Buying Rental Property: How It Works in 2026
Buying rental property can be a smart way to generate extra income and build wealth, but it comes with some unique challenges. Any time you’re buying a home and not planning to live in it yourself, you’re purchasing an investment property — which can be more challenging to finance than a primary residence.
On the other hand, if you choose to buy a rental property that you do live in, there are several loan options that can help you do so. Below, we’ll cover how to buy a rental property and what to consider before choosing this real estate investment strategy.
- Conventional and government-backed loans offer financing options, but some require you to occupy the home as your primary residence.
- Research your local rental market, choose the right property and make sure your finances are strong before buying.
- Rental properties can help you build wealth, but they also require ongoing maintenance, management and financial planning.
Understanding the basics of buying a rental property
Start by narrowing down the type of rental property you’re interested in. Decide whether you want:
- A single-family home or a multifamily home
- To operate a short-term rental (like an Airbnb) or a long-term rental
- To occupy the property yourself in addition to renting it
Each rental property type comes with its own set of financing options and requirements. If you’re new to real estate investing and don’t want to occupy the property, a one-unit property may be more manageable, since it’s generally easier to qualify for a single-family mortgage than a multifamily loan.
What are the requirements to buy a rental property?
The requirements for a rental property loan vary depending on the property type, the loan type, whether you plan to live in the home and whether the rentals are short- or long-term.
| Mortgage type | Maximum number of units | Owner required to live at the property? | Minimum credit score | Minimum down payment | Allows short-term rentals? |
|---|---|---|---|---|---|
| Fannie Mae investment property loan | Four | No | Varies by lender (but commonly 680) | 15% to 25% | Yes |
| Freddie Mac investment property loan | Four | No | Varies by lender | 15% to 25% | Yes |
| Fannie Mae loan (HomeReady®) | Four | Yes | Varies by lender | 3% to 5% | Yes |
| Freddie Mac loan (HomePossible®) | Four | Yes | 660 to 700 | 5% | Yes |
| FHA loan | Four | Yes | 500 | 3.50% | No |
| VA loan | Seven | Yes | Varies by lender (but commonly 620) | 0% | Yes |
The U.S. Department of Housing and Urban Development (HUD), which oversees the FHA, doesn’t allow multifamily residential units to be rented for less than 30 days at a time or to be used for “transient or hotel purposes.” An Airbnb would qualify as using the home for “transient or hotel purposes,” so you may be violating the terms of your loan agreement if you use a home purchased with an FHA loan as a short-term Airbnb.
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Using rental income to qualify
One advantage of buying a rental property is that many lenders will let you use projected rental income to help qualify for a mortgage. This can make it easier to meet income requirements, especially if your current earnings alone aren’t enough. In most cases, lenders count a percentage of the expected rental income alongside your existing income when reviewing your application.
How much future rental income counts depends on the loan type:
- Conventional loans: Lenders generally count up to 75% of your projected rental income when calculating your qualifying income. If the property doesn’t have a recent rental history, an appraiser’s estimated market rent can often be used instead.
- FHA loans: Lenders typically include 75% of the lower of either the appraised market rent or the property’s documented rental history.
- VA loans: You may also be able to use 75% of projected rental income, but you’ll generally need to demonstrate that you have prior landlord experience or can otherwise show you’re able to successfully manage a rental property.
If your debt-to-income (DTI) ratio is close to a lender’s maximum limit, being able to count future rental income could be the difference between qualifying for a loan and being denied.
How to buy a rental property in 5 steps
1. Understand the rental market in your desired area
Researching the rental market is just as important as choosing the property itself, since a home’s location can significantly impact its potential return and overall appeal. Consider factors like crime rates, school ratings, rental demand and average rent prices. Generally speaking, areas with low crime and high rental demand make for better investments.
2. Compare rental property financing options
As we covered above, conventional loans are a common way to finance a rental property purchase because they generally don’t require you to live in the home. If you don’t plan on making the home your primary residence, financing can get trickier. For example, government-backed loans, such as FHA loans and VA loans, are typically only available for borrowers who plan to live in the home they’re financing.
3. Decide on a down payment
Keep in mind that conventional rental property loans can require a 5% to 25% down payment. You could potentially use your home equity to buy a rental property by taking out a home equity loan, HELOC or cash-out refinance. The average home equity loan offer is more than $140,000, according to LendingTree data.
4. Find a home and make an offer
Once you’ve shopped for and chosen a lender, getting a mortgage preapproval can provide you with a more accurate estimate of what you can afford and help home sellers take you more seriously as a buyer. With a preapproval letter in tow, it’s time to find a home you like and make an offer.
5. Close on the property
As with any home sale, you’ll need to go through the closing process, which may include getting an appraisal and inspection, as well as providing the lender with any additional information it requests. Once you close on the home, you’ll receive the keys and can start looking for tenants (assuming no repairs are needed first). Congratulations; you’re officially a real estate investor.
Pros and cons of buying a rental property
Pros
- Extra income stream: Rental properties can provide passive income each month — though if you don’t hire a property manager, you’ll need to manage it yourself.
- Potential property appreciation: Property values tend to rise over time, which could mean a profit when it comes time to sell the home.
- Tax benefits: As a rental property owner, you may qualify for various tax benefits, including deductions for maintenance and property management expenses. Tax laws vary by state, so it’s important to establish a relationship with a local accountant.
Cons
- Finding tenants: Finding and screening tenants can take time, and choosing the wrong ones can lead to massive headaches, like missed rent payments and property damage.
- Maintenance and repairs: As the owner, you’re responsible for keeping the property in good condition and promptly handling repair requests. It’s important to have an emergency fund so you’re not scrambling to find the cash for unexpected repairs.
- Property taxes and insurance: You’ll still need to cover the property taxes and homeowner insurance for the property, but you can factor in these expenses when setting the rent amount.
Should you buy a rental property?
Here are some questions to ask yourself to help determine whether you should buy an investment property:
- Are you financially prepared (do you have enough for a down payment, property management costs, etc.)?
- Do you understand the rental market you’re investing in (demand, average rent, etc.)?
- Does buying an investment property align with your short- and long-term goals?
- Do you have sufficient savings for maintenance and repairs?
- Can you afford the homeowners insurance and property taxes on the property?
- Do you understand the risks and unexpected costs that can arise (losing tenants, property damage, etc.)?
Other ways to invest in real estate
REITs
REITs, or real estate investment trusts, are companies that own income-generating real estate and sell shares of their company to investors. Instead of buying a property yourself, you can indirectly invest in the real estate market by purchasing shares of a REIT. Many REITs are publicly traded, making them easy to buy and sell, like stocks.
House flipping
Fix-and-flip investing involves buying a property that needs renovations or repairs, fixing it up and then reselling it for a profit. Buying a fixer-upper can offer good returns, but it comes with significant risks and requires hands-on work.
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