What you need to do before you buy investment property
Buying investment property means purchasing real estate with the intention of generating income through rent or resale, not living in it yourself. Before you make an offer, you need to secure financing, understand your local tax obligations, and decide what type of property fits your financial situation. Most investors start by getting pre-approved for a mortgage, which tells you how much a lender will loan you and locks in an interest rate for a set period.
Your down payment will be larger than it would be for a primary residence. Most lenders require 20 to 25 percent down for investment property, though some will go as low as 15 percent if you have strong credit and reserves. You will also need cash reserves — typically six to twelve months of the property's projected mortgage payment, taxes, insurance, and maintenance costs — sitting in a bank account to show the lender you can cover the property if it sits vacant or tenants stop paying.
Before you start looking, talk to a tax professional or accountant who works with real estate investors. Investment property comes with deductions for mortgage interest, property taxes, repairs, and depreciation, but the rules vary by state and by how you structure ownership. Some investors use a limited liability company (LLC) to own the property; others hold it individually. That choice affects your taxes, your personal liability if someone is injured on the property, and how easily you can sell later.
Key Takeaways
- Investment property requires a larger down payment (typically 20 to 25 percent) and proof of cash reserves than a primary residence, and lenders will verify your income and credit separately.
- You must understand your state and local rental laws before you buy, because they determine what you can charge, how you evict, and what repairs you must make.
- The purchase process is the same as buying a primary home — offer, inspection, appraisal, title search — but the lender's underwriting is stricter and takes longer.
- Closing costs for investment property typically run 2 to 5 percent of the purchase price and include the appraisal, title insurance, attorney fees, and loan origination fees.
- After closing, you are responsible for all property taxes, insurance, maintenance, and repairs, and you must follow your state's landlord-tenant laws when renting to tenants.
How to find and evaluate investment properties
Investment properties are listed on the same sites as primary residences — MLS databases, Zillow, Redfin, Realtor.com — but you need to evaluate them differently. Instead of asking "Would I want to live here?", ask "What rent can I charge?" and "What will repairs cost?" A property in a neighborhood with high tenant turnover or frequent vacancies will cost you money even when occupied, because you will spend more on marketing and repairs between tenants.
Run the numbers before you make an offer. Calculate the gross rental income (what you can charge per month), subtract the operating expenses (property tax, insurance, maintenance, vacancy rate, property management if you hire one), and see what is left. Many investors use a rule of thumb: the monthly rent should be at least 1 percent of the purchase price. A property that costs $200,000 should rent for at least $2,000 per month. This is not a hard rule, but it helps you screen out properties that will not generate enough income to cover your costs.
Walk the property yourself or hire an inspector before you make an offer. Investment properties are often older, in less desirable neighborhoods, or need work — that is why they are priced to rent rather than to owner-occupy. Know what you are buying. A roof that needs replacement in two years, a foundation crack, or outdated electrical wiring will come out of your profit. Get a written estimate for any major repairs before you commit.
Understanding your state and local rental laws
Before you close on any property, read your state's landlord-tenant law. These laws are not uniform. Some states cap how much you can raise rent each year; others do not. Some require you to return a security deposit within 30 days; others allow 45 or 60 days. Some require you to provide a reason for eviction; others allow no-cause evictions with proper notice. Violating these laws can result in fines, lawsuits from tenants, or an order to return money you collected illegally.
Your state law also determines what repairs you must make and how quickly. Most states require landlords to maintain the property in "habitable" condition — meaning heat, running water, working plumbing, and a roof that does not leak — but the definition varies. Some states require you to make non-emergency repairs within 14 days; others give you 30. If you do not comply, a tenant can withhold rent, repair it themselves and deduct the cost from rent, or break the lease without penalty.
Check your city or county zoning laws and rental registration requirements. Some cities require landlords to register each rental property and pay an annual fee. Some limit how many unrelated people can live in a single-family home. Some require landlords to obtain a rental license before renting. These rules are separate from state law and can be strict — violating them can result in fines or an order to stop renting the property until you comply.
The mortgage application and underwriting process
The mortgage process for investment property is similar to buying a primary residence but takes longer and requires more documentation. You will need to provide two years of tax returns, recent pay stubs, bank statements showing your down payment and reserves, and a list of all debts. The lender will verify your income, pull your credit report, and calculate your debt-to-income ratio — the percentage of your gross monthly income that goes to all debt payments, including the new mortgage.
Lenders are stricter with investment property. Most require a debt-to-income ratio of 43 percent or lower, compared to 50 percent for primary residences. If you already have a mortgage, car loans, or credit card debt, adding an investment property mortgage might push you over that limit. Some lenders will count only 75 percent of the rental income you project, to account for vacancies and repairs, which can lower the amount they will lend you.
The lender will order an appraisal to confirm the property is worth what you are paying. If the appraisal comes in low, you have three options: renegotiate the price with the seller, put down more cash to make up the difference, or walk away. The appraisal process typically takes one to two weeks. After the appraisal, the lender will order a title search to confirm the seller actually owns the property and no liens or judgments are attached to it. This also takes one to two weeks. Total underwriting time is usually four to six weeks.
Closing costs and what happens at closing
Closing costs for investment property typically range from 2 to 5 percent of the purchase price. These costs include the appraisal (usually $400 to $600), the lender's origination fee (typically 0.5 to 1 percent of the loan amount), title insurance ($500 to $1,500 depending on the property price), an attorney or title company fee ($300 to $1,000), property survey if required ($300 to $500), and recording fees ($50 to $200). Some of these costs are paid to the lender; others go to the title company, attorney, or local government.
At closing, you will sign the promissory note (your promise to repay the loan), the mortgage or deed of trust (the lender's claim on the property if you do not pay), and the deed (the document that transfers ownership to you). You will also sign a closing disclosure, which summarizes all the loan terms and costs. Read this document carefully — it should match what you were quoted. If numbers have changed, ask the lender to explain before you sign.
After closing, the deed is recorded with your county or local government, which makes your ownership official and public. You will receive the keys and can begin renting the property. However, you are responsible for all property taxes, insurance, and maintenance from the closing date forward, even if you have not yet found a tenant. Budget for this gap when you calculate your cash reserves.
Tax obligations and deductions for investment property owners
Investment property income is taxable. You must report all rent you collect on your federal tax return, even if you do not receive it in cash (for example, if a tenant pays late or you forgive a month's rent). However, you can deduct many expenses. Mortgage interest, property taxes, insurance, utilities you pay, repairs, maintenance, property management fees, advertising for tenants, and legal fees are all deductible. Depreciation — a deduction for the theoretical wear and tear on the building — is also deductible, though it has complex rules and can affect your taxes when you sell.
The rules differ depending on how you own the property. If you own it individually, investment income and deductions flow through to your personal tax return. If you own it through an LLC, the LLC files its own return, and you report your share of the profit or loss. If you own it with a spouse or partner, you may file as a partnership. Each structure has different tax consequences, and the right choice depends on your overall income, your state's tax laws, and your long-term plans for the property.
Keep detailed records of all income and expenses. The IRS can audit rental property returns, and you will need receipts, bank statements, and invoices to back up your deductions. Many investors use accounting software or hire a bookkeeper to track this. The cost of professional tax preparation for investment property is usually deductible as a business expense.
What to do after you close and before you rent
After closing, you own the property but do not yet have a tenant. This is the time to make any repairs or improvements you identified during inspection, update the utilities to your name, and obtain landlord insurance. Standard homeowners insurance does not cover rental property; you need a landlord or investment property policy, which covers the building but not the tenant's belongings. This insurance typically costs 15 to 25 percent more than homeowners insurance.
Before you advertise for tenants, understand your state's fair housing laws. Federal law prohibits discrimination based on race, color, national origin, religion, sex, familial status, or disability. Many states add protections for sexual orientation, gender identity, marital status, or source of income (such as Section 8 vouchers). You cannot refuse to rent to someone because they receive housing assistance, have a disability, or have children. Violating fair housing law can result in fines up to $16,000 for a first offense and lawsuits from tenants.
Decide whether you will manage the property yourself or hire a property manager. Self-management saves money — typically 8 to 12 percent of rent — but requires you to handle tenant screening, lease signing, rent collection, maintenance requests, and evictions. A property manager handles all of this but takes a cut of the rent. Many first-time investors self-manage one or two properties and hire a manager once they own more.
Frequently Asked Questions
Can I buy investment property with less than 20 percent down?
Some lenders will accept 15 percent down, but you will pay a higher interest rate and may be required to purchase mortgage insurance, which adds to your monthly payment. You will also need stronger credit and larger cash reserves. The lower your down payment, the more risk the lender sees, and the more you will pay for that risk.
What if I want to live in the property part-time and rent out the rest?
If you occupy part of the property as your primary residence — for example, you live in one unit of a duplex and rent the other — you may may have access to for a primary residence mortgage with a lower down payment and interest rate. However, you must occupy it as your primary residence, and lenders verify this. The rules vary by lender, so ask before you apply.
How do I know if a property will generate enough income?
Calculate the annual operating expenses (property tax, insurance, maintenance, vacancy, property management), subtract them from the annual rent, and divide by the purchase price. This is your cash-on-cash return. Most investors target at least 5 to 8 percent annually, though this varies by market and property type. Run these numbers for several properties to see what is realistic in your area.
What happens if a tenant stops paying rent?
You must follow your state's eviction process, which typically requires written notice (usually 3 to 30 days depending on your state), filing in court, and obtaining a judgment before you can remove the tenant. The process takes weeks to months and costs money in court fees and attorney fees. During this time, the tenant can remain in the property without paying. This is why cash reserves are critical.
Can I deduct the cost of buying the property?
No. The purchase price, down payment, and closing costs are not deductible; they are part of your basis in the property. However, the mortgage interest you pay is deductible, as are repairs and maintenance. Improvements that add value or extend the life of the property must be depreciated over time rather than deducted immediately.