How to Buy Rental Property & Earn Income While You Sleep

If you’ve ever wondered how to buy rental property but felt overwhelmed by the process, you’re not alone. Many aspiring investors are eager to create passive income through real estate, but they don’t know how to buy their first rental property.

To help you avoid mistakes and create a strategy that works for you, we’ve created a 12-week roadmap that shows you the key accomplishments you need to make each week and the basics of what to expect when buying a property within 90 days.

As you’ll soon discover, there are a lot of steps you need to take when learning how to get into rental properties. To make the process easier, we’ve broken the basics down into weeks, so you can more easily digest what you need to do. Remember, this is your real estate investing journey, so take the time you need before confidently moving on to the next step.

Begin by defining what you want your investment property to accomplish. Is your goal to create monthly cash flow, capitalize on home appreciation, or a mix of both? Do you want tax advantages like deductions for mortgage interest and depreciation? Is the goal to diversify and protect against inflation? Defining your why helps shape your entire strategy.

The next step is to determine the best real estate investing strategy for you. Here is a breakdown of the strategies you may want to consider.

• Flipping: You purchase an undervalued or distressed property, renovate it, and resell for a profit. Best suited for investors with renovation skills and sufficient time availability. Risks include high holding costs and budgeting errors.
• House Hacking: You buy a duplex or single-family home. You live in one unit, and rent out the other unit(s) or room(s). This strategy helps cover the mortgage and lowers living costs while you build equity. Great for first-time investors.
• BRRRR (Buy, Rehab, Rent, Refinance, Repeat): You buy a fixer-upper, renovate it, rent it out, refinance to pull equity, then use the funds for the next deal. Ideal for investors who are knowledgeable about renovations or have an established reno team.
• Turnkey Investing: You purchase fully rehabbed or new build property that is ready for tenants and managed by professional providers. Ideal for first-time investors and busy professionals who prefer not to manage the day-to-day responsibilities of a landlord.
• Long-Term Rentals: You buy properties and rent to tenants with long-term leases, and hold for the long term. The goal is to generate monthly cash flow while building equity and benefiting from appreciation and tax deductions. Requires either property management or strong personal discipline to be a landlord.
• Short-Term (Vacation) Rentals: You list properties on platforms like Airbnb or VRBO for nightly or weekly stays. This strategy offers higher potential income but demands more management, customer service, furnishing, and market oversight.
• Real Estate Syndications: You pool capital with others to invest in large development projects that a syndication manager manages. Participants usually need to be an accredited investor. Offers passive income, portfolio diversification, and access to larger investment opportunities. Investments are illiquid and depend heavily on sponsor performance.

Take a good, hard look at your skill set and available time, so you can determine how you can make money in real estate. If you have ample time and consider yourself a handy fix-it person, you may be well-suited for flipping, as that requires time and renovation skills. If you are super organized, enjoy customer service, and have time to spare, you may be well-suited for short-term rentals, as these properties typically have a stream of rotating customers and properties that need to be refreshed and upkept. If you are a busy professional with limited time, you’d be well-suited for turnkey investing.

Before buying rental property, you need to understand your financial situation and how much money you have on hand for a down payment. Unlike a 3-5% down payment for a primary home loan, an investment property down payment is typically 20 to 25%.

Many investors have set aside $40,000 to $80,000 to cover a 20% down payment, closing costs, and reserves. If you’re not there yet, focus on increasing your income, lowering expenses, and saving, while you continue to learn how to buy rental property.

Being around like-minded investors or having a real estate mentor can help you level up more quickly. Consider joining a group like REIA (Real Estate Investors Association), which has local chapters all over the U.S. They charge an annual membership fee and offer monthly classes and webinars on various real estate investing topics. Members are investors at all levels, so you’ll likely be able to find a mentor.

If you are looking for a 100% free option with a turnkey focus, RealWealth membership gives you access to educational webinars, connections to vetted property teams, and support and guidance from expert investors.

Now that you’ve built a foundation, it’s time to look at real estate markets, the property types available, and get pre-approved so you can buy your first rental property.

Learning how to buy your first rental property starts with choosing the best market for your goals. Key factors for selecting an investor-friendly market are:

• Location
• Job growth
• Population growth
• Affordability
• Landlord-friendly laws

Spend some time using tools like Niche.com and City-Data.com to dive deeper into the market and learning about neighborhood crime rates, school scores, and rental demand. Before you narrow down the best rental markets for you, go back to the questions you answered in week one.

If your goal is to create passive income, consider markets with higher cash flow and lower appreciation. If you want long-term appreciation, consider markets with lower cash flow but higher appreciation. If you want a mix of both, consider hybrid markets that offer cash flow and appreciation. If you are unsure about what market to choose, the experts at RealWealth can help.

While learning how to buy a rental property, you’ll realize it isn’t necessary to travel to the market, as you can find data and insights online. However, you may still want to visit the market in person. Keep in mind that the strategy you select (flipping, BRRRR, turnkey, etc) may influence this decision, as some may require more on-the-ground research than others.

When buying rental property, you’ll soon find there are a variety of property types to choose from, such as:

• Single family homes
• Duplexes
• Triplexes
• Fourplexes
• Multi-family/Apartments
• Condos/townhomes
• Commercial/retail
• Real estate syndications

When learning how to buy your first rental property, many new investors choose to start with single family homes. Then, they may add different property types as their knowledge and portfolio grow. But, like we’ve said earlier, it all depends on your investing strategy and goals.

For example, someone who chooses flipping as their investment strategy is looking to add value and increase the selling price, so they’ll want a property that needs some work. A turnkey investor, however, is looking for a rent-ready property and will be looking at fully renovated or new build rental properties.

The next step is to start talking to lenders about finance options like conventional loans, DSCR (Debt Service Coverage Ratio) loans, hard money loans, or private financing. If you joined a local REIA group, they’ll likely have lenders who are part of the organization, or you can review our list of vetted resources here.

When buying rental property with a traditional or DSCR loan, it’s a good idea to get a pre-approval letter. To do this, simply submit all of your financial documents to the lender, and from that information, they’ll determine how much of a loan they can offer.

Provide your lender with:

• Tax returns (two years)
• W2s (two years)
• Two months of:
  • Bank statements
  • Mortgage Statements
  • Investment fund statements
  • Stock account statements
• And any other financial documents they request

Sometimes, this process can feel cumbersome. All you can do is be patient and provide your lender with the necessary documents. Once they have everything, they’ll send you a preapproval letter, showing you how much of a property you can shop for. With this in hand, it’s officially time to start searching for investment properties.

With your real estate market and financing for your rental property in place, it’s time to start analyzing properties and putting in an offer.

The next step for buying rental property is to become familiar with the available inventory, price points, and pro forma information. Use tools like DealCheck.io to calculate cash-on-cash return, cap rate, net operating income, and ROI.

To get comfortable with this process, play around with the numbers and see how different scenarios impact your return on investment (ROI). Understanding what makes a deal work or not is a crucial step when learning how to get into rental properties. The more familiar you become, the more likely you’ll be able to act fast when a good deal comes along.

Once you’ve identified a property, it’s time to submit a formal offer. The process may differ slightly if you are working directly with the seller, wholesaler, a real estate agent, or a turnkey provider. Basically, you’ll submit a letter of intent or a standard purchase agreement. Be sure to thoroughly review the details of the documents, noting items like purchase price, escrow amounts, closing date, and contingencies.

The contract should include contingencies for appraisal, inspection, and financing, as they protect you in case something unexpected comes up during the due diligence process. You’ll also want to note items that may be included in the sale, such as appliances, fencing, sheds, and garage door openers.

Once both parties agree on the price and terms of the agreement, you’ll need to provide an earnest money deposit, typically between 1 and 2% of the purchase price. A third party holds the money in an escrow account. You’ll also want to provide a copy to your lender.

Ensure that you have all necessary documents to meet your lender’s requirements and lock in your interest rate.

When buying rental property for most real estate strategies, it’s a good idea to get a home inspection and a property appraisal. Please note this is an out-of-pocket expense, and typically costs around $500 each.

For the home inspection, a professional home inspector will thoroughly examine the property’s structure and systems to identify defects and other concerns. They’ll inspect things like the foundation, roof, electrical and plumbing systems, and look for areas of water damage, mold, broken windows, etc.

What they find will be given to you in a multi-page report. After receiving the report, we recommend discussing any questions with them and obtaining feedback on items that require immediate attention versus those that can wait. This report can be hugely beneficial for investors, as it not only provides you with a thorough review of all aspects of the property, but it may also provide you with some leverage.

For example, suppose your strategy is turnkey investing and the inspection brings to light some pressing issues. In that case, you can give the turnkey provider a fix list (in writing) that will need to be addressed before the property is purchased. Once the items on your list are addressed, you can have the home inspector go back to verify that the fixes were made. In addition, if major repairs need to be addressed, like structural issues or safety hazards, you have some negotiating leverage.

A licensed appraiser performs a home appraisal and provides an unbiased assessment of the home’s current value, using factors like neighborhood, property condition, and comparable sales. In most cases, you’ll want to get a home appraisal. However, for a flipping strategy, you may want to forgo an appraisal, as you’ll be renovating the property to boost its current value. Before you purchase the property, it’s a good idea to do a comparative market analysis, so you understand the potential value of the property after renovations are complete.

When getting a mortgage through a lender, they’ll require that home insurance be in place as part of the process. Obtain insurance quotes from insurance companies that specialize in landlord coverage. To get a quote, provide them with property details like:

• Address
• Age
• Condition
• Square footage
• Property type

Once you’ve chosen a policy, make sure it’s in place before you close.

You’ve made it! All your hard work of learning how to buy rental property has brought you to closing day. Sign all documents and transfer the remaining downpayment funds to finalize your purchase of the rental property. Signing can take some time, so be sure not to be in a rush and give it your full attention.

Congratulations—you now own a rental property! Based on your investment strategy (flip, BRRR, turnkey, house-hack, etc), you’ll want to act accordingly to protect your investment. For example, a flipper will want to monitor the renovation projects, ensuring they meet deadlines, make quality updates, and don’t go over budget. A turnkey investor will want to keep track of rents and expenses every month, as well as overall performance annually.

Learning how to buy your first rental property doesn’t have to be stressful or time-consuming. If you read this article and want a step-by-step roadmap, join RealWealth to download The Busy Person’s Guide to Getting Your First Rental in 90 Days. Download the guide now.