Buying Your First Rental Property? Here’s What You Need to Know

Bethany White May 26, 2022 | 6 min read
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Like any investment, buying your first rental property entails some risk. But, the rewards can be pretty sweet, too. Ready to become a real estate mogul—or, at least, the proud owner of your first investment property? Let’s get into the pros and cons.

The pros of buying your first rental property.

  • No private mortgage insurance required
  • Tax benefits
  • Rental income
  • Diversifies your assets

No private mortgage insurance required

Most loans for a primary residence (the house you live in most of the time) will require you to pay some kind of mortgage insurance. This is insurance that protects your lender if you default on your payments. You won’t have to pay private mortgage insurance on your rental property, so that’s one less monthly fee to worry about. You may still want to invest in landlord insurance, though.

Tax benefits

Remember how your home loan for your primary residence qualified you for write-offs? There’s more where that came from. Buying a rental property could qualify you for tax deductions like:

  • Mortgage interest: Mortgage interest is considered a business expense for your rental property, so you can deduct it using your Form 1098. You should receive this from your lender at the beginning of the year.
  • Property taxes: The property taxes for your rental property will depend on its location and how much the home is worth. To deduct property taxes, you’ll use Schedule E (Form 1040).
  • Depreciation: Like a car or computer, your rental property loses value each year as it accumulates more wear, tear, and general aging. This could actually work to your advantage, though, because you can deduct that depreciation on your tax return. You’ll use Form 4562 for this deduction.

You may not qualify for every possible write-off, but some other potential tax benefits include deductions for repairs, transportation expenses, and advertising costs. Filing can be a little more complicated than it would be for your primary residence, so it may be helpful to consult a tax professional rather than filing on your own.

Rental income

This perk is one of the obvious reasons that many homeowners decide to buy their first rental property. Rent is currently rising, which means you could enjoy a significant boost to that monthly rental income depending on where your property is located. Just don’t let all that power go to your head.

Diversifies your assets

Having a variety of assets to your name is a fundamental investment strategy, and buying your first rental property is a great way to diversify. Since you have more control over it, can sell it when you’re ready to move on, and its value rises with the market, a rental property can be one of the less risky ways to invest. Speaking of risk, let’s explore the cons of buying a rental property.

The cons of buying your first rental property.

  • Higher interest rates
  • Higher down payment
  • It can take a while to see a return
  • Risk of unreliable tenants

Higher interest rates

Because your lender is taking a bigger risk in financing your investment property than they would be for your primary residence, you can typically expect higher interest rates on your rental property’s mortgage.

Higher down payment

Depending on the type of loan you choose for your primary residence, you could put down as little as 3%. In fact, VA and USDA loans require no down payment at all. For investment properties, on the other hand, you’ll need to put down at least 15-20%.

It can take a while to see a return

If you’re looking to get rich quick, a rental property is not the way to do it. In addition to closing costs, you may also have to put in more money up front for home upgrades like fresh paint, new appliances, and updated landscaping to make your property appealing to renters. And, you may not fill your vacancy right away. It could be weeks or even months before you find tenants and start receiving steady rental income.

Risk of unreliable tenants

We believe everyone deserves a place to call home—but that doesn’t mean every tenant will make your job a breeze. If you’re not sure you can handle the awkwardness of following up on missing rent payments, addressing maintenance issues, and generally taking responsibility for the state of your rental property, being a landlord might not be for you. And before you get too frustrated with your renters, just keep in mind that we’ve all made a landlord’s life a little harder at some point.

What to look for in your first rental property and what to avoid.

Choosing the right rental home can make all the difference in the return you enjoy down the line. Here are some dos and don’ts to keep in mind when you start your investment home search.

Do:

  • Make location a priority. Are there restaurants and shops nearby? What’s the crime rate in the area? Make sure the property is in a location that will attract renters.
  • Avoid fixer-uppers. The more you have to fix, the longer you’ll have to wait to take on tenants and see a return on your investment.
  • Research the local housing market. To make sure you offer a fair rent and pay fair rates for your mortgage, do your research and know what to expect from the market. A real estate agent will know all the ins and outs of the local area, so you may want to consider working with one for your investment home purchase.

Don’t:

  • Start with a large property. Smaller residences like condos and single-family homes are less work and less risk for your first time around.
  • Invest without another source of income. It might take a while to profit from your rental property, and it’s true what they say: You have to spend money to make money. Be sure to have an adequate cash flow available before committing to that landlord life.
  • Try to do everything yourself. From your real estate agent to your tax consultant to your loan team (hey, we know a good one), there are a lot of specialized professions involved in buying a rental property. You could do it all by yourself, but you may miss out on opportunities to save or make money that an expert would catch.

So, now you know the basics of buying your first rental property. When you’re ready to get started, our team is here to help. In the meantime, happy house hunting.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

Buying your first rental property can be complicated, but it’s a lot easier when you know what to look for. Hint: Location, location, location.

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About the Author
When Bethany was a kid, her mom took her to the zoo, museums, and more fun spots—then made her write essays about them. Now, Bethany deploys those skills as a copywriter at Cardinal Financial and has to admit: she owes her mom one. When Bethany’s not dreaming up fresh takes on mortgage lending, you can find her running, spoiling her cat, and refusing to improve as a chef.