20 Questions in This Hub
- What are the financing options for a first rental property?
- What is house hacking?
- Can I use an owner-occupied loan for a rental?
- Should I form an LLC for my first rental?
- Do I need a separate bank account for my first rental?
- How do I screen my first tenant?
- What should be in my first lease?
- Should I self-manage or hire a property manager for my first rental?
- What do I need to know about taxes in my first rental year?
- How do I set up bookkeeping for my first rental?
- What are the most common first-year landlord mistakes?
- What should I look for in my first rental?
- How much money do I need for my first rental?
- What credit score do I need for my first investment loan?
- Should my first rental be a single-family or a small multi?
- How do I know if a fix is a repair or an improvement?
- How does depreciation work in my first year?
- What insurance do I need for my first rental?
- What should I do in the first 90 days after closing on my first rental?
- When should I buy my second rental?
1. What are the financing options for a first rental property? #
Three real paths. Conventional Fannie Mae or Freddie Mac investment loan: 15 to 25% down, qualifies on your personal income and DTI, requires two years of tax returns and W-2s, closes in your personal name. Best rate available to investors, typically 0.75 to 1.5 points below DSCR.
DSCR loan: 20 to 25% down, qualifies on the property's cash flow (no personal income docs), can close in an LLC. Higher rate than conventional but skips the income-doc bottleneck. Best for self-employed buyers or buyers who want LLC ownership from day one. House hack: buy a 2-4 unit with a primary-residence FHA (3.5% down), VA (0% down), or conventional (5% down) loan, live in one unit for 12 months, rent the others. The cheapest entry by far if you can stomach the live-in year. For deeper DSCR mechanics see the DSCR loans hub.
2. What is house hacking? #
House hacking is buying a 2-4 unit property with a primary-residence loan (FHA at 3.5% down, VA at 0% down, conventional at 5% down), living in one unit, and renting the others. The other units' rent typically covers most or all of the mortgage, so you live for free or close to it while building equity and rental experience.
Two requirements. First, you must occupy the property within 60 days of close and live there at least 12 months (FHA and conventional rules). Second, you can only have one government-loan house hack at a time, but you can repeat the strategy by moving every 12 months. Many successful long-term portfolios started with three to four serial house hacks before the investor moved to pure DSCR-financed acquisitions. The downside: you live next to your tenants, which is a real lifestyle adjustment.
3. Can I use an owner-occupied loan for a rental? #
Only if you actually occupy the property as your primary residence for the lender's required period (typically 12 months). Lying on an owner-occupied loan to get the cheaper rate (called 'occupancy fraud') is a federal crime under 18 USC 1014, and lenders verify after closing through utility records, mail, and insurance changes.
If you buy with a primary-residence loan and your circumstances genuinely change (job relocation, family change), you can convert the property to a rental and notify your insurance carrier; that is allowed. What is not allowed is buying with a primary-residence loan you never intended to occupy. The rate savings (typically 0.75 to 1.5 points lower than investment) are not worth the loan recall and federal-fraud exposure. Use the right loan product for the use case.
4. Should I form an LLC for my first rental? #
Not always immediately, and almost never before you close. An LLC adds liability separation from your personal assets and lets you close future DSCR loans in the entity. The downsides for one property: $100 to $800 in formation and registered-agent fees, an annual state filing, the need for a separate bank account, and (if you used a conventional residential loan) potential due-on-sale risk if you transfer title to the LLC.
Pragmatic path: buy the first property in your personal name with the cheapest financing available (conventional or house-hack), get a $1M to $2M umbrella insurance policy ($300 to $500/year) for liability coverage, and form an LLC at property two or three when you can close directly into the LLC with a DSCR loan. The LLC matters more for portfolios than for a single property; do not let the entity question delay the first deal.
5. Do I need a separate bank account for my first rental? #
Yes, immediately. Open a dedicated checking account for the rental before the first rent payment lands. All rent receipts, mortgage payments, repair invoices, and operating expenses run through that one account. Personal funds never touch it; rental funds never touch your personal account.
Two reasons. First, it makes Schedule E preparation a 30-minute exercise instead of a weekend reconstruction. Your CPA or tax software pulls a single year of bank transactions and categorizes; that is 90% of the work. Second, it preserves any liability separation if you do form an LLC later (commingling personal and rental funds undermines the LLC's protection in court). Open the account at any community bank or credit union; you do not need a business account for a personally-owned rental, but use one if you have an LLC. Cost is usually zero on a small business checking with a $500 minimum balance.
6. How do I screen my first tenant? #
Five-step screen. Application with full legal name, SSN, employer, prior addresses for past 5 years, contact info for last two landlords. Credit pull through a tenant-screening service (TransUnion SmartMove, RentSpree, AppFolio Tenant); minimum 620 FICO is a common threshold, 680+ for premium properties.
Income verification: gross monthly income should be at least 3x rent (the standard rent-to-income ratio). Pay stubs, offer letter, or two months of bank statements work. Past landlord reference: call the second-to-last landlord, not the current one (the current landlord may be motivated to give a good reference to get the tenant out). Ask: paid on time, gave proper notice, would rent to again. Eviction history: any prior eviction filing in the past 7 years is usually a hard no.
7. What should be in my first lease? #
Use a state-specific lease template; do not start from a generic Word doc. The lease must include lease term and renewal terms, monthly rent and due date, late fee structure (within state limits), security deposit (within state limits), pet policy and pet deposit/fee, utility responsibility (which utilities are tenant-paid, which are landlord-paid), maintenance responsibility (typically tenant for under $50 to $100, landlord above), notice requirements, and jurisdiction-specific addenda (lead paint disclosure for pre-1978 properties, mold, bedbug, etc.).
Most successful first-time landlords either (a) buy a state-specific template from a local landlord-tenant attorney for $200 to $500, or (b) use a state-vetted online lease (TurboTenant, RentRedi, AppFolio) and have the local landlord association review. Do not download a free generic 'all states' lease; they almost always omit the addenda your state requires and are unenforceable on the missing clauses.
8. Should I self-manage or hire a property manager for my first rental? #
Self-manage if the property is local (under 30 minutes), you have an evening or two per month for tenant communication, and you want the operational learning. Self-managing saves the 8 to 10% of rent that a PM charges, which is meaningful cash flow on a tight first deal.
Hire a PM if the property is out of state, if your time is worth more than $100/hour, or if you have no tenant-management experience and the property is in a market with above-average eviction or maintenance volume. PM fees on a $1,800 rental run $144 to $180/month plus tenant placement (typically 50 to 100% of one month's rent at lease signing). Many investors self-manage property one to learn the operations, then hire a PM for property three onwards as scale demands. Either is defensible; the wrong move is half-managing (you handle some, PM handles some) which usually costs you both.
9. What do I need to know about taxes in my first rental year? #
Six things. Schedule E: rental income and expenses are reported on Schedule E (attached to Form 1040). Cost basis: purchase price plus capitalizable closing costs (title insurance, recording fees, transfer tax, but not loan costs which are amortized separately). Depreciation: building basis (cost basis minus land value) divided by 27.5 years; mid-month convention applies in year one.
Mortgage interest: deductible on Line 12 (not principal, which is not deductible). Repairs vs improvements: repairs deduct fully; improvements capitalize. Passive losses: losses generally cap at $25,000/year against W-2 income (and only if MAGI is under $150,000). For deeper line-by-line Schedule E mechanics, depreciation, passive losses, and PM-statement reporting, see the Schedule E hub.
10. How do I set up bookkeeping for my first rental? #
Three components. One bank account per property (or one per LLC if you have multiple in the same entity), with all rent receipts and operating expenses flowing through it. Document storage: a folder per property (digital, in a single tool) for the closing disclosure, lease, mortgage statements, insurance, tax bills, and every repair receipt above $75.
A categorization system: Schedule E categories (advertising, repairs, supplies, taxes, insurance, mortgage interest, management, utilities) so every transaction has a tag from day one. Tools: a basic spreadsheet works for one property; QuickBooks Online ($30 to $80/month) or DoorVault (which auto-categorizes statements and receipts as you upload them) scales. The biggest first-year mistake is starting with a personal-finance app like Mint or Personal Capital; those are not built for rental tracking and you will rebuild everything in year two.
11. What are the most common first-year landlord mistakes? #
Six most-common, in rough order of cost. Skipping tenant screening because the first applicant seems nice; one bad tenant erases two years of cash flow. Underestimating repairs by assuming the inspection caught everything; budget a $2,000 to $4,000 first-year capex hit on any property older than 15 years.
Under-insuring: a $100K dwelling policy on a $250K property leaves you exposed at total loss. Get a real landlord policy at full replacement cost and add a $1M umbrella. Commingling money: running rent through your personal checking account; impossible to clean at tax time. Self-managing badly: missing rent followups, slow maintenance response, no formal lease violations process. Skipping the lease addenda: lead paint, mold, bedbug, state-specific disclosures; an unenforceable lease is worse than no lease in court.
12. What should I look for in my first rental? #
Three priorities. Cash-flow positive at conservative inputs: minimum $100 to $200/month positive cash flow after all real expenses (taxes, insurance, PM, vacancy, maintenance, capex), not after-debt-service-only optimism. Lower-risk asset: 3 bed / 1.5+ bath single-family in a B-class neighborhood is the easiest first rental to operate. Avoid C-class for the first deal; the operating intensity is real.
Solid financing path: pre-check DSCR at the lender's actual rate before writing the offer. A first deal where DSCR is 0.95 is a deal you cannot finance. Skip exotic property types (condotels, non-warrantable condos, mobile homes) on the first deal; the financing constraints are not worth the price discount. The first deal teaches you operations; pick something boring and well-located so you can focus on learning the business.
13. How much money do I need for my first rental? #
Plan for down payment plus closing costs plus reserves. On a $200,000 conventional investment-property purchase with 20% down: $40,000 down payment, $5,000 to $7,000 closing costs (3 to 3.5%), and 6 months of PITIA in reserves ($8,000 to $11,000). Total cash needed: $53,000 to $58,000.
Alternatives that lower the cash bar. House hack with FHA: 3.5% down on a $300K duplex is $10,500 down plus $9,000 closing plus $5,000 reserves, total around $25,000. House hack with VA: 0% down, $9,000 closing, $5,000 reserves, total around $14,000. House hack with conventional 5%: $15,000 down, $9,000 closing, $5,000 reserves, total around $30,000. The cash gap between investment and house-hack is the reason most successful portfolios started with a house hack.
14. What credit score do I need for my first investment loan? #
Conventional Fannie Mae investment loan: 620 minimum FICO, with rate adders below 740. Best pricing is 740+. Below 700 the rate adders stack quickly and a borderline-affordable deal can become unaffordable on the rate hit. DSCR loan: 660 minimum at most lenders, 720+ for best pricing.
House-hack loans: FHA goes to 580 (3.5% down) or 500 (10% down); VA has no FICO minimum at the federal level but most VA lenders impose a 580 to 620 overlay; conventional 5% house-hack typically requires 680+. If your score is below the threshold for the loan type you want, a 90-day credit cleanup (paying revolving balances under 30% utilization, disputing errors, no new credit pulls) often moves a score 20 to 50 points. The savings on rate alone usually pays for the cleanup effort many times over.
15. Should my first rental be a single-family or a small multi? #
Single-family is easier to finance, easier to operate, easier to sell, and almost always easier on a first-time landlord. One tenant, one HVAC, one roof, one set of utilities, one set of expectations. Lower vacancy risk because tenants tend to stay longer in single-family.
Small multi (2-4 unit) produces more gross income per dollar of price, supports house hacking with a primary-residence loan, and spreads vacancy risk across multiple units. The trade is operational complexity: more tenants, more turnovers, shared infrastructure (one roof feeds 4 units, one boiler heats 2 units), more inspection items. For a first deal where you self-manage, single-family is usually the right call. For a first deal where you house-hack, a 2-4 unit is usually right because the financing math is so much better.
16. How do I know if a fix is a repair or an improvement? #
Repair: restores the property to its prior working condition. Patching drywall, fixing a leaky faucet, replacing a broken thermostat, repainting a wall the same color. Repairs deduct fully in the year incurred on Schedule E Line 14.
Improvement: adds value, extends useful life, or adapts the property to a new use. New roof, HVAC system replacement, kitchen remodel, room addition. Improvements capitalize into basis and depreciate over their own recovery period (5, 7, 15, or 27.5 years depending on component). The IRS tangible-property safe-harbor lets small landlords expense items under $2,500 per invoice without capitalizing, which simplifies a lot of borderline calls. When in doubt, ask your CPA before the work; getting it right at the time is cheaper than fixing it at audit.
17. How does depreciation work in my first year? #
Residential rental property depreciates over 27.5 years using straight-line under MACRS, with a mid-month convention in year one. Take your cost basis (purchase price plus capitalizable closing costs), subtract land value (commonly the county assessor's land/improvement ratio), and divide the building basis by 27.5 to get annual depreciation.
Year-one is prorated by month. If you placed the property in service on July 15, year-one depreciation counts roughly 5.5 months of the full annual amount (mid-July through year-end), not 5 months and not 6. Depreciation is non-cash but reduces taxable rental income on Schedule E Line 18. The IRS requires it: even if you do not take the deduction, you owe depreciation recapture tax on what you could have taken when you sell. So always take it.
18. What insurance do I need for my first rental? #
Two policies. Landlord insurance (sometimes called DP-3 or rental-dwelling policy): replacement-cost coverage on the building, loss-of-rent coverage for 12 months at the actual rent, $1M of liability minimum. Annual premiums vary widely by state ($800 to $3,500 for a typical SFR) and have been rising 15 to 30% in coastal and wildfire-exposed markets.
Umbrella policy: $1M to $5M of personal liability that sits above your landlord policy and your auto policy. Annual premium typically $300 to $700 for $1M, scales modestly. The umbrella is the cheapest meaningful liability protection a small landlord can buy, and matters more on the first property than later because you may not have an LLC yet. Do not use a homeowners policy on a rental; if a claim happens, the carrier denies coverage because the property is not owner-occupied.
19. What should I do in the first 90 days after closing on my first rental? #
Week one: change the locks, update the property's mailing address with USPS, transfer (or set up) utilities to your name during any vacancy, and confirm the insurance binder is in force on day one. Week two: open the dedicated bank account, set up automatic mortgage payment from it, and route any existing tenant rent payments to it.
Weeks three to twelve: upload every closing document to your file system, build the per-property folder, set the depreciation schedule based on your closing-disclosure cost basis, and either advertise the unit (if vacant) or formally introduce yourself to the existing tenant in writing. By day 90 you should have a complete property file, a clean bank ledger, an active lease, and a set of monthly recurring tasks (mortgage payment, escrow review, mid-month rent check). The cleaner you start, the easier every later property will be.
20. When should I buy my second rental? #
Two readiness signals. Operationally: the first property has been leased and stable for at least 6 months, you have completed at least one tenant interaction (rent collection, maintenance request, lease question) without panic, and your bookkeeping is clean. If those are not true, you are not ready to add a second property; double the operational load and you double the existing problems.
Financially: you have rebuilt your reserves to cover both properties (typically 6 months of PITIA per property, so 12 months total), and the first property has not surfaced a major surprise (deferred maintenance, tenant issue, tax reassessment) that would change your underwrite. Most successful operators wait 9 to 18 months between deal one and deal two, then accelerate. Buying deal two too early (months 1 to 3) is the most common scaling mistake, often cascading into spreadsheet sprawl and missed tax deductions in year one.