How to Buy Your First Rental Property: A Step-by-Step Guide

Why buy a rental property?

In 2023, 514,000 new rental households were constructed in the US. The rental property market is projected to continue rising as Gen Z becomes the first renter-majority generation, on track to be the main renter demographic by 2030.

Rental properties are here to stay, but investing in them is more than just a trend. It offers multiple financial benefits for investors:

• Steady cash flow: Consistent rental income generates a reliable revenue stream.
• Long-term appreciation: Over time, property tends to get more expensive.
• Inflation protection: As inflation rises, so do rental rates, helping to offset cost-of-living increases.
• Economic resilience: Rental properties can be a strong hedge against economic downturns, remaining in demand even during recessions.
• Tax advantages. Tax advantages represent a sophisticated area for many people who are new to real estate. 

Let's discuss the latest aspect of rental property investing in more detail.

Tax advantages

Here are the basics you need to know:

• Depreciation. One major advantage is depreciation, which allows investors to deduct the cost of their residential property over 27.5 years, therefore reducing taxable income.
• Mortgage interest. Mortgage interest is fully deductible, which can save  thousands of dollars each year, especially on large loans.
• 20% Pass-Through Deduction (Section 199A). This allows for significant tax relief by providing a 20% deduction on qualified rental income. 
• 1031 exchanges. Investors can defer capital gains taxes when selling and reinvesting in another property, which helps avoid immediate tax liabilities.
• Opportunity Zones. By investing in certain low-income areas, investors can postpone their capital gains. Hold on to the property for more than 10 years, and the capital gains can be removed from taxation forever.

Additional deductions include expenses for property taxes, repairs, and maintenance. Here’s an example from “Every Landlord’s Tax Deduction Guide” by Stephen Fishman:

“Karen owns a rental house. This year, her effective gross rental income (all the income she actually earned from the property) was $10,000. She doesn’t pay tax on the entire $10,000 because she had the following expenses—$5,000 in mortgage interest, $1,000 for other operating expenses, and $2,000 for depreciation. She gets to deduct these as outlined in the above equation:

Effective Gross Rental Income $10,000
– Operating Expenses 6,000”
– Depreciation and Amortization 2,000
= Taxable Income $ 2,000

Karen only pays income tax on her $2,000 taxable income”

But before you dive head first into how to start real estate investing, you need to be aware of some risks.

Challenges of owning a rental property

All types of residential real estate are vulnerable to shifts in the economy and the typical wear and tear that occurs over time. With rental properties, another major concern that can cause headaches is a high vacancy rate.

When rental properties experience periods of vacancy, you lose rental income. If the property remains vacant for too long, covering your mortgage payments and other expenses can become challenging.

If you're about to invest in a property that has been a rental for some time, running a vacancy rate analysis in advance will give you a clearer picture of what to expect. You should also conduct regular vacancy rate analyses on your rental portfolio as it grows to identify which properties have the fastest turnovers and understand why.

Simple vacancy rate calculation for an apartment complex with 100 units where 10 are currently vacant:

10/100 x 100 = 10%.

Current vacancy rate is 10%.

For a single-family real estate property unit, you can use a different formula:

Vacant Days / Days Available for Rent x 100

For example:

45 (turnover period) / 365 (days in a one-year lease) x 100 = 12.3% 

The vacancy rate is 12.3%

With that in mind, you are ready to plan the purchase of your first rental property.

Steps to buy your first rental property

To make the most profitable purchase, prepare for a lengthy process filled with planning, market analysis, and communication. Let’s break it down. 

Step 1 – Set your investment goals.

Consider your long-term financial goals and define why you want to buy a rental property: cash flow, appreciation, or both.

• Buying for cash flow means your main priority is the passive income you receive from monthly rent payments. The specifics of what makes for good cash flow depend on your initial investment, which is known as the cash-on-cash return.
• Buying for appreciation means investing in a property with a good chance to increase in value over time. The advantage of real estate investment is that inflation typically causes properties to appreciate, but you can further maximize your gains by researching the most promising locations and property features, and by purchasing a property that will generate income through compound interest.

How compound interest works

"You buy a house worth $400,000, financing 80% of it with a mortgage. This means you would need a 20% down payment, or $80,000.

If the rental income covers your monthly payments, and the house appreciates by 5% in the first year, the appreciation would be $20,000 (5% of $400,000). That’s a 25% return on your initial $80,000 investment.

The next year, your house is worth $420,000, and it appreciates another 5%, or $21,000."

400,000 x 0.05 = 20,000
400,000 + 20,000 = 420,000
420,000 x 0.05 = 21,000
420,000 + 21,000 = 441,000
441,000 x 0,05 = 22,050
441,000 + 22,050 =463,050

…to be continued.

As you can see, the property’s value increases each year. Meanwhile, your mortgage balance decreases as you make payments, meaning you’re building equity while the value of your asset appreciates.

This journey towards infinite appreciation will begin from the first footstep: calculating the amount of money you need to start.

Further reading: Real Estate Investing for Beginners: Where to Start

Step 2 – Assess your financial readiness

During this stage, you'll determine your current budget and the expenses you'll face before your rental property becomes truly profitable.

• Down payment: The fixed sum you pay upfront to secure a mortgage or loan. Larger down payments can lower your interest rate immediately, but don’t be discouraged if your funds are limited. The average down payment on a house in the U.S. in Q1 2024 was about 8% of the median home purchase price.
• Mortgage or loan: The money you receive from a lender, which you will pay back over an agreed-upon period. With rental properties, your tenants' monthly rent should be slightly higher than your monthly mortgage payment.
• Operational costs: This includes everything from property taxes to advertising, repairs, and property management fees. To estimate rental property operating expenses, many investors use the 50% Rule, which suggests expenses are about half of the gross annual rental income, excluding mortgage and capital expenses.
• Emergency fund: Money for unexpected expenses and long vacancy periods. This fund should cover 3-6 months of tenant search and basic expenses.

Once your finances are all sorted, it’s time to find the best way to invest them.

Further reading: How to Finance Your Investment Property

Step 3 – Research the market

Real estate market changes every year, so research is everything. Let’s explore the key statistics you need to track to learn how to start real estate investing. 

Property values and rental demand

Property values, including those of rental properties, are continually rising due to inflation, but the rate of inflation itself fluctuates. In 2023, the average inflation rate was 4.1%. In 2022, it was 8.0%, and in 2021, it was 4.7%.

Inflation raises property prices by increasing construction and material costs while reducing the purchasing power of money. In addition, the U.S. real estate market has seen a rapid increase in property prices over the last five years. Home prices rose 9% in 2019, 12.9% in 2020, 15.4% in 2021, and 10.22% in 2022, and average rents across the U.S. have been rising by about 3.18% annually since 2012.

Knowing this information is crucial for both setting a competitive rent and ensuring consistent wealth generation. Rental demand also fluctuates from state to state, so be sure to stay updated on the latest rental market trends.

Economic metrics of a good buy and hold market

If you have a great property in the wrong location, investing in it doesn’t make sense. When seeking rental investment opportunities, start by analyzing the market.

Further reading: The Top 10 Cities for Real Estate Investment in 2025

Key economic indicators to consider include GDP, GMP, and several others:  

• GDP (Gross Domestic Product): This measures a region's economic strength by calculating the total value of goods and services produced over a period. It provides insight into the area’s economic health and potential for sustaining growth over the next 5 to 15 years, making it crucial for investment decisions.  
• GMP (Gross Metro Product): This assesses the economic output of a specific metropolitan area. Reviewing GMP trends over 1, 5, and 10 years offers insight into local market stability, resilience, and recovery following economic cycles, helping investors identify regions with consistent, sustainable growth.  
• MSA (Metro Statistical Area): This indicates population growth potential. When deploying capital for the next 5 to 15 years, a growing MSA figure suggests positive demographic trends.  
• Net migration number: This reflects the area’s attractiveness and growth prospects. A positive trend here is favorable for long-term growth potential.  
• Percentage of renters. The ideal market would have 30%, 40%, or more.  
• Housing Affordability Index (HAI): This evaluates affordability based on income levels. For example, if the median price in your target market is $150,000 and the median income is $50,000, the HAI would be 3. An ideal HAI is around 4.  
• Rent to Price Ratio (RPR): This measures rental income relative to property price, providing an estimated cash flow.  

Example:

$1,000 Monthly Rent × 12 Months = $12,000  

$12,000 ÷ $125,000 (Median Price) = 9.6%  

The ideal RPR depends on the type of market you're operating in—whether it’s a growth market or a high-yield market.

Population growth and employment opportunities

To spot the potential for a booming rental market, you need to consider not only changing population densities but also the age groups experiencing these shifts.
For example, more people moved to the southern U.S. in 2023 than in any previous year, with Florida named the fastest-growing state and Tampa ranking first among the top 10 cities with the most real estate potential. However, only 26.5% of the population in the Cape Coral-Fort Myers, Florida, metro area consists of Millennials and Gen Zers, placing this area among the lowest for prospective renters. 

On the flip side, the Dallas, Texas, metro area is quickly becoming a rental hotspot, with just 99 available rentals per 100,000 households and an influx of younger generations.

The U.S. is also currently experiencing a manufacturing boom, with more than 800,000 new jobs, primarily concentrated in the Sun Belt. Many property investors are flocking to areas near major players like Taiwan Semiconductor Manufacturing’s $65B chip complex in Arizona and Ford’s $5.6B BlueOval City in Tennessee, making the competition to buy rental properties in these regions quite intense.

These demographic shifts, along with other key market research metrics, are relatively easy to track using various digital tools, but they will go a long way in letting you know exactly how to start real estate investing in a specific area. 

Would you prefer to enter a booming market and compete with other investors for rental units, or would you rather invest in an area with oversupply and longer vacancy periods? It’s up to each investor to choose their battle.

Step 4 – Choose the right property type

It’s also up to each investor to select a property type that best fits their objectives.

• Multi-family homes like duplexes or triplexes are very convenient for synchronizing maintenance and rent collection. They are also great for house hacking, where the landlord lives in one part of the multi-unit property and rents out the rest.
• Single-family apartments and condos typically require a smaller initial investment compared to single-family homes, making them a great option for beginner investors. However, they are generally limited to metropolitan areas where competition is higher. Investing in a condo will be more like being a regular landlord with full control of the asset, while apartments are generally regulated by companies. 

In recent years there has also been a rise in the amount of co-renting and co-living spaces across the world. Large co-living complexes can easily lease over 300 apartments in just three months, but there are certain requirements specific to this new property type that the house owner has to provide:

• Personal space for every tenant, including separate rooms of similar size, an adequate number of bathrooms, and sufficient parking for the intended number of tenants.
• Social spaces, such as a large, welcoming communal area, along with amenities like gyms, co-working spaces, and backyards.

Research shows that the popularity of co-living spaces began to rise after the COVID-19 pandemic left many people eager for social interaction. Renovating a property to be co-living-friendly may require additional time and funds, but the growing demographic of young renters makes this trend worth exploring.

Step 5 – Calculate potential ROI and cash flow

Before purchasing a property, all real estate investors need to know the metrics that will help calculate the profits it can produce.

• Return on Investment (ROI): ROI is used to determine the profitability of an investment. This gives you a broad sense of how successful the investment is compared to its cost. 
• Cash on Cash Return: A subset of ROI, cash on cash return measures the return on actual cash invested to assess leveraged real estate investments.
• Cash Flow: Cash flow measures the net cash the property will generate. Positive cash flow indicates that the property generates more income than it costs to operate.
• Cap Rate: The capitalization rate, or cap rate, measures the expected annual return based on the property’s value. It helps to assess a property’s profitability without considering financing.

Let’s talk more about them.

Return on Investment (ROI)

There are a couple formulas to calculate your potential ROI that will give you the same numbers:

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment.
or
ROI = (Net Profit / Cost of Investment) x 100

For instance, if you buy a property that costs $200,000 and just hold, with an average appreciation rate of 4% you could sell it in 10 years for $296,000, but let’s round it up to 300,000. Now we calculate:

  $300,000
- $200,000
=$100,000 (the net profit)

ROI = $100,000 / $300,000 x 100 = 33.3%

For rental properties, ROI also factors in rental income. It’s useful for comparing the performance of different properties or investments.

Cash flow

To calculate cash flow on a rental property, use this formula:

Gross Rental Income – (Operating Expenses + Taxes + Dept Payments) = Cash Flow.

It could look like this:

  $2,000 (monthly rental income)
- $1,500 (mortgage, insurance, property taxes, maintenance, and vacancies)
= $500 (your cash flow)

To estimate expenses, some investors use the 50% rule, assuming 50% of rental income will go toward expenses, or you could calculate them manually.

Cash-on-cash return

The formula for cash-on-cash return is:

Cash on Cash Return = (Annual Pre-tax Cash Flow / Total Cash Invested) x 100

This example from Investopedia helps to see how it works:

“Investor purchases a property for $1 million putting $100,000 cash as a down payment and borrowing $900,000. The investor also pays $10,000 cash for ancillary costs out of pocket. The investor decides to sell the property for $1.1 million after having paid $25,000 in loan payments that include a principal repayment of $5,000.

This means the investor's total cash outflow is $135,000 [$100,000+$10,000+$25000] and cash inflow is $205,000 [$1,100,000 - $895,000]. So, the investor's cash-on-cash return is 51.85% [($205,000 - $135,000) ÷ $135,000]”.

by Will Kenton

With rental properties, getting 10-12% of what you invested within a year is considered a good cash-on-cash return.

Cap rate

Here’s how you calculate cap rate:

Cap Rate = Stabilized Net Operating Income (NOI) / Current Market Value x 100

Net Operating Income (NOI) in a rental property is the annual income generated from the property after subtracting all operating expenses, but before debt payments and taxes.

Suppose you have a rental property with a Net Operating Income (NOI) of $50,000 per year, and the property is currently valued at $500,000.

($50,000 / $500,000) x 100 = 10% Cap rate

Cap rates that fall anywhere between 4% and 12% are generally considered good.

Estimating your potential profit helps to determine how much money to take out.

Step 6 – Secure financing

If you don’t know how to start real estate investing because of a limited budget, don’t worry. Few investors have the full purchase price of a future rental property readily available, and even if they did, paying it upfront could limit their potential tax advantages. Most real estate investors take out a loan:

• Hard money loans come from private companies or groups specializing in real estate investments. They are often used for house flips and less frequently for rental properties.some text
  • Pros: Quick approval (within 24 hours) makes them ideal for competitive markets, and your credit score doesn’t need to be as high as with other loan options.
  • Cons: High-interest rates (10-18%) and short loan terms (6-24 months) can pressure first-time buyers intending to rent. While fix-and-flips are like sprints, wealth generation through rentals is more of a marathon; it takes time.
• Private money lending involves individual investors providing short-term, asset-backed loans for real estate projects.some text
  • Pros: Much of a private loan relies on interpersonal communication, making most terms negotiable and allowing for unconventional income or credit situations.
  • Cons: Interest rates (10-12%) are relatively high, and building good rapport with your lender is crucial. A first-time buyer may lack the experience to negotiate confidently.
• Creative financing options, like seller financing, turn the seller into a lender. The buyer makes payments directly to the seller instead of a bank. Down payments are flexible, depending on what you negotiated.some text
  • Pros: First-time buyers can benefit from lower down payments (10-20%) and more negotiable interest rates (5-7%), making it suitable for those with lower credit scores or difficulty securing conventional financing.
  • Cons: It can be challenging to find sellers willing to offer financing.
• FHA loans are government-backed mortgages for borrowers with lower incomes.some text
  • Pros: Low-interest rates (3.5-5%), a low down payment (3.5%), and flexible credit score requirements (580+) make homeownership accessible for those with limited financial resources.
  • Cons: FHA loans require mortgage insurance and have strict property standards, which may limit property options.

Once you secure your funds, it’s time to put them to good use.

Step 7 – Make an offer

You chose your property,  you have your money. How do you make an offer that maximizes your profits? Negotiating requires rapport, education, and persistence. Here are a few tips for strong negotiations:

• Get a home inspection to establish a realistic price point and identify areas for potential negotiation. 
• Negotiate in person whenever possible to build a connection and create rapport. 
• Be ready to support your offer with substantial reasons for your desired price, including comparable properties. 
• Be an active listener and focus on finding mutually beneficial solutions. 
• Ask questions to understand the buyer’s vision and specific goals. 
• Stay calm, keep thorough documentation of all discussions, and be ready to walk away if the deal does not fit. 
• Consider proposing creative solutions, like covering closing costs, to reach a favorable agreement.

Purchase Agreement

A real estate purchase agreement is a contract between a buyer and seller that describes the terms and conditions of a property sale. Use this checklist to ensure your document includes all necessary details:

•  Full names of buyer and seller
• Property description (address and legal description)
• Purchase price and payment terms
• Deposit amount and conditions
• Closing date and possession date
• Financing and inspection contingencies
• Title and zoning conditions
• Disclosures (e.g., property condition)
• Closing costs and who pays them
• Signatures of both parties

After signing the purchase agreement, all that’s left is to close the deal.

Step 8 – Close the deal and purchase your rental property. 

Here’s the real estate closing process in a bullet point list:

• Home inspection to assess the property’s condition.
• Appraisal to confirm the property’s market value.
• Title search to ensure the property is free of legal issues.
• Secure financing and confirm loan approval.
• Review and agree on closing costs (e.g., lender fees, attorney fees, etc.).
• Sign closing documents, including the deed, mortgage agreements, and bill of sale.
• Transfer funds from buyer to seller.
• Prorate property taxes and utilities for the respective ownership periods.
• Record the title deed with the local government.
• Buyer receives keys and takes possession of the property.

The entire process typically takes 30 to 45 days, depending on the transaction's complexity and the speed of securing financing.

Hiring an attorney

Real estate legal documents contain many specifics that can be challenging for beginner investors to navigate. A closing attorney offers legal protection and helps you to navigate local laws. Alternatively, you could seek the help of a general real estate attorney with prior experience in closing deals.

And, just like that, you’re a rental property owner! But owning it is only half of the story…

Managing your first rental property

Rental properties require consistent maintenance and hands-on management. Key responsibilities include:

• Rent collection and lease enforcement
• Tenant screening and communication
• Property maintenance and repairs
• Budgeting and expense management
• Ensuring legal compliance with local laws
• Managing tenant turnover and filling vacancies
• Record-keeping and reporting to property owners

As your investment portfolio grows, you might start to need a property manager. A property manager, with a background in real estate investment, can handle these responsibilities for a fixed fee or a percentage of rental income, typically between 8% and 12%.

To optimize your collaboration with a property manager and reduce lease renewal costs, prioritize lease renewals and aim for multi-year leases. Once your property management is in place, you’re ready to move on to your next project and continue expanding your rental portfolio.

Conclusion

Purchasing your first rental property can be overwhelming for beginner investors, but you can adjust your perspective by looking at it like a learning experience.

Set investment objectives, assess your financial readiness, and research the market before choosing the right property type. Calculation of potential returns will help you build a strong case when securing appropriate financing, but negotiating a solid purchase agreement will also require confidence and charisma. Once the purchase is finalized, the way you manage the property will make or break your success. 

Remember, patience and diligence are key in real estate; the main profit in rental property investment comes from a steady flow of cash that generates over time. It’s no quick gain. Stay focused on your goals, adapt to market changes, and consistently grow your rental portfolio.

‍