To become a rental property owner, you line up investment-property financing with a larger down payment than a primary home requires, hold the property through a structure that shields your personal assets, satisfy your city’s rental licensing and habitability rules, screen tenants under fair housing law, sign a lease that complies with your state’s deposit rules, and report the income on Schedule E. Fannie Mae currently requires at least 15 percent down for a single-unit investment property and 25 percent down for a two-to-four-unit building, so the cash threshold is the first thing to confirm before you shop.1Fannie Mae. Eligibility Matrix
Line Up Financing Built for Investment Property
Investment loans are underwritten more strictly than owner-occupied mortgages. The maximum loan-to-value ratio under Fannie Mae guidelines is 85 percent on a single unit and 75 percent on a two-to-four-unit building, and individual lenders often set tighter limits based on your profile.1Fannie Mae. Eligibility Matrix
Credit score minimums for conventional investment loans generally fall between 620 and 680. Scores at 740 and above typically unlock the best rates, which compounds into real money over a 30-year loan. Expect the lender to scrutinize your debt-to-income ratio, cash reserves, and the property’s projected rental income on top of your credit.
Before you start writing offers, open a separate bank account for the rental business. Running personal and property money through the same account is called commingling, and it undermines the liability protection you’ll set up next.
Hold the Property Through an LLC and Buy the Right Insurance
Many investors title rental property to a Limited Liability Company rather than themselves. The LLC puts a legal wall between the property and your personal savings, so a tenant or visitor who sues over an injury or dispute is suing the entity, not you. You form one by filing organizational documents with your state’s Secretary of State, naming the entity, listing a registered agent, and describing the management structure. Filing fees run roughly $50 to $500 depending on the state, and most states charge an annual or biennial renewal to keep the LLC in good standing.
A standard homeowner’s policy generally will not cover a property you rent out. File a claim on the wrong policy and the insurer can deny it outright. What you need is a landlord policy, sometimes written as a dwelling fire policy, which covers the structure, liability for injuries on the premises, and lost rent if the unit becomes uninhabitable. An umbrella policy stacks on top of that for broader liability limits; coverage usually starts at $1 million for roughly $150 to $350 per year.
Close on the Property
Your lender will require the Uniform Residential Loan Application (Form 1003), capturing the property address, legal description, expected monthly rent, and your debt-to-income ratio.2Fannie Mae. Uniform Residential Loan Application Form 1003 Have two years of tax returns, bank statements, and documentation of any existing rental income ready for underwriting.
If the home was built before 1978, federal law requires the seller to disclose any known lead-based paint hazards before you are legally bound by the contract, provide an EPA-approved information pamphlet, and give you at least a 10-day window to inspect for lead paint.3Office of the Law Revision Counsel. 42 USC Chapter 63A – Residential Lead-Based Paint Hazard Reduction – Section 4852d The same disclosure obligation will apply to you later when you lease the property.4eCFR. 24 CFR Part 35 Subpart A – Disclosure of Known Lead-Based Paint Hazards Upon Sale or Lease of Residential Property
Order a professional home inspection covering the HVAC, foundation, electrical, roof, and plumbing. Both your lender’s willingness to fund and your own repair budget depend on what that report finds. Pull local vacancy and rent data at the same time so your income projections match the market the property actually sits in.
At closing you sign the mortgage note (your promise to repay) and the deed (the transfer of ownership). An escrow agent or title company handles the exchange so the seller only gets paid once everything is signed. After closing, the escrow agent sends the deed to the county recorder, which enters it into the public record and gives legal notice that you own the property. Recording fees generally run from about $15 for a base filing to over $100 once state and local surcharges are added.
Register the Rental and Meet Habitability Rules
Owning the property doesn’t automatically mean you can rent it. Many cities and counties require you to obtain a rental business license or register the property as a rental unit before advertising to tenants. Registration usually means filing an application with the local building or housing department, listing your contact information and sometimes a local property manager or emergency contact. Fees vary widely by jurisdiction.
Most localities also require a certificate of occupancy or a rental inspection before anyone moves in. Inspectors check smoke detectors, egress windows, plumbing and electrical safety, and structural condition. Failing an inspection delays the lease start and can trigger fines.
Behind every state’s rental code is the implied warranty of habitability: you must maintain safe, livable conditions for the entire tenancy. That means working heat in winter, functioning plumbing, no pest infestations, and a weatherproof structure. Violations can lead to fines, tenants legally withholding rent, or orders from housing authorities to make repairs.
Screen Tenants Without Violating Fair Housing Law
The federal Fair Housing Act prohibits discrimination based on race, color, national origin, religion, sex, familial status, and disability, and the rules apply at every stage: advertising, screening, lease terms, and enforcement.5Office of the Law Revision Counsel. 42 USC 3604 – Discrimination in the Sale or Rental of Housing State and local laws commonly add protected categories on top of the federal list, so check your own jurisdiction.
Write your screening criteria down before you accept the first application. Typical standards include a minimum credit score, an income-to-rent ratio of roughly 2.5 to 3 times monthly rent, clean eviction history, and positive references from prior landlords. Apply them identically to every applicant and keep the paperwork, including the reason for any denial, for at least three to four years.
Blanket criminal-record exclusions can violate the Fair Housing Act if they disproportionately affect a protected group without being tied to a real safety concern. HUD’s guidance is to evaluate each applicant on the nature, recency, and relevance of any offense rather than issuing a flat rejection.6U.S. Department of Housing and Urban Development. Housing Discrimination Under the Fair Housing Act
You also have to make reasonable accommodations for tenants with disabilities. The most common example involves assistance animals: if an applicant has a disability-related need for a service or emotional support animal, you generally cannot deny the request or charge a pet deposit for that animal, even under a no-pets policy.7U.S. Department of Housing and Urban Development. Assistance Animals
Adverse Action Notices Under the FCRA
If you pull a credit report or background check from a consumer reporting agency and the result causes you to deny the application, require a co-signer, or charge a higher deposit, the Fair Credit Reporting Act requires you to send the applicant a written adverse action notice. The notice must identify the reporting agency, state that the agency did not make the decision, and inform the applicant of the right to dispute the report’s accuracy and obtain a free copy within 60 days.8Office of the Law Revision Counsel. 15 USC 1681m – Requirements on Users of Consumer Reports If a credit score factored into the decision, you must also disclose the score, its range, and the key factors that reduced it.9Federal Trade Commission. Using Consumer Reports – What Landlords Need to Know
Sign a Lease That Will Hold Up
The lease is the contract that governs your relationship with the tenant. At a minimum it should name every adult occupant, identify the property, set the lease term, state the monthly rent and due date, and spell out the grace period and late fee if a payment is missed.
Treat the security deposit carefully. Roughly half the states cap deposits, typically at one or two months’ rent, and the rest set no statutory limit. Whatever the cap, your lease needs to lay out the conditions for withholding part or all of the deposit and the deadline for returning it after move-out. Deposit-return mistakes are one of the most common reasons landlords lose in small-claims court.
Round out the lease with maintenance responsibilities, pet and guest rules, an insurance requirement if you want tenants to carry renters’ coverage, and the process for repair requests. Give every adult tenant a signed copy. Once both sides sign and the tenant pays first month’s rent plus deposit, the tenancy starts.
Report the Income and Capture the Tax Benefits
Rental income is taxable and reported on Schedule E of your Form 1040. You report all rent received during the year, including advance rent and the fair-market value of non-cash payments, and against that you deduct ordinary and necessary expenses: mortgage interest, property taxes, insurance, repairs, management fees, and depreciation.10Internal Revenue Service. Instructions for Schedule E (Form 1040)
Depreciation is the deduction most new landlords underuse. The IRS requires you to depreciate the building (not the land) over 27.5 years using the straight-line method and a mid-month convention.11Internal Revenue Service. Publication 527 – Residential Rental Property A building with an adjusted basis of $200,000 produces roughly $7,273 in annual depreciation ($200,000 divided by 27.5), reducing taxable rental income without any additional out-of-pocket spending.
The Section 199A Qualified Business Income deduction lets eligible landlords deduct up to 20 percent of net rental income. It was originally scheduled to expire after 2025 but was made permanent by the One Big Beautiful Bill Act, signed in July 2025.12Internal Revenue Service. Qualified Business Income Deduction To qualify, your rental activity generally must rise to the level of a trade or business. The IRS safe harbor treats rental real estate as eligible if you keep separate books, log at least 250 hours of rental services per year, and keep contemporaneous records.
Repairs that keep the property working, such as fixing a faucet or patching drywall, are fully deductible in the year you pay for them. Capital improvements that add value or extend the property’s useful life, like replacing an entire HVAC system, have to be depreciated over 27.5 years instead.11Internal Revenue Service. Publication 527 – Residential Rental Property Industry practice is to set aside 1 to 3 percent of the property’s value each year in a capital reserve. On a $250,000 property that’s $2,500 to $7,500 annually, which covers the furnace that eventually fails in January.
When you sell, a 1031 like-kind exchange lets you defer capital gains tax by rolling the proceeds into another investment property. The rules are tight: identify the replacement property within 45 days of the sale and close within 180 days (or by your tax return due date, whichever is earlier). The exchange must involve real property held for business or investment use, property held primarily for sale doesn’t qualify, and a qualified intermediary has to hold the funds between the sale and the purchase.13Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
Decide Whether to Self-Manage or Hire It Out
You can manage the property yourself or hire a management company. Self-managing saves money and makes sense if you own one or two nearby units and have the time to screen tenants, collect rent, coordinate maintenance, enforce the lease, and stay current on landlord-tenant law.
Full-service property management companies typically charge 8 to 12 percent of gross monthly rent, plus a leasing fee each time they place a new tenant, often equal to half a month’s rent or a full month’s rent. In return they advertise vacancies, screen applicants, collect rent, dispatch repairs, and start eviction proceedings when needed. The management fee is deductible on Schedule E.10Internal Revenue Service. Instructions for Schedule E (Form 1040)
Hiring out the day-to-day doesn’t hand off the legal exposure. Fair housing compliance, habitability standards, and proper handling of security deposits remain the owner’s responsibility whether you or a manager carries out the work.