Real Estate Investment FAQ

Most beginners should start with single-family homes or duplexes. Single-family homes are easier to finance, understand, and sell later. The learning curve is gentler, and you can often find them in better neighborhoods. Duplexes can be a sweet spot - you get some diversification (two tenants instead of one), but they're still relatively simple to manage. Avoid large apartment buildings until you've mastered the basics with smaller properties.

Plan on needing 25-30% down for investment properties (lenders require higher down payments than primary residences). Add closing costs (2-3% of purchase price), initial repairs and updates (budget 5-10%), and operating reserves. I recommend having at least 6 months of expenses saved per property to cover vacancy, maintenance, and unexpected repairs. For a $200,000 investment property, you're probably looking at $60,000-$80,000 in total cash needed.

Good deals rarely advertise themselves - you have to dig. Start with MLS searches using specific criteria and set up alerts. Network with real estate agents who specialize in investors. Join local real estate investment groups and meetups. Drive neighborhoods you're interested in and look for FSBO signs, distressed properties, or rental signs (maybe the landlord wants to sell). Online platforms like BiggerPockets can connect you with wholesalers and other investors. Expect to analyze 50-100 properties to find one that truly works.

A price-to-rent ratio between 15-20 is typically favorable for investors. You calculate this by dividing the purchase price by the annual rent. For example, a $300,000 house renting for $2,000/month has a ratio of 12.5 ($300,000 ÷ $24,000), which is excellent. Ratios below 15 usually indicate strong rental markets, while ratios above 25 suggest you might be better off renting than buying. Keep in mind that expensive coastal markets often have higher ratios but may still work due to appreciation potential.

The basic formula is: (Annual rental income - Annual expenses) ÷ Total cash invested × 100. Let's say you buy a $200,000 house with $50,000 down. It rents for $1,800/month ($21,600/year) and has $6,600 in expenses (taxes, insurance, maintenance, vacancy allowance). Your net income is $15,000, divided by your $50,000 investment, giving you a 30% ROI. Don't forget to factor in closing costs and initial repairs when calculating your total cash invested.

Cap rate ignores financing - it's the property's net operating income divided by the purchase price. Cash-on-cash return considers your loan and measures your actual cash flow against the cash you invested. For example, a $300,000 property with $30,000 net income has a 10% cap rate. But if you put $60,000 down and your mortgage payment reduces your cash flow to $18,000, your cash-on-cash return is 30% ($18,000 ÷ $60,000). Cash-on-cash is more relevant for evaluating your actual investment performance.

Cap rate is the property's annual net operating income divided by its value, expressed as a percentage. It's useful for comparing properties regardless of financing. A property with $20,000 in net income selling for $250,000 has an 8% cap rate. Generally, higher cap rates mean higher returns but also higher risk or less desirable areas. Prime areas might have 4-6% cap rates, while secondary markets often offer 6-8%. Use cap rates to quickly screen deals, but don't forget to consider appreciation potential and your financing structure.

A good rule of thumb is to spend no more than 10-15% of the property's after-repair value on renovations, and focus on improvements that increase rent or reduce vacancy time. Paint, flooring, and updated kitchens/bathrooms usually give the best return. Avoid over-improving for the neighborhood - putting granite countertops in a property that will rent for $1,200/month probably doesn't make sense. Always get multiple contractor quotes and add 20-30% to their estimates for unexpected issues.

Look for markets with job growth, population growth, and economic diversification. You want multiple industries, not just one major employer that could leave. Strong rental demand is crucial - look at vacancy rates and how quickly rentals get leased. Price-to-rent ratios between 15-25 are typically workable. Landlord-friendly laws matter too - some states make it very difficult to evict problem tenants. Good infrastructure, schools, and amenities help with both rental demand and future appreciation.

Interest rates have a huge impact on affordability. Every 1% increase in rates typically reduces buying power by about 10%. So if rates go from 3% to 4%, a buyer who could afford a $400,000 home can now only afford about $360,000. This cooling effect on demand often leads to slower price growth or even price declines. For investors, higher rates mean higher mortgage payments, which can turn cash-flowing deals into money losers. But they can also create opportunities as competition decreases.

Watch for rapid price increases that far outpace local income growth, excessive speculation (lots of investors and flippers), and overbuilding relative to population growth. When you start hearing 'buy now or be priced out forever' from everyone including your barista, that's a red flag. Other warning signs include loose lending standards, high household debt levels, and economic recession indicators like rising unemployment. Remember, multiple factors usually align before major market corrections.

It depends on how much time you have and how many properties you own. Management companies typically charge 8-12% of rent but can be worth it if you're busy, live far from the property, or don't want to deal with tenant calls at 2 AM about broken toilets. They also handle marketing, screening, rent collection, and maintenance coordination. If you only have one nearby property and enjoy the hands-on aspect, self-management can save money. But as you scale up, professional management usually becomes necessary.

Start with a credit check - look for scores above 620-650 and avoid recent bankruptcies or evictions. Verify income (most landlords want 3x monthly rent) and employment stability. Call previous landlords, not just the current one (the current landlord might lie to get rid of a bad tenant). Run background checks for criminal history, especially violent crimes or drug charges. Look at the application quality too - incomplete or sloppy applications often indicate problem tenants. Trust your gut, but be consistent and follow fair housing laws.

Budget 5-10% of gross rental income for ongoing maintenance and repairs, plus build reserves for major replacements. Roofs typically last 15-25 years, HVAC systems 10-20 years, water heaters 8-12 years, and appliances 8-15 years. Keep 3-6 months of total expenses in an emergency fund per property. Older properties and those in harsh climates need higher reserves. Don't forget about capital improvements like flooring, paint, and kitchen/bathroom updates every 5-10 years. It's better to over-budget and be pleasantly surprised than to be caught short when the furnace dies in January.

Leverage lets you control a large asset with a relatively small down payment, amplifying both gains and losses. Put $75,000 down on a $300,000 property, and if it appreciates 5% ($15,000), your return on your cash is 20% - not 5%. But leverage works both ways. If the property drops 5% in value, you've lost 20% of your investment. Higher leverage also increases cash flow risk - if you have a vacancy, you still owe the mortgage payment. Conservative investors stick to 70-80% loan-to-value ratios.

The biggest benefit is depreciation - you can deduct 1/27.5th of the building's value each year for residential properties, even while it's appreciating. You can also deduct mortgage interest, property taxes, repairs, travel to the property, and other operating expenses. 1031 exchanges let you defer capital gains taxes when selling by reinvesting in another property. If you qualify as a real estate professional (spend 750+ hours annually), you may be able to deduct losses against other income. Always consult a tax professional since rules vary based on your situation.

Consider selling when the property no longer meets your investment goals or when you can reinvest the equity more profitably elsewhere. Common reasons include: the neighborhood is declining, major capital expenses are coming due (new roof, HVAC), you're tired of dealing with problem tenants, or you want to do a 1031 exchange into a better property. Also consider selling if the price-to-rent ratio has gotten too high - if your property is now worth 30x annual rent, it might be time to cash out and buy something with better cash flow.

Start small and master the fundamentals with one property before expanding. Once you're comfortable with the process and generating positive cash flow, you can use that equity for your next purchase through cash-out refinancing or a HELOC. Focus on cash flow sustainability over rapid growth - it's better to own 3 profitable properties than 10 that drain your bank account. Diversify by location and property type as you grow. Some investors prefer the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), while others focus on turnkey properties. Find what works for your situation and scale systematically.