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Here's what clients never tell you—they jump in assuming single-family homes are the only option when there's actually a whole menu of rental property types.
Single-family homes are the easiest to finance and manage but typically have lower returns than multi-unit properties. If your tenant moves out, you've got 100% vacancy.
But they're also easier to sell later since you're marketing to both investors and regular home buyers.
Duplexes, triplexes, fourplexes give you built-in diversification. One vacancy doesn't kill your cash flow. You can also house-hack these by living in one unit while renting the others, which opens up FHA financing with just 3.5% down if you meet eligibility requirements according to Loan Pronto.
Multifamily buildings (5+ units) require commercial financing which is a different beast entirely. Higher potential returns but also more management complexity and higher investment requirements.
Short-term vacation rentals through Airbnb or VRBO can generate substantially higher income than traditional rentals. Average daily rates hit $313.61 nationally as of January 2025 according to Baselane. But they require way more work, face stricter regulations in many cities, and have less predictable income. Short-term rental financing also comes with its own qualification criteria, typically 620+ credit scores, 20-30% down, and DTI ratios under 43%.
When we acquired this process of evaluating property types at AmeriSave, we learned that matching the property to your actual lifestyle matters more than theoretical returns. If you're working full-time and have young kids, I've got a 9-year-old boy and 6-year-old girl myself plus 2 dogs and 2 cats, managing a 12-unit apartment building is probably unrealistic. A single-family rental five miles from your house makes more sense.
Most people assume conventional mortgages are the only path. Let me show you what else exists in 2025:
Conventional loans remain the gold standard for most investors. For 2025 Fannie Mae's conforming loan limit is $806,500 for single-family homes in most areas, reaching up to $2,326,876 for four-unit properties according to Baselane. You'll need 680+ credit score, 15-25% down, DTI under 43%, and the property must be turn-key and tenant-ready.
FHA multifamily loans let you buy a 2-4 unit property with just 3.5% down IF you live in one unit. Updated 2025 policies reduced cash needed at closing making FHA loans more competitive. Loan terms stretch 35-40 years, substantially longer than conventional options, and the program focuses on properties serving residents below 80% of area median income. This makes up about 9.2% of the mortgage market according to OKC Property Manager.
Several of LendingTree's best VA lenders of 2025 accept credit scores between 500-580VA loans are incredible if you qualify. Zero down payment on a 1-4 unit property where you occupy one unit. No minimum credit score requirement from VA, though lenders typically want 620+, and maximum 41% DTI ratio. .
DSCR loans (Debt Service Coverage Ratio) qualify you based on the property's rental income rather than your personal income. A property generating $50,000 yearly rental income with $40,000 in annual debt has a DSCR of 1.25. February 2025 DSCR loan rates sit between 6.5-8.5% with an average of 7.65% for 30-year fixed loans with 25% down according to OKC Property Manager. Griffin Funding lets investors qualify with DSCR ratios as low as 0.75. The beautiful thing about DSCR loans? No tax returns, no W-2s, no employment verification needed.
Portfolio loans from local banks or credit unions don't follow Fannie/Freddie guidelines, giving lenders flexibility to create custom terms for borrowers with multiple properties or unique situations.
Blanket loans let you finance multiple properties under a single mortgage. The unified approach cuts down administrative complexity and saves substantially on closing costs. As of 2025 typical requirements include strong credit, proven property management experience, and larger down payments—but you get release clauses letting you sell individual properties without triggering due-on-sale provisions. This flexibility helps investors use sale proceeds to buy new properties while maintaining the original loan structure.
home equity loansy loaCash-out refinancing oron your primary residence can fund the down payment for a rental property. If you have at least 15% equity in your primary residence you could tap that through a HELOC, home equitn, or cash-out refi. Rates in 2025 are stabilizing around 6.5-7% for investment properties according to 208 Properties, so compare carefully against your current mortgage rate.
The cheapest location is not always the best location. You want neighborhoods that are safe and desirable—places you'd actually want to live yourself.
Start by evaluating...
Local amenities: How far to grocery stores, restaurants, parks?
School districts: Even if targeting young professionals, good schools boost property values
Public transportation: Major plus in urban markets
Crime statistics: Check local police department data
Employment centers: Proximity to major employers drives rental demand
Future development: New businesses or infrastructure coming?
Then dig into rental market specifics...
Average rental prices: What do comparable properties rent for?
Vacancy rates: Lower is better for steady income
Rental demand indicators: Days on market for rental listings
Population trends: Growing or shrinking?
Rental yield: Annual rent ÷ property price
The national rental vacancy rate hit 7.0% in Q2 2025, up from 6.6% the previous yearaccording to the U.S. Census Bureau. But this varies wildly by region. The South showed the highest vacancy at 9.0%, followed by Midwest at 6.6%, while rates outside metro areas sat at just 5.8%. Principal cities saw 7.6% vacancy versus 6.7% in suburbs.
For market-specific data Worcester Massachusetts had the lowest rental vacancy among the 75 most-populated metros at 0.0% in 2024,while Birmingham-Hoover Alabama hit 15.1%. San Antonio Texas reached 10.0% vacancy despite having a population exceeding one million. If half the comparable rentals in your target neighborhood sit empty, that's a massive red flag.
I was just in class learning about how economic indicators predict housing demand—the textbook version is that job growth correlates with rental demand. Real talk for a second: I've seen beautiful properties in declining neighborhoods become money pits. Do not skip this research phase.
Between you and me, most first-time investors dramatically underestimate expenses and overestimate rental income. Here's how to actually calculate return on investment using the cash-on-cash return method, which is standard for rental properties.
Look at 5-10 comparable rental properties currently on the market in your target area. Filter for properties with similar:
Square footage
Number of bedrooms/bathrooms
Condition and amenities
Location proximity
Calculate the average monthly rent, then multiply by 12. Let's say comps show $2,400-$2,600/month. Use the conservative $2,400 to avoid overpromising yourself. That's $28,800 annual income.
But wait, factor in realistic vacancy. With national vacancy at 7.0%, budget for at least one month lost to turnover and vacancy. Adjusted income: $28,800 – $2,400 = $26,400.
This is where people go wrong. They forget expenses or wildly underestimate them.
Mortgage payment (principal + interest): Use an online calculator. At 6.85% on a $328,640 loan (80% of $410,800), that's $2,154/month or $25,848 annually.
Property taxes: Check county records for the exact amount. National average runs 0.27-2.23% annually. On a $410,800 property at 1.5%, that's $6,162 yearly ($513/month).
Landlord insurance: Covers property and liability. Budget $1,200-$2,000 annually ($150/month).
Maintenance and repairs: Reserve 1-3% of property value annually even for new properties. At 1% of $410,800 that's $4,108 yearly ($342/month). Seriously—do not skip this. Weather damage, broken HVAC, plumbing emergencies happen.
Property management: If hiring a manager budget 8-12% of monthly rental income. At 10% of $2,400 that's $240/month or $2,880 annually.
HOA fees: If applicable, check the exact amount.
Utilities: Some landlords cover water/sewer/trash. Budget $100-200/month if so.
Vacancy reserve: We already factored one month above.
Example total annual expenses:
$25,848 (mortgage) + $6,162 (taxes) + $1,800 (insurance) + $4,108 (maintenance) + $2,880 (property management) = $40,798
NOI = Annual rental income – Annual operating expenses
$26,400 – $40,798 = -$14,398
Uh oh. Negative NOI means you're losing money monthly even before calculating ROI. This is actually common in high-cost markets where investors bank on appreciation rather than cash flow. But it demonstrates why running real numbers matters.
Down payment: $82,160 (20% of $410,800)
Closing costs: $12,324 (typically 2-5% of purchase price)
Initial repairs: $5,000 (even "move-in ready" properties need something)
Total cash invested: $99,484
Cash-on-cash return = NOI ÷ Total cash invested
In our example: -$14,398 ÷ $99,484 = -14.5% ROI
A negative return obviously isn't sustainable. What this means for you is the purchase price is too high relative to rental income in this market, or you need to find a property requiring less expensive financing, or you need to target markets with better rent-to-price ratios.
A "good" ROI on rental property varies by market and strategy. Conservative investors target 8-12% cash-on-cash returns. Agressive investors in cash-flow markets aim for 10-15%+. Some investors in high-appreciation markets accept 4-6% returns (or even negative short-term cash flow) betting on substantial property value gains.
The 1% rule suggests monthly rent should be at minimum 1% of purchase price ($4,108 monthly rent on our $410,800 property). The 2% rule says 2% ($8,216 monthly rent). As our example shows, the 2% rule is increasingly unrealistic in many 2025 markets.
Use these formulas to compare different properties and markets. A $250,000 property in Louisville generating $2,100 monthly rent (0.84% monthly) might deliver better cash flow than a $410,800 property in San Francisco generating $2,400 monthly rent (0.58% monthly) due to lower expenses.
This step is non-negotiable. Getting preapproved for an investment property mortgage shows sellers you're serious and can actually close. It also prevents you from falling in love with properties you can't afford.
The preapproval process for investment properties requires more documentation than primary residence loans:
Two years of tax returns showing stable income
Two years of W-2s or 1099s if self-employed
Two months of bank statements proving cash reserves
Credit report showing your debt obligations
Rental income documentation from existing investment properties if applicable
Property information (address, estimated value, intended use)
According to Baselane's 2025 guide lenders will consider 75% of your estimated rental income when calculating debt-to-income ratio to account for potential vacancies and expenses. This projection typically comes from an appraiser's rental analysis or documented leases for similar properties in the area.
For DSCR loans the process is simpler—no tax returns or employment verification needed since qualification is based entirely on the property's income potential rather than your personal finances.
A common mistake is assuming you'll manage the property yourself to save money. Maybe you will initially, but what happens when you take a vacation, get sick, or just burn out dealing with 2am emergency calls?
Professional property management typically costs 8-12% of monthly rental income. On a $2,400/month rental that's $192-$288 monthly or $2,304-$3,456 annually. Yes, it eats into profits. But it also buys you:
Tenant screening and background checks
Lease preparation and legal compliance
Rent collection and late payment enforcement
Maintenance coordination and emergency response
Property inspections and turnover management
Legal compliance with local rental laws
Even if you plan to self-manage initially, factor property managment costs into your ROI calculations. If the numbers only work with you doing free labor, you don't really have a scalable investment—you've just bought yourself a second job.
I completely understand the frustration of watching 10% of your rental income dissapear to management fees. But speaking from experience after managing projects at companies with hundreds of properties, professional management usually pays for itself through better tenant retention, lower vacancy rates, and faster maintenance response preventing small issues from becoming expensive repairs.
One of rental property's biggest advantages is the tax treatment. If you rent out your property for at least 14 days per year, you can deduct numerous expenses from your taxable income:
Mortgage interest on the property loan
Property taxes
Insurance premiums (landlord and liability)
Repairs and maintenance (fixing broken items)
Property management fees
Advertising costs to find tenants
Legal and professional fees (attorneys, accountants)
Travel expenses to manage the property
Home office deduction if you dedicate space to managing rentals
Depreciation of the property structure (not land) over 27.5 years
That last one is huge. Rental property depreciation lets you deduct 1/27.5th of the building's value annually even though the property is likely appreciating in actual market value. On a $410,800 property where $328,640 is attributable to the structure (80% is common), that's $11,950 in annual depreciation deductions.
These deductions can turn a property that breaks even on cash flow into a profitable investment when you factor in tax savings. However, tax rules vary based on your income level and whether you're classified as a real estate professional. Definitely consult a tax specialist familiar with rental property taxation in your state—this stuff gets complicated fast.
The difference between a profitable rental and a nightmare comes down to tenant quality. Good tenants pay rent on time, maintain the property, and renew leases. Bad tenants cost you thousands in lost rent, legal fees, and property damage.
My team deals with this daily at the lending side, but I've also seen enough horror stories to know proper screening is non-negotiable.
Minimum screening components:
Credit check: Look for scores above 650 ideally, no recent evictions
Background check: Criminal history, previous evictions, rental history
Income verification: Most landlords require monthly income of 3x the rent
Employment verification: Call the employer to confirm job and income
Previous landlord references: Call at least two prior landlords. Current one might lie to get rid of a bad tenant.
Personal references: Character references beyond family
Red flags to watch for:
Pressure to skip or rush screening
Reluctance to provide information
Inconsistent employment or income claims
Previous evictions or unpaid rent
Criminal history involving property crimes
Frequent moves without clear explanation
Fair Housing laws prohibit discrimination based on race, color, national origin, religion, sex, familial status, or disability. Screen all applicants using the same objective criteria applied consistently.
Lenders require 2-6 months of mortgage payments in cash reserves for investment properties, but honestly you should have more. Here's why:
Unexpected expenses on rental properties are not "if" but "when." In my experience, here's what comes up.
HVAC replacement: $5,000-$10,000 depending on system size
Roof repair or replacement: $8,000-$25,000
Plumbing emergencies: $500-$3,000 for serious issues
Appliance replacements: $500-$2,000 each
Vacancy periods: Entire mortgage payment plus utilities for 1-3 months
Eviction costs: $2,000-$5,000 in legal fees and lost rent
Property damage: Varies wildly but plan for at least $2,000-$5,000
I suggest keeping reserves that are equal to:
At least six months' worth of mortgage payments, which in our case is $12,924.
An emergency repair fund of $10,000 that is separate from the mortgage reserves
A vacancy buffer of one month's rent, which in our case is $2,400.
The total amount of reserves you should have is $25,324, which is in addition to your down payment and closing costs. If you bought rental properties without enough money set aside, that must have been very stressful. One big repair can cost you a whole year's worth of profits.
There are laws in every state and many cities that govern the relationship between landlords and tenants. Not knowing these laws won't keep you from being sued or fined.
Important things to look into:
Limits on security deposits: the most you can collect, which is usually one to two months' rent, and where it must be kept
Things that must be disclosed: lead paint, mold, bed bugs, and so on.
Eviction procedures: The exact steps and time frame for getting rid of tenants
Standards for habitability: What makes a rental unit livable
Notice requirements: How long before entering, usually 24 to 48 hours
Rent increase limits: Some cities have laws that control rent
Laws against discrimination: the Federal Fair Housing Act and state and local laws that add to it
Property upkeep: Inspections, smoke detectors, and carbon monoxide detectors are all required.
The rules in Louisville, where I live, are different from those in California or New York. Don't think you can figure this out as you go. Join a local landlord group and talk to a real estate lawyer who knows the laws about rental properties in your area.
Before you buy, make a plan for how to leave.
It may seem strange to plan to sell before you even buy. But homes that are investments aren't homes for life. You should know how you'll eventually get out of this investment:
Hold for a long time: Get cash flow, appreciation, and pay down your mortgage over 10 to 30 years or more. Then you can either sell it for a big profit or give it to your heirs with a stepped-up basis to avoid paying capital gains tax.
1031 exchange: Sell a property and use the money to buy a bigger one within strict IRS deadlines, putting off all capital gains taxes. This lets investors keep buying bigger and bigger properties.
Sell for a profit: After your equity has gone up for 5 to 10 years, cash it out. If you make more money than your basis (the purchase price plus improvements minus any depreciation taken), you will have to pay capital gains tax on that profit.
To qualify for the primary residence capital gains exclusion ($250,000 for single people and $500,000 for married people), you must live in the rental for at least two years.
Market conditions have a big impact on when to leave. In many markets, property values reached their highest point in late 2022 and then fell through 2023 and 2024. In the second quarter of 2025, the median home price was $410,800. This was down from $414,500 a year earlier but still a lot higher than it was before 2020. Prices went down 2.38% in some places, like San Francisco, and up 12.35% in others, like Bridgeport, Connecticut.
House hacking is a less risky way to get into real estate investing if you're worried about jumping right into it. It's easy to understand: buy a property with two to four units, live in one of them, and rent out the others.
FHA loansLower down payments: If you live in one of the 2-4 unit properties,only require 3.5% down. For owner-occupied properties, conventional loans only require 5–10% down, while for pure investments, they require 15–25%.
Better interest rates: Rates for owner-occupied homes are about 0.5–0.75% lower than rates for investment properties, which can save you thousands over the life of the loan.
Easier to get approved: You can use 75% of your projected rental income to help you qualify, which makes your debt-to-income ratio easier to handle.
Learn while you live there: While you live there, you'll learn the basics of property management so you can deal with problems right away.
Your tenants pay most or all of your mortgage, so you can build equity faster while living rent-free or at a very low cost.
Stepping stone to pure investments: After a year or two, you can move out, turn the property into a full rental, and do the same thing with another house hack purchase.
What are the downsides? You live next door to your tenants, which makes it hard to keep things professional. When you're neighbors, you have to deal with noise complaints, parking problems, and shared yard duties in a more diplomatic way. But house hacking is one of the best ways to make money in real estate if you don't have a lot of money to start with.
You don't need an LLC to buy or run rental property. Many landlords own their rentals in their own names. But forming an LLC protects your personal assets from the rental property by keeping them separate. If a tenant gets hurt on the property and sues, they can only go after the LLC's assets, not your home or savings.
The downside is that getting financing is harder. Most residential mortgage lenders won't lend money directly to LLCs. Instead, you'll have to either put the property in your name first and then transfer it (which could break due-on-sale clauses) or get commercial financing, which has stricter terms. Some investors find a middle ground by buying in their own names but keeping high liability insurance coverage. For example, $1–2 million in umbrella coverage costs only a few hundred dollars a year.
Before you make a decision, talk to a real estate lawyer and a CPA who knows how your state's LLC laws and taxes work. The best structure for you will depend on your situation, how many properties you have, and the laws in your state.
Yes and no. You can only get a VA loan on a property that you plan to live in as your main home. You can use a VA loan to buy a property with 2 to 4 units, though. You can live in one unit and rent out the others. This is really house-hacking, not buying a rental property.
If you qualify, the benefits are amazing: no down payment (if you have full VA entitlement), no private mortgage insurance, competitive interest rates, and a debt-to-income ratio of no more than 41%. The VA doesn't set a minimum credit score, but most lenders that work with the VA do require a score of at least 620. Some of LendingTree's top VA lenders for 2025 will work with credit scores between 500 and 580.
You must sign a form saying that you plan to live in the property as your main home within 60 days of closing and stay there for at least a year. After that year, you can leave and turn it into a full rental while keeping the VA loan terms. If you still have VA benefits, you could buy another multi-unit property, live in it for a year, and do it all over again.
Veterans and active-duty service members should definitely look into this option before going the traditional route of getting a loan for an investment property. The fact that you don't have to put any money down is the biggest barrier to real estate investing.
This is why it's so important to have cash reserves and screen tenants properly. You are still 100% responsible for the mortgage, property taxes, insurance, and maintenance costs even if you can't find tenants or your tenant stops paying.
The national vacancy rate was 7.0% as of Q2 2025, so when figuring out ROI, plan for at least one month of vacancy every year. When the economy is bad or the market is slow, properties can be empty for 2 to 3 months between tenants. When your property is empty, you'll have to pay the full mortgage and utilities, but you won't make any money. There are the 1% and 2% rules for this reason: there needs to be enough space between rent and costs to cover times when the property is empty.
If a tenant stops paying rent, you can't just change the locks or turn off the utilities. That's against the law in all 50 states. You have to follow your state's eviction process, which usually includes sending the right notice, filing eviction papers with the courts, going to a hearing, getting a judgment, and hiring a sheriff to physically remove the tenant. Depending on your state and the number of cases in court, this process can take anywhere from one to six months. During this time, you won't get any rent but will still have to pay all your bills. The total cost, which includes legal fees and lost rent, can easily reach $5,000 to $10,000.
This is why it's important to screen tenants carefully, have cash reserves, and think about getting landlord insurance that includes rent guarantee coverage. Some investors also want the first month's rent, the last month's rent, and a security deposit up front to protect themselves.
There is both art and science in setting rent prices. If you set the price too high, your property will stay empty, which will cost you more. If you set the rent too low, you could miss out on money and attract tenants who might not be as good and wonder what's wrong with the property.
The steps I suggest are:
Keep in mind that rental prices can change a lot depending on where you live, the time of year, and the state of the economy. The U.S. Census Bureau says that the median monthly rent for empty apartments in Q2 2025 was $1,494. Census Bureau, but that number includes both small apartments and large single-family homes all over the country.
No one should have to deal with the stress of making a big investment at the wrong time in the market cycle. Here is an honest look at how the market will be in 2025.
Reasons to buy now:
Things that make it hard to buy now:
The book answer is that investing in real estate is a long-term game. If you can find a property that makes money or has little negative cash flow that is offset by tax benefits, and you have enough money set aside to cover periods when the property is empty, buying in 2025 could still be a good idea. Markets don't wait for the "perfect" time.
I tell my clients to look for a good deal in a strong rental market instead of trying to time the whole market. A home bought in 2025 for 20% less than market value will do better than a home bought at full price in a "better" year.
Yes, but there are some important limits. The IRS usually lets you deduct up to $25,000 in rental real estate losses from your regular income if your rental property has negative cash flow, meaning that your expenses are higher than your rental income. However, this only applies if you actively manage the property and your modified adjusted gross income (MAGI) is less than $100,000.
As your MAGI goes up from $100,000 to $150,000, that $25,000 deduction goes away. If your MAGI is more than $150,000, you usually can't deduct rental losses from your regular income unless you work in real estate for at least 750 hours a year and more than half of your working time.
If you can't deduct losses right now because your income is too high, you can carry them forward to future years when you either have rental income to offset them or sell the property. This is why rental property can still be good for taxes even if it doesn't make money: you're building up depreciation deductions and losses that you can use later.
It doesn't take long for the rules about passive activity losses to get complicated. I'm really sorry that the tax code is so hard to understand. To get the most deductions legally, you should definitely work with a CPA who knows a lot about rental property taxes.
As the landlord, you are responsible for maintenance and repairs unless your lease clearly states that tenants are responsible for certain tasks, like shoveling snow or taking care of the lawn. The main difference is between maintenance and capital improvements.
You can write off regular costs like fixing broken appliances, patching leaks, painting, pest control, landscaping, HVAC service, plumbing repairs, and more right away. Set aside 1% to 3% of the property's value each year for these. For a $410,800 property, that's $4,108 to $12,324 a year. The age and condition of your property have a big impact on the actual costs. Older properties need more.
Capital improvements, like a new roof, replacing the HVAC system, adding rooms, completely renovating the kitchen, or putting in new windows, can increase the property's value or lengthen its useful life. You can't fully deduct these right away; instead, you have to spread the cost over 27.5 years along with the property itself.
Most states require landlords to respond to emergency repairs (like burst pipes, no heat in the winter, or no air conditioning in the summer) within 24 to 48 hours. This is why it's important to have a maintenance reserve and good relationships with contractors. I suggest:
Most of the time, a property management company will handle scheduling repairs for you, but you'll still have to pay for the work itself.
Real estate investment trusts (REITs) let you put money into real estate without having to take care of the properties yourself. This is how they stack up.
Owning Rental Property:
Investing in REITs:
Owning physical rentals usually makes you more money over time because of leverage, tax breaks, and higher potential returns. This is true for investors who are willing to manage the properties or pay for management. REITs are a good choice for passive investors who want to invest in real estate without having to do any work.
Many smart investors do both: they own several rental properties to save money on taxes and force themselves to save money by paying off their mortgages. They also hold REITs in their retirement accounts to diversify their portfolios and have access to cash.
You can definitely own and manage rental property from a distance, but it's a lot harder. To make it work, you need:
Most successful out-of-state investors either owned the property locally first and then moved, have property management take care of everything, or own multiple properties in the same distant market to save money on trips. It doesn't usually work out well to buy a rental property in a state you've never been to before just because it "looks like a good deal online."
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