Before you start: prerequisites
Financial Readiness Checklist
- • Credit score: 640+ (720+ for best rates)
- • Cash reserves: 6+ months expenses + down payment
- • Stable income: W-2 or 2+ years self-employment
- • Down payment: 20-25% for investment properties
Step 1: Define your investment strategy
Buy-and-Hold Strategy
Goal: Long-term cash flow and appreciation
Timeline: 5+ years
Best for: Stable markets, W-2 employees
Cashflow target: $200+ per month after expenses
BRRRR Method
Goal: Scale faster through refinancing
Timeline: 6-12 months per cycle
Best for: Hands-on investors, growing markets
ARV target: 70% purchase + rehab costs
Step 2: Market analysis and location
Research Framework
Economic Indicators
- • Job growth trends
- • Population growth
- • Major employers
- • Infrastructure projects
Market Metrics
- • Median home prices
- • Days on market
- • Price-to-rent ratios
- • Rental vacancy rates
Neighborhood Factors
- • School ratings
- • Crime statistics
- • Walkability score
- • Future development
Step 3: Financial analysis
The 1% Rule (Starting Point)
Rule: Monthly rent should equal 1% of purchase price
Example: $150,000 purchase → $1,500/month rent target
Reality: Harder to find in expensive markets (aim for 0.7-0.8%)
Cash Flow Analysis Template
| Income/Expense | Monthly Amount | Notes |
|---|---|---|
| Gross Rent | +$1,500 | Market rate research |
| Vacancy (5-8%) | -$105 | Local vacancy rates |
| Property Tax | -$250 | County assessor |
| Insurance | -$125 | Landlord policy quote |
| Maintenance (5-10%) | -$112 | Property age factor |
| Property Management | -$135 | 8-12% if outsourced |
| Mortgage Payment | -$640 | P&I only |
| NET CASH FLOW | +$133 | Target: $200+ minimum |
Step 4: Financing options
Conventional Investment Loans
Down payment: 20-25% minimum
Rates: 0.5-0.75% higher than owner-occupied
DTI limits: 43-45% including new rental income
Best for: Strong credit (740+) and stable income
Portfolio Lenders
Down payment: 15-20% possible
Rates: Variable, often competitive
Benefits: Keep loans in-house, flexible underwriting
Best for: Local banks, credit unions in target area
Hard Money/Private Lending
Down payment: 10-20% of ARV
Rates: 8-15% short-term
Benefits: Fast closing, BRRRR strategy
Best for: Fix-and-flip or quick refinance plans
Step 5: Property inspection and due diligence
Critical Inspection Areas
Structural Systems
- • Foundation and basement
- • Roof and gutters
- • HVAC systems (age/efficiency)
- • Electrical panel and wiring
- • Plumbing (materials, water pressure)
Investment-Specific Issues
- • Lead paint (pre-1978)
- • Mold and moisture issues
- • Code compliance/permits
- • Rental income verification
- • Tenant lease review
Step 6: Property management basics
Self-Management vs Hiring
Self-Management
- • Cost: $0 monthly fees
- • Control: Direct tenant relationships
- • Learning: Hands-on experience
- • Time: 5-10 hours/month per unit
Professional Management
- • Cost: 8-12% of gross rent
- • Benefits: 24/7 coverage, expertise
- • Scaling: Essential for multiple properties
- • Distance: Manage out-of-state properties
Common beginner mistakes to avoid
Buying in the wrong neighborhood
Low prices often mean high vacancy, crime, or declining values. Focus on B and C+ areas with growth potential.
Underestimating expenses
Budget 50% of gross rent for all expenses (taxes, insurance, maintenance, vacancy, management).
Emotional decision making
Treat it as a business. If the numbers don't work, walk away regardless of how much you "love" the property.
Insufficient cash reserves
Keep 6+ months of expenses per property. Major repairs and extended vacancies happen when you least expect them.
Frequently Asked Questions
How much money do I need to start?
Plan for 25% down payment plus 6 months reserves. For a $150K property: $37.5K down + $10K reserves + $5K closing costs = $52.5K minimum.
Should I buy locally or invest out-of-state?
Start local for your first 2-3 properties to learn the process. Out-of-state requires more research, professional management, and higher risk tolerance.
What's a good cap rate for rental properties?
Target 6-10% cap rates depending on market. Higher cap rates often mean higher risk/management intensive. Factor in appreciation potential, not just current yield.
How do I find good deals in competitive markets?
Build relationships with wholesalers, direct mail campaigns, drive for expired listings, and network with agents who understand investor criteria.