Buying Your First Rental Property: A How-To Guide

Investing in your first rental property can be an exciting step toward building wealth and generating passive income. However, the process involves more than buying a home and finding tenants—it requires careful planning, financial preparation, and an understanding of the real estate market. This 5-step guide will walk you through the essential steps to help you make a wise and profitable investment.

The Risks & Rewards of a Rental Property

Not sure if rental ownership is for you? Here are the risks and rewards of buying and renting out a property:

Rewards	Risks
Diversifies investment portfolio and reduces overall risk.	Legal liabilities, such as tenant disputes or property damage claims.
Can be leveraged with mortgage financings to maximize returns.	Vacancy periods can lead to lost income and higher expenses.
Potential to increase rental income over time with market demand.	Unexpected repair costs can strain cash flow.
Gives landlord control over asset improvements and renovations.	Interest rate fluctuations can impact mortgage payments.
Can be a long-term retirement investment with steady income.	Regulatory changes or rent control laws may affect profitability.

Owning a rental property comes with both significant rewards and potential risks. While it can diversify your investment portfolio, provide long-term financial security, and offer control over asset improvements, challenges like legal liabilities, vacancy periods, and unexpected costs can impact profitability. Weighing these factors carefully can help investors make informed decisions.

How to Buy Your First Rental Property: 5 Steps for Beginners

If you’ve considered the risks and have decided it’s worth it to buy a rental property, here’s how to do it in 5 steps:

1. Finance Your Rental Property

Buying a rental property is similar to purchasing a primary residence but has a few key differences. Down payments are typically higher, lender fees and interest rates are more prominent, and there are differing requirements to qualify for a mortgage, including the following:

• Down payments are generally 15%–20% of the property purchase price compared to 0%–3% for government-backed mortgages for primary residences. Start saving right when you decide to invest in real estate since you’ll need more upfront for a rental property. The good news is that you can quickly earn back what you put down in rental payments.
• A credit score of about 720 or higher is often preferred for the best loan terms. It’s possible to purchase a rental property with lower credit, but it’s definitely a more challenging task. Before investing in real estate, heighten your credit score to receive the best loan possible.
• Similar to applying for a loan on a primary residence, required borrower documentation includes copies of bank statements, tax returns, and proof of income. Gather these documents when purchasing a rental property for efficiency and ease.
• Select lenders require 6 months of mortgage payments to be held in a reserve account if rental income is lower than expected or unexpected expenses come in higher than predicted. Nonetheless, it’s smart to have a stash of savings when buying a rental property for unforeseen circumstances.

You may be tempted to pay for the rental property in cash, as it eliminates interest payments and speeds up the buying process. However, tying up all your money in one property can limit your financial flexibility and may not be the best strategy, depending on your long-term investment goals. Before deciding, review your savings and determine whether purchasing without a loan aligns with your financial plan. If paying in cash isn’t an option—which is typical for many investors—explore the best loan types for your needs and budget. Conventional mortgages, including fixed-rate and adjustable-rate loans, are popular choices for rental properties. If you’re purchasing a multi-unit property and plan to live in one of the units, you may also qualify for an FHA or VA loan, which offers lower down payment requirements. Researching your financing options will help you make an informed decision that supports your investment strategy.

2. Get Preapproved

Securing a mortgage for a rental property—also known as a non-owner-occupied loan—is similar to obtaining financing for a primary residence. However, there are some key differences to keep in mind. Most investors rely on conventional lenders such as Fannie Mae or Freddie Mac to finance their rental properties, choosing between a fixed-rate mortgage or an adjustable-rate mortgage (ARM).

Before you begin shopping for an investment property, getting preapproved for a loan is crucial. A preapproval helps you understand the interest rates and terms you qualify for, allowing you to plan your investment strategy accordingly. Additionally, it signals to sellers that you are a serious and financially reliable buyer, potentially giving you a competitive edge in a competitive market.

However, if you have the funds to purchase a rental property outright (as mentioned previously), you can bypass the mortgage process entirely. Paying in cash eliminates interest payments, allows for faster closings, and may even give you negotiating power with sellers who prefer cash buyers. While this approach reduces debt, financing can benefit investors looking to leverage their capital and keep cash reserves available for additional investments or property improvements.

3. Location, Location, Location

Once you’ve decided how to finance your rental, it’s time to start looking for the right investment property. When buying your first rental property, search for one in a sought-after location. Whether purchasing a single-family home or a multi-family investment, research local amenities surrounding the property, from access to public transportation to highly-rated school districts.

Other things to consider include:

• Rental rate and vacancy trends/projections
• Job growth statistics
• Neighborhood rating
• Percentage of renter-occupied households
• Your ability/willingness to spend time in a particular area
• Property tax rate in contrast to other markets

The more appealing the neighborhood or city, the more likely you’ll be able to keep your rental filled. Consider asking how individuals like living in the area and decide if there’s a demand for homes in the region you’re looking into.

What’s the Condition of the Property Itself?

In addition to location, how does the property measure up? Is their decent curb appeal? What’s the age and condition of major plumbing, electrical, and HVAC systems? Does it have enticing amenities like a pool or garden? Is it close to a college or a solid school system? What’s the bed and bath count? Answering these questions is essential to deciding what type of rental property you want to purchase and how much you can price it for. You may also buy and flip a property instead of renting it out, selling it for a higher price and earning profit that way. When looking at potential rentals to buy, consider not only the location but also what makes it stand out and how it measures up to the other properties in the market to determine if it’s worth it.

4. Get an Accepted Offer & Price Your Rental

Once you find the right rental property, create a winning offer with a real estate agent. After it’s accepted, you’ll continue to the next steps of the mortgage process, which could involve an inspection or appraisal. Once you’ve closed on the rental, it’s time to decide on the price and start the search for potential tenants.

How to Price Your Rental

Pricing a rental property requires balancing competitive market rates with profitability—research local rental prices through online listings, real estate platforms, and rental market reports. A comparative market analysis (CMA) helps you assess how similar properties in your area are priced based on factors like size, location, amenities, and condition. Additionally, consider the 2% rule, which suggests setting the monthly rent at approximately 2% of the property’s purchase price, though this may vary depending on market demand and property expenses.

Beyond market rates, factor in your operating costs to ensure profitability. Calculate expenses such as property taxes, insurance, maintenance, management fees, and potential vacancies. Your rental income should cover these costs while generating a reasonable return on investment (ROI). You can also adjust pricing based on tenant demand—higher demand may allow for slightly higher pricing. In comparison, lower demand may require competitive pricing or additional incentives like move-in specials. Regularly reviewing and adjusting rent based on market trends will help maximize your rental income while keeping your property occupied.

Working with a professional property management company, like TrueDoor Property Management in Orange County and the Inland Empire, can save you time determining how to price your first rental. Professionals often know the local market inside and out, ensuring your rental is competitive while maintaining strong profitability. At TrueDoor, we analyze market trends, assess comparable rental properties, and factor in local demand to help you set the optimal rent amount. Additionally, property managers can provide insights on seasonal pricing fluctuations, tenant expectations, and strategies to minimize vacancies, ultimately maximizing your rental income while keeping your property occupied.

Return on Investment: An Essential Metric to Consider

An important factor to consider when pricing your rental is ROI, which can help you determine the property’s potential profitability.

To calculate the ROI of your rental property, you need to:

1. Determine your total investment cost. This includes the property’s purchase price, closing costs (such as loan fees, title insurance, and inspections), renovation and repair costs, and any other upfront expenses.
2. Calculate your annual rental income. Multiply the monthly rent by 12 to get the total yearly rental income. If you earn additional income from parking fees, laundry, or other amenities, include those as well.
3. Subtract operating expenses. These costs include property taxes, insurance, maintenance and repairs, property management fees (if applicable), HOA fees, utilities (if the owner covers them), and a vacancy allowance for any months the property may be unoccupied.
4. Determine your net profit. Subtract your total operating expenses from your annual rental income. This will give you the actual profit you earn from the property each year.
5. Calculate your ROI. Use the formula: Net Profit ÷ Total Investment Cost x 100 = ROI.

For example, let’s say you purchase a rental property for $200,000 with additional costs, bringing the total investment to $210,000. If you decide the monthly rent will be $1,500, the annual rental income will be $18,000. Operating expenses, including insurance, maintenance, vacancy costs, and taxes, total $6,000 annually. The net profit is then $18,000 – $6,000 = $12,000. Using the ROI formula: ($12,000 ÷ $210,000) x 100 = 5.7% ROI.

What’s a good ROI? That’s dependent on your region and circumstances. A “good” ROI varies from state to state and market to market. To determine if your ROI is favorable, conduct a CMA to see how your property stacks up against similar rentals. This will help you evaluate its profitability relative to other real estate investments you’ve made.

5. Hire a Property Manager

Buying a rental property is one thing, but managing it is another hurdle to overcome. Maintaining a rental property can be time-consuming, especially if you own multiple properties, live far away, or prefer a hands-off investment approach. A property manager can handle the day-to-day responsibilities, such as tenant screening, rent collection, maintenance requests, and legal compliance. They also help minimize vacancies by marketing your property effectively and ensuring it stays in top condition.

While hiring a property manager comes with a fee—typically 8-12% of the monthly rent—their expertise can save you time, reduce stress, and even improve your rental’s profitability. If you’re new to real estate investing or simply want to streamline operations, working with a professional can be a worthwhile investment. Before hiring, research local property management companies, read reviews, and ask about their experience with similar rental properties. Southern California investors should consider partnering with TrueDoor Property Management. We’ve helped countless property owners easily build wealth in the Golden State. For over 20 years, we’ve been a trusted management partner in the Inland Empire and Orange County. Contact us to see how our expertise can help you thrive as a rental property owner.

3 FAQs About Buying Your First Rental Property

1. How many rental properties do I need to make $5,000 per month?

The number of rental properties needed to generate $5,000 per month depends on each property’s cash flow—the profit left after expenses like mortgage, taxes, insurance, and maintenance. For example, if one property earns $800 monthly in net cash flow, you’d need at least 7 properties to reach your goal ($5,000 ÷ $800 = 6.25).

To reduce the number of properties needed, look for rentals with higher cash flow, lower expenses, or multi-unit potential. Paying off mortgages, investing in high-rent markets, or considering short-term rentals (like Airbnb) can also boost earnings per property. The key is to focus on profitability per unit rather than just the number of properties owned.

2. Can I put less than 20% down on an investment property?

Most investors must put down at least 20% when purchasing an investment property. However, if your credit score is 680 or higher, some lenders may allow a 15% down payment, though this often comes with private mortgage insurance (PMI) and higher interest rates. While it’s possible to put down less, saving at least 20% is generally recommended to secure better loan terms and avoid additional costs.

3. Is owning a rental property stressful?

Owning a rental property can be stressful at times, especially when dealing with tenant issues, maintenance repairs, vacancies, and financial responsibilities. Managing rent collection, legal compliance, and unexpected expenses can add pressure, particularly for first-time landlords. However, the stress level largely depends on factors like property location, tenant quality, and whether you choose to self-manage or hire a property manager. With proper planning, a solid lease agreement, financial reserves for emergencies, and hiring the right property management company, rental property ownership can be a rewarding and relatively passive investment over time.

Partner With TrueDoor For Easy Success as a Rental Property Owner

Whether you’re a first-time investor or own multiple rentals, hiring a professional property manager can ease your stress, help you earn and save money, and keep your property filled year-round. TrueDoor Property Management is a trusted partner for hundreds of investors in Southern California. Our comprehensive single-family and multi-family management services cover everything from tenant screening and placement to ongoing maintenance and property inspections. Contact our team for 5-star property management services.