Get started with real estate investing by understanding property types, financing options, cash flow analysis, location research, property management decisions, and the tax benefits of ownership.
Learn about direct rental properties (single-family, multi-family, condos)
Single-family rentals are the most accessible entry point, typically requiring 20%-25% down payment. A $250,000 property needs $50,000-$62,500 down. Multi-family (2-4 units) allows owner-occupancy with as little as 3.5% down via FHA loans.
Learn about REITs (Real Estate Investment Trusts) for hands-off investing
REITs let you invest in real estate with as little as $10 through a brokerage account. REIT index funds hold 150+ properties across offices, apartments, warehouses, and more. Average annual returns historically run 8%-12% with quarterly dividend payments.
Learn about real estate syndications and crowdfunding platforms
Syndications pool investor money to buy large properties (apartments, commercial buildings). Minimum investments typically range from $25,000-$100,000. Crowdfunding platforms lower minimums to $500-$5,000 but carry illiquidity risk.
Decide which type matches your capital, time, and risk tolerance
Direct rentals offer the highest returns (8%-15% cash-on-cash) but require active management. REITs offer lower returns (8%-12%) with zero effort. Pick direct ownership only if you have $50,000+ in capital and willingness to handle tenants and repairs.
Understand Financing Options
Learn conventional mortgage requirements for investment properties
Investment property mortgages require 20%-25% down, credit scores of 680+, and interest rates 0.5%-0.75% higher than primary residence rates. On a $300,000 property, expect rates around 7.5%-8.5% with $60,000-$75,000 down.
Explore FHA loans for owner-occupied multi-family (2-4 units)
Buy a duplex, triplex, or fourplex with an FHA loan at 3.5% down while living in one unit. On a $400,000 fourplex, that's $14,000 down. Rental income from the other 3 units can cover most or all of your mortgage.
Calculate your debt-to-income ratio to determine how much you can borrow
Lenders typically cap total DTI at 43%-45%. If your monthly gross income is $8,000, total debt payments (including the new mortgage) can't exceed $3,600. Existing rental income from the property can count at 75% toward qualifying income.
Budget for closing costs of 2%-5% of the purchase price
On a $300,000 investment property, closing costs run $6,000-$15,000 covering appraisal ($400-$600), inspection ($300-$500), title insurance ($1,000-$2,000), origination fees, and attorney fees. Factor these into your total cash-needed calculation.
Run a Cash Flow Analysis
Calculate expected monthly rental income based on comparable properties
Search rental listings for similar properties within a 1-mile radius. A 3-bedroom house renting for $1,800, $1,900, and $2,000 suggests a market rate of about $1,900. Price below the top of the range to attract tenants quickly and reduce vacancy.
Calculate all monthly expenses: mortgage, taxes, insurance, maintenance, vacancy, management
Budget 5% of rent for vacancy, 5%-10% for maintenance, and 8%-10% for property management (even if self-managing, value your time). On $1,900 rent with a $1,500 mortgage, add $95 vacancy + $190 maintenance + $190 management = $1,975 total costs.
Calculate net monthly cash flow (income minus all expenses)
Positive cash flow of $100-$300 per month per unit is a solid target for a leveraged rental. If your analysis shows negative cash flow, the deal only works through appreciation—a risky bet. Cash flow is the safety margin.
Calculate cash-on-cash return (annual cash flow divided by total cash invested)
If you invest $70,000 (down payment + closing costs + initial repairs) and earn $3,600 per year in net cash flow, your cash-on-cash return is 5.1%. Aim for 8%-12%. Below 6%, a REIT index fund may offer better risk-adjusted returns.
Apply the 1% rule as a quick screening test
The 1% rule says monthly rent should be at least 1% of the purchase price. A $250,000 property should rent for $2,500+ per month. Properties meeting this rule are more likely to cash flow positively. In expensive markets, 0.7%-0.8% may be the best available.
Research Location and Market
Research population growth trends in the target metro area
Markets growing 1%-2% annually in population support rising rents and property values. Check census data and local planning reports. Cities losing population face higher vacancy rates and stagnant or declining values.
Check local employment diversity and major employers
A city dependent on one company or industry is risky. If the top employer cuts 5,000 jobs, vacancies spike. Look for metros with diverse industries: healthcare, education, technology, and government provide stable tenant bases.
Review landlord-tenant laws and regulations in the state and municipality
Some states favor landlords (Texas, Florida—no rent control, fast evictions). Others heavily protect tenants (California, New York—rent control, 60-90 day eviction processes). Know the rules before investing. Eviction timelines range from 2 weeks to 6+ months by state.
Evaluate property tax rates and recent assessment trends
Property tax rates vary dramatically: 0.3% in Hawaii to 2.2% in New Jersey. On a $300,000 property, that's $900 versus $6,600 per year. Higher taxes eat into cash flow. Check whether recent reassessments have caused sharp increases.
Decide on Property Management
Compare self-management versus hiring a property manager
Self-management saves 8%-10% of rent ($150-$200 per month) but requires your time for tenant calls, maintenance coordination, and rent collection. Property managers handle everything for 8%-10% of collected rent, typically $150-$250 per month per unit.
If self-managing, set up systems for tenant screening and rent collection
Run credit checks (minimum score: 620-650), verify income (at least 3x monthly rent), and check eviction history for all applicants. Use online rent collection tools that auto-debit on the 1st—late payments drop by 50%-70% with automatic collection.
Build a reliable network of contractors (plumber, electrician, handyman)
Average maintenance costs run 1%-2% of property value per year ($2,500-$5,000 on a $250,000 property). Having pre-vetted contractors means faster response times. Tenants who wait 2+ weeks for repairs become unhappy tenants who don't renew leases.
Understand Tax Benefits and Risks
Learn about depreciation: deduct the property's value over 27.5 years
On a $250,000 property (excluding $50,000 land value), you can deduct $200,000 / 27.5 = $7,272 per year as depreciation. This is a paper loss that reduces taxable rental income without costing you actual cash. It can offset $7,272 in rental profits.
Understand deductible expenses: mortgage interest, repairs, insurance, travel to property
Nearly every expense related to the rental is deductible: mortgage interest, property taxes, insurance, repairs, advertising, mileage to the property (67 cents per mile for 2024). Track every expense throughout the year to reduce your tax bill.
Set aside reserves for major capital expenses (roof, HVAC, appliances)
Budget $200-$300 per month into a reserve fund. A new roof costs $8,000-$15,000, HVAC replacement $5,000-$10,000, and a water heater $1,000-$2,000. Without reserves, a major repair wipes out years of cash flow.
Understand the risk of vacancy, non-paying tenants, and market downturns
Average U.S. rental vacancy is 5%-7%, but it can spike to 10%-15% in weak markets. A 2-month vacancy on a $2,000/month rental costs $4,000 in lost income while you still pay the mortgage, taxes, and insurance. Cash reserves of 6 months of expenses are critical.
Frequently Asked Questions
How much money do I need to start investing in real estate?
Direct investment requires 20-25% down ($40,000-$60,000 on $200,000) plus 3-6 months reserves. Lower-capital options: REITs (one share, $15-$300), Fundrise ($10 minimum), or house hacking with FHA at 3.5% down.
What is the 1% rule in real estate investing?
Monthly rent should equal at least 1% of purchase price for positive cash flow. A $200,000 property needs $2,000+/month rent. Hard to hit in expensive markets. Run full cash flow analysis: mortgage, taxes, insurance, maintenance (1-2%), vacancy (5-8%), management (8-10%).
Should I invest in rental properties or REITs?
Rentals offer 8-12% cash-on-cash returns through leverage and depreciation but require capital and landlord work. REITs provide diversified liquid exposure at 8-12% total returns. Many start with REITs while learning, then add direct property as capital grows.
What tax benefits do real estate investors receive?
Deductible: mortgage interest, property taxes, insurance, repairs, management fees. Depreciation over 27.5 years creates paper losses offsetting income. 1031 exchanges defer gains when reinvesting proceeds. Consult a tax professional for your situation.