Before you buy an investment property, run the real numbers — not the optimistic ones. Budget for vacancy, maintenance, capital expenditures, and property management even if you plan to self-manage. The properties that look great on a napkin often lose money in reality.
10-Point Investment Property Checklist
| # | Action | Why It Matters |
|---|---|---|
| 1 | Run cash flow numbers with ALL expenses | Most new investors underestimate costs |
| 2 | Get pre-approved for investment property financing | Different rules than primary residence loans |
| 3 | Research the local rental market | Vacancy rates, rent trends, tenant demand |
| 4 | Understand landlord-tenant laws in your state | Eviction rules, required repairs, security deposit laws |
| 5 | Budget for vacancy (8-10% of annual rent) | Properties aren’t rented 365 days year after year |
| 6 | Budget for maintenance (10%+ of rent) | Things break constantly |
| 7 | Budget for capital expenditures (5-10% of rent) | Roof, HVAC, water heater replacements |
| 8 | Decide: self-manage or hire property manager | Property management costs 8-10% of rent |
| 9 | Get an investor-focused home inspection | Focus on expensive systems: roof, foundation, HVAC, plumbing |
| 10 | Understand the tax implications | Depreciation, deductions, and eventual recapture |
Cash Flow Analysis Template
| Income/Expense | Monthly Amount ($250K Property, $2,000 Rent) |
|---|---|
| Gross rental income | $2,000 |
| Vacancy (8%) | -$160 |
| Effective income | $1,840 |
| Mortgage (25% down, 7.5%, 30-year) | -$1,311 |
| Property taxes | -$260 |
| Insurance | -$125 |
| Maintenance (10% of rent) | -$200 |
| Capital expenditures (5%) | -$100 |
| Property management (10%) | -$200 |
| Net cash flow | -$356 ❌ |
This property loses money monthly. Many “deals” look like this when you include all real expenses.
Investment Property Financing
| Requirement | Primary Residence | Investment Property |
|---|---|---|
| Down payment | 3.5-5% | 15-25% |
| Credit score | 580-620 | 680-720+ |
| Interest rate | Market rate | +0.5-0.75% higher |
| Cash reserves required | 0-2 months | 6+ months |
| DTI limit | 43-50% | 36-45% |
| Rental income counted | N/A | 75% of projected rent |
The 1% Rule (Quick Screen)
| Purchase Price | Min Monthly Rent (1% Rule) | Verdict |
|---|---|---|
| $150,000 | $1,500 | Worth analyzing |
| $200,000 | $2,000 | Worth analyzing |
| $250,000 | $2,500 | Worth analyzing |
| $350,000 | $3,500 | Hard to find in many markets |
| $500,000 | $5,000 | Very rare |
The 1% rule is a screening tool, not a guarantee. Always run full cash flow analysis.
Hidden Costs New Investors Miss
| Cost | Typical Amount | How Often |
|---|---|---|
| Turnover costs (painting, cleaning, repairs) | $1,000-$5,000 | Each tenant change |
| Roof replacement | $8,000-$15,000 | Every 20-25 years |
| HVAC replacement | $5,000-$10,000 | Every 15-20 years |
| Water heater replacement | $1,000-$2,500 | Every 8-12 years |
| Appliance replacements | $500-$2,000 each | Every 10-15 years |
| Eviction costs | $3,000-$10,000+ | Hopefully never |
| Legal fees | $500-$5,000 | As needed |
| Property management setup fee | 50-100% of first month’s rent | Each new lease |
When Rental Property is a Bad Idea
| Situation | Why It’s Risky |
|---|---|
| You have no emergency fund | One repair or vacancy period can bankrupt you |
| You’re relying on appreciation, not cash flow | Speculation, not investing |
| You can’t afford 25% down without stretching | Over-leveraged from day one |
| The property barely breaks even on paper | Real expenses will push it negative |
| You don’t want the hassle of being a landlord | It’s a second job, not passive income |
| You haven’t researched local landlord-tenant law | Evictions can take months in some states |
The Bottom Line
Real estate investing can build significant wealth, but it requires accurate numbers, adequate reserves, and realistic expectations. Budget for vacancy, maintenance, capital expenditures, and property management even if you plan to self-manage — because eventually you’ll want to, or you’ll need to. If the property doesn’t cash flow positively with all expenses included, it’s a speculation, not an investment.