs a quick close to beat other buyers.
Joint ventures with other investors who provide financing in exchange for profit sharing.
Pro tip: Get pre-approved before house hunting. Good investment properties move quickly, and sellers prefer buyers with confirmed financing.
2. Understand rental property metrics
Master these four key calculations to evaluate the Return on Investment (ROI) on any property:
Estimate annual rental income (include rent plus fees for pets, parking, storage)
Estimate operating expenses (typically 40-50% of rental income)
This includes property taxes, insurance, repairs and maintenance, property management fees, vacancy allowance, marketing costs, landscaping, pest control, HOA fees (if applicable), and utilities you pay without being reimbursed
Subtract operating expenses and mortgage interest from rental income
Divide result by your total cash investment
Here's a real example:
Purchase price: $250,000
Down payment: $50,000 (20%)
Annual rental income: $24,000
Operating expenses: $9,600 (40% of income)
Mortgage interest: $11,000
Annual cash flow: $24,000 - $9,600 - $11,000 = $3,400
Cash-on-cash return: $3,400 ÷ $50,000 = 6.8%
Additional metrics to track:
Cap rate: Net operating income ÷ purchase price (measures property performance independent of financing)
Cash flow: Monthly income minus all expenses including mortgage payment
Gross rent multiplier: Purchase price ÷ annual rent (quick screening tool)
You can use the free rental property analysis spreadsheet in this post to forecast the potential return of a property. Simply enter some information to view projected key metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.
This rental returns calculator might be helpful to you here as well.
3. Select a local market
Most investors start by making a key choice that helps them focus their search efforts: invest locally or invest remotely.
Local investing can work well when your area has properties that generate positive cash flow, you can easily visit properties for inspections and showings, you understand neighborhood dynamics and rental demand, and you want hands-on control over your investment.
Remote investing can become attractive when your local market has high property prices that kill cash flow (for example, someone living in San Francisco might choose to buy in Kansas City or Atlanta), you live in an area with limited rental demand, you want to diversify across multiple markets, or you find better ROI opportunities in other states.
Consider these key factors when evaluating potential market:
1. Economic indicators can help you assess market stability
Job growth trends and population changes
Employment diversity across multiple industries
Economic resilience during downturns
Markets with steady job growth and employers across multiple industries can be more resilient during economic downturns. For example, a city dependent solely on oil or manufacturing might face challenges if that industry struggles.
2. Rental market dynamics affect your investment's performance
Percentage of renter-occupied households
Vacancy rates in your target neighborhoods
Rent growth compared to inflation
You might find that college towns or cities with large numbers of young professionals have different rental patterns than family-oriented suburbs.
3. Practical factors impact your ability to manage the investment successfully
Property tax rates in your target areas
Local landlord-tenant laws
Your distance from the market
Insurance costs and natural disaster risks
Some investors prefer staying within a 4-hour drive for easier property visits, while others are comfortable managing remotely with good local teams.
4. Run the numbers on a lot of properties
A smart strategy is to analyze at least 20 properties before making your first offer or purchase. This is how you can start building expertise in your chosen market.
Start by focusing on similar property types in your target area. Let's say you decide to focus on 3-bedroom, 2-bathroom single-family homes under $400,000. After running numbers on 20 similar properties, you'll start noticing patterns, like:
Properties built after 1980 typically need fewer immediate repairs
Homes near good schools rent faster and command higher rents
Corner lots often have higher maintenance costs
Properties with 2-car garages rent for $50-100 more monthly
The key here is to compare apples to apples. A 3-bedroom house will have different ROI potential than a 4-unit apartment building. Stick with one property type until you understand its numbers completely.
Then create a simple tracking system to help you get faster at analyzing deals. It could look something like a spreadsheet that compiles:
Address and asking price
Estimated monthly rent
Required down payment
Monthly cash flow projection
Key issues (deferred maintenance, location concerns)
After analyzing dozens of properties, you'll quickly spot good deals and avoid bad ones.
5. Use a property listing site built specifically for investors
Generic listing sites like Zillow target homebuyers, not investors. These sites lack the metrics you need to evaluate rental properties quickly.
That’s where the Stessa investment property marketplace can help.
The Stessa marketplace provides investor-focused tools like:
Investor-specific filters: gross yield, cap rate, cash on cash return
Proprietary metrics: rent estimates, neighborhood score, crime score
Interactive map layers for school districts, crime data, and market trends
Detailed property characteristics including rental history and repair needs
Instant buy box alerts for properties matching your criteria
Be the first to know when your ideal opportunity arises
Looking for a 3-bedroom single-family rental with a pool? Or a triplex with $2,000+ projected rent? Set up custom alerts using specific property characteristics and investment metrics. You'll get notified the instant properties matching your criteria hit the market.
Unlock your investment edge with smarter underwriting
Stessa's parent company, Roofstock, has provided institutional investors with market intelligence for years. Now you get access to the same analytical tools, including projected rent estimates and neighborhood scores on every listing. Easily adjust financial models for your specific situation, avoiding surprises at tax time.
Buy without the hassle
When you're ready to make an offer on a property, Stessa connects you with vetted agents who handle the transaction details while you focus on evaluating your next investment opportunity.
Go here to start browsing properties.
6. Complete due diligence and close
Once your offer is accepted, you have limited time to verify your assumptions before closing. Your critical due diligence items might include…
Rental income verification:
Compare your projected rent to current market rates
Review leases if tenant-occupied
Confirm any additional income sources (parking, storage, pets)
Property condition assessment:
Professional inspection covering structural, electrical, plumbing, HVAC
Estimate repair costs for any issues found
Budget additional 10-20% for unexpected problems
Financial confirmations:
Lock mortgage rate if not already secured
Review settlement statement for unexpected fees
Confirm property insurance availability and cost
Check title report for liens or easements
Neighborhood verification:
Drive the area at different times of day
Check nearby comparable sales and rentals
Verify school district ratings and crime statistics
For example, if your inspection reveals a 15-year-old HVAC system, you may need to budget $5,000-$8,000 or more for replacement within the next few years. This affects your ROI calculations and reserve requirements.
After Closing: Essential Next Steps
Track income and expenses
Proper record-keeping is crucial for tax benefits and performance tracking.
Income categories to track:
Monthly rental payments
Late fees and other charges
Security deposits (held separately)
Additional income (pet fees, storage, parking)
Expense categories to monitor:
Property management fees (usually 8-12% of rent)
Repairs and maintenance
Property taxes and insurance
Mortgage payments (separate interest and principal)
Utilities (if you pay any)
Marketing and tenant screening costs
Professional services (accountant, attorney)
Travel expenses for property visits
Use dedicated software like Stessa rather than spreadsheets. Stessa automatically categorizes transactions, generates tax reports, and tracks key performance metrics across multiple properties.
Property management
Self-managing vs. hiring a property manager depends on your time, location, and experience.
Self-management can work best when:
Property is within an hour of your location
You have time to handle tenant calls and showings
You enjoy the hands-on aspects of real estate
You want to maximize cash flow (save 8-12% management fee)
Hiring a professional property manager can be beneficial when:
You own out-of-state properties
You lack time for tenant management
You prefer focusing on finding new deals
You want someone else handling tenant screening and repairs
Consider professional property management companies like Mynd, which operates in over 40 markets across the country and specializes in single-family rental management. Professional managers handle tenant screening, rent collection, maintenance coordination, and legal compliance, allowing you to focus on finding your next investment property.
Alternative strategies for buying your first rental property
If traditional down payments feel out of reach, consider these approaches:
House hacking
Buy a duplex, triplex, or fourplex
Live in one unit while renting the others
Use rental income to help qualify for the mortgage
Access owner-occupant financing with lower down payments
FHA multifamily loans
Put down just 3.5% on properties with 2-4 units
Must live in one unit for at least one year
For example, buy a $400,000 duplex with $14,000 down instead of $80,000
Convert your primary residence:
Live in a property for 2+ years to establish it as a primary residence
Move out and convert it to rental property
Keep the lower interest rate from owner-occupant financing
Joint ventures:
Partner with other investors to split costs and responsibilities
One partner provides capital, another manages the property
Structure profit-sharing based on each person's contribution
Each strategy has specific requirements and trade-offs, so choose based on your financial situation and investment goals.