Buying an investment property is a completely different exercise than buying a home to live in. You're not looking for a place you love — you're buying a stream of income and a set of numbers that either work or don't. Emotion is what gets new investors into bad deals. Here's how to start on the right foot.
Buy on cash flow, not hope
The first question isn't "will this go up in value?" — it's "does it make money every month?" Add up the rent you can realistically charge, then subtract every cost: mortgage payment, property taxes, insurance, maintenance, a vacancy allowance for the months it sits empty, and property management if you won't self-manage. What's left is your cash flow. If a property doesn't cash-flow (or won't clearly and soon), you're speculating on appreciation, not investing.
Know the metrics that let you compare deals
A few simple numbers let you size up very different properties on the same footing:
- Cap rate — net operating income (rent minus operating expenses, before the mortgage) divided by the price. It tells you the property's unleveraged yield.
- Cash-on-cash return — annual pre-tax cash flow divided by the actual cash you put in. This is the number that reflects your real return after financing.
- The 1% rule — a quick screen: monthly rent around 1% of the purchase price. It's a rough filter for which deals are worth a closer look, not a guarantee.
Financing is different for investors
Loans on investment property are stricter than on a home you'll live in. Expect a larger down payment — often 20–25% — a slightly higher interest rate, and cash reserves the lender wants to see. Understanding how the loan itself works matters even more here, because the mortgage is your single biggest expense; if you're fuzzy on the mechanics, read how mortgages work first.
Taxes can make or break the return
Rental income is taxable, but real estate comes with meaningful deductions — mortgage interest, property taxes, insurance, repairs, management fees, and depreciation, a non-cash deduction that can shelter part of your income each year. The rules are detailed and easy to get wrong, so treat this as educational only and work with a tax professional. The IRS lays out the basics in its guide to rental real estate income, deductions, and recordkeeping.
Location and management decide the real-world result
The spreadsheet assumes the property stays rented to good tenants. Location is what makes that true — a modest property in a strong, in-demand rental area beats a beautiful one where nobody wants to live, because vacancy is the silent killer of returns. Decide up front whether you'll manage it yourself or hire a manager (typically 8–12% of rent), and budget for it either way. Screen tenants carefully, keep a reserve for the repairs that always come, and treat vacancy and turnover as real line items rather than surprises — the deals that fail usually fail on the assumptions, not the purchase price.
Work with an investor-savvy agent
Not every agent speaks rent comps, cap rates, and cash-on-cash. An agent who works with investors will steer you toward deals that pencil out and away from pretty properties that don't — it literally changes which listings you consider. On Homegrity you can compare agents and match with one who understands investment property. Matching is always free, your information is never resold, and placement is never for sale — every agent is ranked equally on a track record, always. Get matched with an investor-friendly agent →
Frequently asked questions
How much money do I need to buy a rental property?
Investment loans typically require 20–25% down plus closing costs and cash reserves. You'll also want a cushion for vacancies and repairs, so budget beyond the minimum down payment.
What is a good cap rate?
It varies by market and property type, so there's no universal "good" number. What matters is comparing similar properties in the same area and making sure the deal cash-flows after all expenses and financing.
What is the 1% rule?
It's a quick screen suggesting monthly rent should be roughly 1% of the purchase price. It helps you filter deals fast, but it's a starting point — always run the full numbers before buying.
Is rental income taxed?
Yes, rental income is taxable, but you can deduct many expenses and depreciation. The rules are complex, so work with a tax professional and see the IRS rental real estate guide for the basics.
