Before you make an offer

Tear off a street

Real estate can pay you through rent, through tax rules such as depreciation and through a loan that lets a small down payment control a larger property. It can also tie up your money for years. A local real estate agent can show you what is for sale; these guides cover what to check first.

Each guide is built from official sources, from IRS publications to SEC investor bulletins and federal housing law. Talk to a tax professional and a local lender before you buy, and use local resources such as your county assessor and housing office for the rules where you invest.

Getting Started StWays to Invest AvePitfalls & Rules Rd
Pre-purchase reportItemStatus

Inspect Yourself Before You Inspect a Property

Five items to look at before the first showing. None of them needs a large bank balance; all of them need honesty.

  1. 01
    Your own finances

    Lenders look at an investment property harder than at a home you live in. Fannie Mae generally wants six months of reserves for an investment property loan, counted in full monthly payments of principal, interest, taxes, insurance and dues. Before you shop, know your credit, your debts and how much cash would be left after the down payment and closing costs. See Financing an Investment Property: What Lenders Look For.

    Plan
  2. 02
    The numbers on the listing

    A listing shows the rent the seller hopes for. Your offer should rest on effective income after vacancy, a full list of operating costs and the mortgage payment. Net operating income, cap rate, cash flow and cash-on-cash return are simple formulas; the hard part is honest inputs. The Deal check below runs them three ways. See Rental Property Math: Cash Flow, NOI and Cap Rate Explained.

    Watch
  3. 03
    The path that fits you

    Owning a rental makes you a landlord. Living in one unit of a two- to four-unit building can open FHA financing with 3.5 percent down, because FHA insures those loans only when the borrower lives there. REITs and crowdfunding let you own a slice without tenants, with their own risks. See How to Start Investing in Real Estate: A First-Timer’s Roadmap.

    Ready
  4. 04
    The rules you inherit

    Federal fair housing law covers how you advertise and choose tenants, even for many small owners who are otherwise exempt. For most housing built before 1978 you must give tenants EPA’s lead pamphlet and disclose known lead paint. The IRS taxes rent as income and lets you depreciate the building, not the land, over 27.5 years. See Landlord Rules Every New Investor Should Know: Fair Housing and Lead Paint.

    Watch
  5. 05
    The people selling shortcuts

    The FTC keeps finding the same pattern: a free seminar, then a costly coaching package, then promises of easy profits. Only scammers guarantee big returns, and the SEC never approves an offering. If a pitch pushes you to decide today or to borrow for the program itself, walk away. See Real Estate Investment Scams: Seminars, Coaching and Too-Good Deals.

    Fix first

The neighborhood

Three Streets, One Sign per Guide

Start at the top of Getting Started St and walk down. A yellow rider marks every guide you have already toured.

Getting Started St100 block

Getting Started Where to begin, the honest pros and cons, the rental math to run before an offer and how lenders treat an investment property.

TouredLot 01How to Start Investing in Real Estate: A First-Timer’s RoadmapReal estate investing can mean owning a rental, living in one unit of a duplex, or buying shares of a REIT. How to choose a first path, get your finances ready, learn the tax and landlord rules, and avoid the costly seminars the FTC warns about.5 min readTouredLot 02Real Estate Investing Pros and Cons: An Honest LookRental income, depreciation, leverage and control on one side; illiquidity, concentration, tenant problems and borrowed money on the other. A balanced look at what real estate offers and what it costs, using IRS, SEC and Fannie Mae rules.4 min readTouredLot 03Rental Property Math: Cash Flow, NOI and Cap Rate ExplainedThe handful of formulas every rental buyer should run before making an offer: gross rent, vacancy, operating expenses, net operating income, cap rate, cash flow and cash-on-cash return, worked through one hypothetical duplex with round numbers.4 min readTouredLot 04Financing an Investment Property: What Lenders Look ForHow conventional lenders treat rental property differently from a home you live in: higher pricing, approval through automated underwriting, six months of reserves, limits on financed properties and strict rules on counting rental income. Plus the FHA route for owner-occupied 2- to 4-unit homes.4 min read
Ways to Invest Ave200 block

Ways to Invest Four routes in: a first rental, house hacking a duplex, REITs and real estate crowdfunding.

TouredLot 05Buying Your First Rental Property: From Search to First TenantA practical sequence for buying a single-family or small multi-unit rental: setting criteria, checking rents and costs, inspecting an older building, lead paint disclosures, financing, the tax records to keep from day one and the fair housing rules for finding a tenant.4 min readTouredLot 06House Hacking a Duplex: Living in One Unit, Renting the OthersBuying a two- to four-unit building, living in one unit and renting the rest is a common first step. How FHA and conventional rules treat it, why the rent may not help you qualify, how taxes split between your home and the rental, and the fair housing exemption that is narrower than many think.4 min readTouredLot 07REITs Explained: Owning Real Estate Without Being a LandlordA real estate investment trust lets you own a slice of apartments, offices or warehouses through shares. How publicly traded and non-traded REITs differ, why REIT dividends are taxed differently, and the SEC’s warnings about fees, liquidity and distributions paid from borrowed money.4 min readTouredLot 08Real Estate Crowdfunding: How It Works and What the SEC WarnsOnline platforms let you put small amounts into individual real estate projects. Who can invest and how much under Regulation Crowdfunding, what accredited investor status means, the 48-hour cancellation window, the one-year resale restriction and the risks the SEC lists.4 min read
Pitfalls & Rules Rd300 block

Pitfalls and Rules The rules that catch new investors: rental taxes, fair housing and lead paint, seminar and investment scams, and 1031 exchanges.

TouredLot 09Rental Property Taxes: Income, Deductions, Depreciation and LossesHow the IRS taxes a rental: what counts as rent, which expenses you can deduct, why repairs and improvements are treated differently, how 27.5-year depreciation works, the passive loss rules and the $25,000 allowance, and what happens to depreciation when you sell.4 min readTouredLot 10Landlord Rules Every New Investor Should Know: Fair Housing and Lead PaintTwo federal rules apply to almost every small landlord. What the Fair Housing Act prohibits, including in advertising, the narrow exemptions for small owners, reasonable accommodations for tenants with disabilities, and EPA’s lead paint disclosure rule for housing built before 1978.4 min readTouredLot 11Real Estate Investment Scams: Seminars, Coaching and Too-Good DealsThe FTC and SEC see the same pattern again and again: free events, celebrity endorsements, expensive coaching and promises of easy profits. How real estate training and investment scams work, the warning signs regulators list, how to check an offer and where to report it.4 min readTouredLot 121031 Exchanges Explained: Deferring Tax When You Trade UpA like-kind exchange lets an investor sell one investment property and buy another without paying tax on the gain right away. What qualifies since 2018, the 45-day and 180-day deadlines, related-party rules, what happens to cash received, and why the tax is deferred, not forgiven.4 min read

Deal check

Run Every Deal Three Times

Enter your own numbers: the sheet shows NOI, cap rate, cash flow and cash-on-cash as entered, with rent 10% lower and with one major repair.

The property
Income
Costs
Optional

How these formulas work →

Deal sheet

As enteredRent 10% lowerPlus one repair

1031 exchange clock

    1031 exchanges explained →

    Arithmetic only, on numbers you enter; nothing is sent anywhere. The starting numbers are the hypothetical duplex from Rental Property Math: Cash Flow, NOI and Cap Rate Explained, not typical figures. Not investment or tax advice.

    Door hangers

    Questions Left at the Door

    Short answers from federal sources, each with the guide that goes further.

    Can I use an FHA loan to buy a rental?

    Only if you will live in it. Federal law lets FHA insure a one- to four-family home when the borrower occupies it, with at least 3.5 percent down, so a duplex where you live in one unit can qualify. See House Hacking a Duplex: Living in One Unit, Renting the Others.

    How much cash do lenders want me to keep after closing?

    For an investment property loan in its automated underwriting, Fannie Mae generally requires six months of reserves, measured in full monthly payments including taxes, insurance and dues. See Financing an Investment Property: What Lenders Look For.

    What is the difference between NOI and cash flow?

    Net operating income is rent collected minus operating expenses, before the mortgage. Cash flow is what is left after the mortgage payment. See Rental Property Math: Cash Flow, NOI and Cap Rate Explained.

    How long do I depreciate a rental house?

    The IRS depreciates residential rental buildings over 27.5 years. Land is never depreciated, so you split the purchase price between land and building. See Rental Property Taxes: Income, Deductions, Depreciation and Losses.

    Can rental losses lower my other taxes?

    Up to $25,000 of rental losses can offset other income if you actively participate, with the allowance phasing out between $100,000 and $150,000 of modified adjusted gross income. See Rental Property Taxes: Income, Deductions, Depreciation and Losses.

    How much can I put into real estate crowdfunding?

    If your income or net worth is under $124,000, the limit in any 12 months is the greater of $2,500 or 5 percent of the greater of the two. Accredited investors have no limit. See Real Estate Crowdfunding: How It Works and What the SEC Warns.

    Do REITs pay out most of their income?

    Yes. Investor.gov says REITs must distribute at least 90 percent of their taxable income each year, and their dividends generally do not get the lower qualified dividend rate. See REITs Explained: Owning Real Estate Without Being a Landlord.

    What are the 1031 exchange deadlines?

    In a deferred exchange you must identify the replacement property within 45 days of transferring the one you sell, and receive it within 180 days or by your tax return due date, if earlier. See 1031 Exchanges Explained: Deferring Tax When You Trade Up.