Buying a house to rent out means clearing a higher financial bar than a primary-home purchase and taking on a set of legal duties that begin before you close and continue for as long as you own the property. Expect a larger down payment, stricter loan qualifying, a check that the property can legally operate as a rental, and a landlord’s ongoing obligations under fair housing, tax, and local licensing rules.
What You’ll Need Upfront
Cash is the first hurdle. Under Fannie Mae guidelines, a single-unit investment property requires at least 15 percent down (an 85 percent maximum loan-to-value ratio). A two- to four-unit building requires at least 25 percent down.1Fannie Mae. Eligibility Matrix
On top of that, lenders want to see reserves. Fannie Mae’s rules call for at least six months of mortgage payments, property taxes, and insurance in a liquid account, and the required amount rises if you already own other financed properties.2Fannie Mae. Minimum Reserve Requirements
Then come closing costs, which typically run 2 to 5 percent of the loan amount and cover lender fees, title insurance, recording fees, and prepaid taxes.3Fannie Mae. Closing Costs Calculator Add the down payment, reserves, and closing costs together to size the cash you actually need at the table.
Qualifying for the Loan
The minimum credit score for a conventional investment property loan is 620, though a higher score improves your rate and approval odds.4Fannie Mae. General Requirements for Credit Scores Your debt-to-income ratio generally cannot exceed 36 percent on a manually underwritten loan, though lenders may allow up to 45 percent with strong compensating factors such as higher reserves or a better credit score. Loans processed through Fannie Mae’s automated underwriting system can go as high as 50 percent.5Fannie Mae. Debt-to-Income Ratios
One detail catches many first-time investors off guard. Lenders don’t count the full projected rent when deciding whether you qualify. Fannie Mae’s formula uses only 75 percent of the property’s expected gross rental income, to account for vacancies and maintenance, then subtracts the full mortgage payment from that figure.6Fannie Mae. Income from Rental Property in DU A property renting for $2,000 a month contributes only $1,500 toward your qualifying income. Plan around that number, not the sticker rent.
Expect a higher interest rate than on a primary-residence loan. Rates on non-owner-occupied properties typically run 0.50 to 0.875 percentage points above owner-occupied rates. Over 30 years, that spread adds tens of thousands of dollars in interest, which needs to sit in your return projections from the start.
Documentation to Gather Before You Apply
- At least two years of federal tax returns showing consistent income.
- Pay stubs covering roughly the last 30 days, plus W-2s or 1099s from the prior two years.
- Bank and asset statements from the past 60 to 90 days showing enough liquid funds for the down payment, closing costs, and reserves.
- A list of all current debts, including other mortgages, auto loans, and student loans.
- Estimated property taxes, insurance premiums, and any available rental income data for the property. If you already own rental properties, expect to provide Schedule E from your most recent return.
Missing or incomplete documentation is one of the most common reasons investment applications stall. Compile everything before you apply.
Financing Options Beyond a Conventional Loan
A conventional investment loan under Fannie Mae or Freddie Mac guidelines is the common route, not the only one. Portfolio lenders keep loans on their own books and can approve borrowers who don’t fit conventional guidelines, such as self-employed buyers with complex income or investors already holding multiple properties. Debt service coverage ratio (DSCR) loans qualify you on the property’s rental income rather than your personal income; lenders generally require a DSCR of at least 1.0, meaning the expected rent covers the full monthly mortgage payment. Rate structures and documentation requirements differ, so compare early.
Buying in Your Name or Through an LLC
You can hold the title personally or through a Limited Liability Company. Personal ownership keeps financing straightforward, since most conventional loans require a personal borrower, but a tenant lawsuit could reach your personal savings, home equity, and other assets. An LLC creates a legal barrier between the rental business and your personal finances, limiting exposure to what’s invested in the LLC itself.
The trade-off is that most conventional lenders won’t lend directly to an LLC, so many investors buy in their own name and later transfer the property into an entity. That transfer can trigger a due-on-sale clause in your mortgage, so talk to an attorney before moving title.
Confirming the Property Can Legally Be Rented
Before committing to a purchase, verify that the property can actually operate as a rental. Municipal zoning may restrict short-term rentals, long-term rentals, or both. Some areas limit how many unrelated people can share a dwelling, and some require special permits for multi-tenant occupancy. A property you’re legally barred from renting out is not an investment property.
Inspection
A professional home inspection checks whether the property meets the basic standards to house tenants: working heating, safe electrical systems, adequate exits, and sound structure. Problems found during inspection give you leverage to negotiate repair credits or a lower price. A property that can’t pass local habitability codes can’t be rented, so treat the inspection as a go/no-go step.
Lead Paint Disclosure
If the property was built before 1978, federal law requires the seller to disclose any known lead-based paint hazards and hand over all available reports or records about lead on the property.7Office of the Law Revision Counsel. 42 USC 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property The seller must also give you the EPA’s lead safety pamphlet and allow at least 10 days for you to conduct a lead inspection before you’re locked into the contract. Once you become the landlord, the same disclosure duty follows you into every new lease.8US EPA. Lead-Based Paint Disclosure Rule (Section 1018 of Title X)
Appraisal With Rent Comparables
Once your application is in, the lender orders an appraisal. When you’re using rental income to qualify, the appraiser also compares your projected rent against what similar nearby properties actually charge, confirming the income figure is realistic.9Fannie Mae. B3-3.1-08, Rental Income If the appraised rent comes in below what you assumed, your qualifying math changes.
Closing
At closing, you sign the deed transferring title from the seller and the mortgage note committing you to repay the loan. From accepted offer to closing generally takes 30 to 45 days, though investment property loans can run longer because of the additional documentation and appraisal work.
Between Closing and Your First Tenant
Owning the property is the start, not the finish. Several steps sit between the closing table and a signed lease.
Landlord Registration and Rental Licensing
Many cities and counties require landlords to register rental properties with a local housing authority or clerk’s office. Registration identifies who is responsible for the property and gives code enforcement a point of contact. Separately, many jurisdictions require a Certificate of Occupancy or a specific rental license before a tenant can move in, usually after a municipal inspection confirming the property meets current fire, safety, and building codes. Some areas require periodic reinspection to keep the license active. Operating without required permits can result in fines and, in some places, can leave you unable to enforce the lease in court if a dispute arises.
Landlord Insurance
A standard homeowner’s policy (HO-3) covers owner-occupied homes and will not protect a property rented to tenants. If your insurer discovers you’re renting a property covered by a homeowner’s policy, they can deny claims outright. You’ll need a landlord policy, often called a dwelling fire policy (DP-3), designed for non-owner-occupied properties.
Landlord policies work differently from homeowner’s coverage. They typically do not cover a tenant’s belongings, which is why tenants carry renter’s insurance. Liability coverage is often an add-on rather than automatic. Landlord policies can include loss-of-rent coverage, which replaces rental income if the property becomes uninhabitable after a covered event such as a fire. Get quotes before closing so the premium is in your cash flow numbers from day one.
Security Deposit Handling
Nearly every state regulates how landlords hold tenant deposits. The most common requirement is a separate account, not commingled with your personal or business operating funds. Many states also require the account to be interest-bearing and require written notice to the tenant of the bank and account information. At move-out, missing your state’s deadline or itemization rules for returning the deposit can expose you to penalties that, in some states, multiply the amount owed.
Screening Tenants Without Violating Federal Law
The federal Fair Housing Act makes it illegal to refuse to rent, set different terms, or otherwise discriminate against tenants based on race, color, religion, sex, familial status, national origin, or disability.10Office of the Law Revision Counsel. 42 USC 3604 – Discrimination in the Sale or Rental of Housing Many state and local laws add further protected categories. The rules apply from the moment you list the property. Your advertising, application process, screening criteria, and lease terms all have to comply.
Criminal History
HUD guidance draws clear lines around criminal background screening. Blanket policies that reject anyone with any criminal record are likely to violate the Fair Housing Act because of their disproportionate impact on certain protected groups. HUD’s guidance calls for screening based on convictions rather than arrests, limiting the types of offenses considered to those that pose an actual safety risk, using a reasonable look-back period (generally seven to ten years), and giving applicants a chance to explain their circumstances before a final decision.11eCFR. 24 CFR Part 100 – Discriminatory Conduct Under the Fair Housing Act
Credit Reports
If you use a consumer credit report to screen applicants, the Fair Credit Reporting Act requires specific steps when you deny an application or impose less favorable terms (such as a higher deposit) based partly or fully on that report. You must give the applicant a written adverse action notice with the name and contact information of the credit reporting agency, a statement that the agency did not make the rental decision, and notice of the applicant’s right to dispute inaccurate information and get a free copy of their report within 60 days.12Federal Trade Commission. Using Consumer Reports: What Landlords Need to Know If a credit score played into your decision, the notice must also include the score, its range, and the key factors that affected it.
How Rental Income Is Taxed
Rental income is taxable, but the tax code also allows deductions that can substantially reduce, and sometimes eliminate, your tax bill in the early years.
Depreciation
The IRS lets you deduct the cost of the building (not the land) over its useful life. For residential rental property, the recovery period is 27.5 years using the straight-line method under the Modified Accelerated Cost Recovery System.13Internal Revenue Service. Publication 527 (2025), Residential Rental Property It’s a paper loss with no cash outlay, and it offsets rental income dollar for dollar on your return.
Passive Activity Loss Rules
Rental real estate is generally treated as a passive activity, meaning losses can only offset other passive income. If you actively participate in managing the rental by making decisions about tenants, repairs, and lease terms, you can deduct up to $25,000 in rental losses against your regular income each year.14Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited The allowance begins to phase out once your modified adjusted gross income exceeds $100,000 and disappears at $150,000. Those thresholds are fixed in the statute and don’t adjust for inflation.15Internal Revenue Service. Publication 925 (2024), Passive Activity and At-Risk Rules Losses you can’t use in the current year carry forward.
1031 Like-Kind Exchanges
When you eventually sell, you can defer capital gains taxes by reinvesting the proceeds into another investment property through a 1031 exchange. The rules are strict. You must identify the replacement property in writing within 45 days of selling the original and complete the purchase within 180 days, or by your tax return due date, whichever comes first.16Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use in a Trade or Business or for Investment A qualified intermediary must hold the sale proceeds during the exchange; you cannot touch the money yourself. Properties held primarily for resale, such as flips, do not qualify.
If You’d Rather Not Manage It Yourself
A professional property manager typically charges 5 to 12 percent of monthly gross rent, with 8 to 10 percent being the most common range. Many managers also charge a one-time leasing fee, often a portion of one month’s rent, each time they place a new tenant, plus setup fees when onboarding a new property. These costs are deductible as business expenses, but they cut directly into monthly cash flow, so run the numbers with those fees included before you buy, not after.