Buying a rental property: Everything you need to know

In the right location and with the right price, a rental property can be a great investment opportunity. Some people own a number of these and hire property managers, while some just have one that they manage themselves. Whatever you’d rather do, having a rental property might be within your reach. Here, we’ll explain what you need to know before buying, how to buy, and how to maximize the investment.

What you need to know before purchasing rental property

You probably already have experience buying a primary residence, but buying a house to rent out is a bit different. It’s not a just-perfect-for-you home to slowly renovate over time, but something you’ll want to start earning money quickly. Finding affordable properties in good locations and cost-effective financing are important, as well as understanding your responsibilities.

You’re responsible for everything as a sole owner

If you’re the one funding and purchasing the home (often a multifamily home), you’ll also be in charge of finding and screening tenants, maintaining the property, collecting rent, and paying property taxes. If this sounds overwhelming for you, you might want to find a property manager before committing to a purchase.

You could invest with a partner

You also don’t have to go in alone. You can find an investment partner and pool resources like money and skill sets. Maybe you’ll find someone who already owns a few properties or who has management experience. Or maybe you’ll work with someone who’s also new to the field, but able to help with the initial down payment.

Rental properties come in different forms

You don’t want to just buy any old property. You have to think about the location and demographics of the area. For instance, if it’s a college town, an apartment building or multifamily home might be a good investment. In the sleepy suburbs with a lot of families, maybe a single-family home would be best. If you’re looking at a vacation hotspot, maybe a cottage for short-term rentals is what you want.

You also have to decide which kind of property you have the time and management skills for. Some properties need landscaping and lawn care. Others might require finding many tenants. Maybe you’ll go for a property that needs to be renovated first. Think carefully about what your skillset is and what you have the time for.

How to buy a rental property

The steps you’ll follow to buy a rental property are pretty straightforward if you have some direction. Here is a step-by-step guide:

1. Research locations and rental markets

The cheapest location is not always the best location. You want to find a neighborhood that’s safe and desirable. Look into local amenities, public transportation, school districts, crime statistics, and anything else you would consider before buying a home for yourself. If it’s a neighborhood you’d want to live in, others probably feel the same.

Once you pick a neighborhood, look at the rental statistics. What’s the average rental price? How many vacancies are already on the market? Is there a big demand for rentals? What kind of properties are up for rent? You might realize that the neighborhood you’d like to buy in isn’t the best for a rental. Focus instead on areas with higher average rent prices and lower vacancy rates to maximize your return.

Rocket Homes℠, can connect you with a local real estate agent who can help you find the best rental property for your budget.

2. Decide on the kind of property

Do you want a single-family home, a duplex, or an entire apartment building that can host a dozen tenants?

If you have experience with fixer-uppers, these might be a good option for rental properties. On the other hand, if you’re not used to dealing with these homes, you might end up spending more money than you can make getting it fixed up. In that case, look for ready-to-rent properties.

3. Understand the financial impact of local property taxes

Although a rental property in a desirable neighborhood is likely to bring in more money, you’ll also probably have to pay higher property taxes. Because property taxes are public record, you should be able to use local government resources to find the tax history on a particular property. Contact the local county assessor or tax collector office for details on how to get this information.

4. Decide whether you’re buying with cash or a mortgage

If you have a lot of cash to spare, you could go ahead and buy the property outright. But most of us aren’t in the position to do that, so you’re probably looking at a mortgage.

If you’re not living in the rental property as a primary residence, your financing options will be more limited than they would be. Government-backed loans are mainly for owner-occupied properties, so you’ll have to look elsewhere. Home equity loans or cash-out refinances are possible options.

When buying an investment property, the down payment will typically be higher at 15% – 20%. You’ll also face higher interest rates and stricter qualification requirements.

5. Get preapproved

Getting a mortgage for a rental property, also called a non-owner-occupied loan, isn’t much different from getting a mortgage for a primary residence.

As always, it’s important to start with a preapproval. This will help you understand the amount you can borrow, the interest rates and the terms for which you qualify. It will also show property sellers that you’re a serious buyer.

6. Receive an accepted offer

Once you’re preapproved and have your eye on the right property, it’s time to make an offer. If accepted, you’ll proceed with the mortgage process. Be prepared for additional steps like an appraisal or inspection before closing, and make sure all your paperwork is in order. After closing, you can make necessary repairs and start looking for tenants.

Is buying a rental property a smart investment?

People invest in rental properties to earn money. While it can be a smart investment that gives you a significant return, it can also be a drain on your finances. You’re unlikely to make all your money back quickly, so plan carefully, and be sure you know what you’re getting into.

Predicting rental property expenses

Owning any property comes with expenses, both expected and unexpected. Here are some you’ll be responsible for:

• Maintenance costs: It can be hard to predict maintenance costs, so it’s best to reserve 1% – 3% of the property’s value every year. Even if a property is new and in good condition, weather or other unpredictable issues could result in necessary maintenance. You might also have to consider homeowners association (HOA) fees.
• Landlord insurance costs: While landlord insurance might not be required in all areas, it’s a good idea to purchase it. Landlord insurance policies usually cover the property itself and personal liability if someone is injured on the property. You can also purchase add-ons for things like building code updates or vandalism.
• Property management premiums: If you’re hiring a property manager, plan on putting aside 8% – 12% of your monthly rental income for their pay.
• Property taxes: Property taxes across the country range from 0.27% – 2.23% in 2025, so this is another payment you’ll have to consider.
• Mortgage payments: Unless you’re also living on the property you’re renting out, such as a multifamily home, you’re going to have at least two monthly mortgage payments.
• Utilities: Some landlords ask tenants to pay all utilities, while others will cover some or all of these costs depending on the complexity of splitting up bills or how hard it is to find tenants.

Calculating return on investment for rental properties

Return on investment is a way to understand how much profit your investment might bring. An easy way to think of it is how much money you make divided by how much you spend. There are several ways you can calculate ROI, but the cash-on-cash return approach is often used for rental homes.

Here’s how to calculate your ROI this way:

1. Estimate your annual rental income. Look at other comparable rental properties in the area to get an estimate of what you might make in rental income. This will not only help you estimate your rental income, but it will also allow you to offer a fair and competitive price.
2. Estimate your annual expenses. Include taxes, insurance, maintenance, and repairs as well as any additional fees like payments to a property manager or HOA fees.
3. Find your net operating income. Calculate your NOI by subtracting your annual rental income from your annual expenses.
4. Find your total cash investment. Add your down payment, closing costs and any up-front renovation or repair costs to determine your total cash investment.
5. Divide your NOI by your total cash investment. The result determines your ROI.

A rental property ROI calculation example

Let’s calculate your expected ROI on a three-bedroom rental home you bought for $200,000.

1. Annual rental income: You think you can rent the property for $2,100 a month, which is $25,200 a year ($2,100 ✕ 12 months).
2. Annual expenses: Your monthly mortgage payment with tax and insurance is $1,400 a month ($16,800 a year). You set aside 1% of the property value ($2,000) for annual repairs and maintenance. You also pay about $1,500 a year for landlord insurance. All the expenses total $20,300 a year ($16,800 + $2,000 + $1,500).
3. NOI: Your NOI is your annual rental income minus your annual expenses, which is $4,900 ($25,200 – $20,300).
4. Total cash investment: Your down payment ($50,000) and closing costs ($6,000) total $56,000. You didn’t invest any money in repairs up front, so $56,000 represents your total cash investment.
5. ROI: Your NOI ($4,900) divided by your total cash investment ($56,000) is approximately .09, which means your ROI is 9% (.09 ✕ 100 = 9).

Interpreting ROI

Is 9% a good ROI? That depends on where you live and your circumstances. A good ROI may look different in California than it does in Michigan. Research how your property compares to other rentals in the area with a comparative market analysis to see if this ROI makes sense for your region and budget.

Pros and cons of buying a rental property

We’ve already talked a bit about them, but let’s look more closely at the pros and cons of buying rental properties.

Pros of buying a rental property

• Passive income: Managing rental properties can be a source of passive income, especially if you have a property manager. You can continue your normal job while earning more income.
• Increased value: Rising market values and other housing market indicators might increase the value of your investment property. This means that if you eventually decide to sell it, you can earn a profit.
• Tax deductible: If you rent out your property for at least 14 days a year, you might be eligible for special tax deductions. These could include the cost of repairs, insurance, mortgage interest, attorney’s fees, marketing expenses, property depreciation, and other related expenses. Because these vary based on state and income level, it’s best to consult a tax specialist.

Cons of buying a rental property

• Finding and managing tenants: You’ll have to find enough tenants for the property to generate income, and you’ll want to make sure your tenants pay the rent. This means you will have to advertise your property and put effort into screening those who are interested.
• Upkeep and maintenance: You’re responsible for regular maintenance and repairs, which means keeping the building up to code and landscaping.
• Ongoing costs: If you’re the sole owner, you’re also in charge of the finances: the mortgage payment, property taxes, and insurance. You also might want to pay for additional landlord insurance.
• Property management: If you don’t want to manage the property yourself, you’ll have to hire a property manager. This can get expensive.

The bottom line: A rental property can be a worthy investment with the right planning

Rental real estate can be a rewarding investment, not just because you’ll earn money, but because you’ll help others find a place to live. To be successful, be sure you understand your responsibilities, liabilities, and limitations. Even if you think you need an investment partner or a property manager, you can still be a successful real estate investor.

Have you done all your research and found a rental property you’re ready to buy? Start your mortgage application and begin your real estate investment journey today.