Buy and hold a rental

Buy a house, condo or small multi-unit home to rent out long term: monthly income and growth over time.

How it makes money

• Monthly cash flow: the rent left after the loan, taxes, insurance, repairs, vacancy and savings for big replacements.
• Loan paydown: the tenant’s rent pays your loan balance down every month.
• Appreciation over years, which you can’t count on in any one year.
• Tax: depreciation lowers the tax on the rent; it comes back when you sell.

The honest risk

• Cash you need to start: The down payment: at least 15% (one unit) to 25% (two to four units) on Fannie Mae investment loans, plus closing costs and reserves.
• Worst realistic outcome: Vacancy, a tenant who stops paying or a big repair leaves you paying the mortgage yourself. Evictions take a court case.
• What you keep owing: You owe every loan payment, tax and insurance bill even when a unit is empty or repairs run over. If you can’t pay, you can lose the property and the equity in it, so you can lose more than the cash you start with.
• How long a first deal takes: Months: pre-approval, a search and a closing, then finding a tenant.

What goes wrong on a first deal

• The listing’s rent and the seller’s tax bill are rarely yours: check leased comparables and your own tax bill.
• Known replacements (roof, water heater, HVAC) belong in the numbers before you offer.
• A thin cushion: lenders often want several months of payments in savings after closing; how much more you keep depends on your situation and risk tolerance.

Your first steps

• Read the lessons on analyzing a deal and traditional financing.
• Pick an area: check rents from homes like these that actually rented nearby, taxes and flood risk. HUD’s Fair Market Rent is only a rough area benchmark.
• Get pre-approved for an investment property loan; lenders often want six months of payments in reserve.
• Decide whether you’ll manage it yourself or hire a property manager, and get quotes.
• Run the numbers with vacancy, repairs and management, and know your cash flow.
• Get landlord insurance quotes before you make an offer.
• Plan tenant screening and use a written lease that follows your state’s law.