Yes, you can buy a home and rent it out, and plenty of people do. But renting to a tenant is not the same legal or financial arrangement as living in the home yourself. Your mortgage type, insurance policy, local permits, tax filings, and any HOA rules all shift the moment a tenant moves in. Get any of them wrong and you can face denied insurance claims, IRS penalties, fines from your city or association, or in the worst case, criminal exposure on your loan paperwork.
Use the Right Kind of Mortgage
The first decision is what loan you take out, and this is where new landlords get into the most serious trouble.
Primary-Residence Loans Require You to Live There
Standard residential mortgages, including Fannie Mae and Freddie Mac loans, require you to move into the home within 60 days of closing and use it as your primary residence for at least one year. You sign an occupancy affidavit at closing stating that intent. Taking the lower owner-occupant interest rate and renting the property out instead is occupancy fraud, a federal crime under the statute covering false statements to lending institutions.1Office of the Law Revision Counsel. 18 USC 1014 – Loan and Credit Applications Generally; Renewals and Discounts; Crop Insurance A lender who discovers the misrepresentation can accelerate the loan, demanding the full balance immediately. If you can’t pay, foreclosure follows.
Investment Property Loans
If you plan to rent from day one, you need an investment property loan. The terms are stiffer. Fannie Mae’s guidelines cap the loan-to-value ratio at 85% for a single-unit investment purchase, so you need at least 15% down, compared with a 3% minimum on a primary residence.2Fannie Mae. Eligibility Matrix Rates typically run a half point to a full point higher than owner-occupied rates. Both the down payment and the rate reflect the higher default risk lenders see on rental properties. Build these numbers into your cash flow math before you make an offer.
The House-Hack Middle Ground
FHA loans let you buy a property with up to four units, live in one, and rent out the others on owner-occupant terms, with down payments as low as 3.5% at a credit score of 580 or higher. You still have to live in one unit as your primary residence for at least 12 months, and the rented units must be on long-term leases. Short-term vacation rentals through platforms like Airbnb are not permitted on FHA-financed properties. VA loans work similarly for eligible veterans, sometimes with no down payment.
Switch to Landlord Insurance Before Anyone Moves In
Standard homeowners insurance covers an owner-occupied home. Once a tenant is in the property, that policy can leave large coverage gaps or trigger an outright claim denial. You need a landlord dwelling policy, sometimes called a rental property policy, in place before the tenant takes possession.
The differences that matter in practice:
- Liability coverage on a landlord policy responds to tenant injuries on the property, such as a slip on an icy walkway. A homeowners policy is built around incidents involving you and your family.
- Personal property coverage on a landlord policy covers items you own to service the rental, like appliances or a lawnmower. It does not cover the tenant’s belongings; that is what renters insurance is for.
- Fair rental income coverage pays you the rent you lose while the property is uninhabitable after a covered loss. A homeowners policy instead covers your own additional living expenses.
Landlord insurance typically costs about 25% more than a comparable homeowners policy. Treat it as an operating expense of the rental, not an optional upgrade.
Register With Your City and Meet Habitability Rules
Many cities and counties require landlords to register or hold a rental permit before advertising. Fees and procedures vary, and registration usually ties the property to local safety standards. This isn’t just paperwork. In some jurisdictions, an unregistered landlord cannot use the courts to evict a non-paying tenant, which effectively removes your main enforcement tool.
A certificate of occupancy or habitability inspection is often part of the process. Inspectors check for working smoke detectors, adequate emergency exits, and structural safety. A majority of states also require carbon monoxide detectors in rentals, especially those with gas appliances, fireplaces, or attached garages. Installation and maintenance are the landlord’s responsibility.
For any property built before 1978, federal law requires you to disclose known lead-based paint hazards to tenants before they sign the lease. You must provide the EPA lead hazard information pamphlet, share any inspection reports you have, and include the required disclosure language in the lease itself.3eCFR. 24 CFR Part 35 – Lead-Based Paint Poisoning Prevention in Certain Residential Structures This applies to every lease you sign, not just the first.
Check Zoning and HOA Restrictions
Two separate rulebooks can limit or block a rental even when your mortgage and insurance are in order.
Local zoning generally allows long-term leasing in residential zones, but short-term rentals are treated differently. Many cities either prohibit short-term rentals in residential areas or require a special use permit with occupancy limits, parking requirements, and noise restrictions. Short-term is commonly defined as stays of 30 days or fewer, and those stays often trigger a transient occupancy tax similar to a hotel tax, which you collect from guests and remit to the city. Some booking platforms handle collection automatically in certain jurisdictions; many do not. Operating outside the zoning rules can bring a cease-and-desist order, daily fines, and in some cities a lien against the property for accumulated penalties.
If the property is in a homeowners association, the recorded covenants can go further than any city rule, and they bind you the moment you take title. Read them before you buy. Common restrictions include:
- Rental caps limiting the percentage of units that can be rented at any given time, sometimes as low as 20%, with a waiting list once the cap is hit.
- Minimum lease terms of six months or a year, designed to prevent short-term rental activity and high turnover.
- Board approval of prospective tenants before move-in.
Violations usually start with fines and can escalate to a court injunction stopping the lease, with the association’s attorney fees added to yours. Some associations offer hardship waivers for owners who need to relocate for work, but these are rare and typically time-limited.
Follow Fair Housing Law From the First Listing
Every landlord in the country, including someone renting out a single unit, must comply with the Fair Housing Act. The law prohibits discrimination in any aspect of renting based on race, color, religion, sex, national origin, familial status, or disability, from how you word the listing to how you screen applicants to how you handle the tenancy.4Office of the Law Revision Counsel. 42 US Code 3604 – Discrimination in the Sale or Rental of Housing
The practical rule is uniform screening. Set objective standards, like a minimum credit score, an income-to-rent ratio, and rental history, and apply them the same way to every applicant. Telling a family with children the unit “isn’t suitable for kids” or steering applicants based on background is a textbook violation, intent aside.
Disability protections include a requirement to allow assistance animals, covering both service animals and emotional support animals, even where the property or HOA has a no-pets policy. You cannot charge a pet deposit or pet fee for an assistance animal. Documentation from the tenant’s treating healthcare professional is what supports the accommodation; online “registration” certificates sold to anyone who pays generally are not considered reliable.5U.S. Department of Housing and Urban Development (HUD). Fact Sheet on HUD’s Assistance Animals Notice
HUD investigates complaints and can impose civil penalties administratively. The Attorney General can also sue in federal court, where penalties reach up to $50,000 for a first violation and up to $100,000 for a subsequent one.6Office of the Law Revision Counsel. 42 US Code 3614 – Enforcement by Attorney General Enforcement agencies use testers who pose as prospective tenants to detect discriminatory practices.
Handle Security Deposits the Way Your State Requires
Every state regulates deposits differently, and mistakes here are one of the fastest ways new landlords lose money in court. Most states cap the deposit at one to two months’ rent, though some have no statutory limit and a few set lower caps for specific tenant categories, such as seniors.
What you can deduct at move-out is narrower than most owners assume. Unpaid rent and damage beyond normal wear and tear are generally deductible. A hole punched in a wall counts. Paint faded by years of sunlight does not. Cleaning costs are usually deductible only to the extent needed to return the unit to its move-in condition.
Many states require you to hold deposits in a separate account, and some require an interest-bearing account with the interest paid to the tenant. Return deadlines after move-out commonly fall between 14 and 30 days. Missing that deadline, even narrowly in strict states, can force you to return the entire deposit regardless of legitimate deductions, and some states add penalties of two or three times the deposit for willful violations. Document the property’s condition with photos at move-in and move-out; landlords who skip this step lose deposit disputes almost every time.
Report the Rent and Take the Deductions
Rental income is taxable. You report it on Schedule E of your Form 1040, along with the expenses of running the property.7Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
What You Can Deduct
Ordinary and necessary expenses for managing and maintaining the property are deductible, including mortgage interest, property taxes, insurance premiums, repairs, property management fees, and advertising. The deduction most first-time landlords overlook is depreciation. The IRS lets you write off the cost of the building itself, not the land, over 27.5 years on a straight-line basis. On a $300,000 building, that’s roughly $10,900 a year in paper losses that reduce your taxable income without any additional cash outlay that year.8Internal Revenue Service. Publication 527 (2025), Residential Rental Property
Passive Loss Limits
Rental real estate is a passive activity for tax purposes, so rental losses generally can’t offset your wages or other active income. There is an exception. If you actively participate in managing the rental, meaning you approve tenants, set lease terms, and authorize repairs, you can deduct up to $25,000 in rental losses against non-passive income each year.9Office of the Law Revision Counsel. 26 US Code 469 – Passive Activity Losses and Credits Limited That $25,000 allowance phases out once your modified adjusted gross income exceeds $100,000, shrinking by $1 for every $2 above the threshold, and disappears entirely at $150,000. Losses you can’t use carry forward to future years.10Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
Qualified Business Income Deduction
Rental owners may also qualify for the Section 199A qualified business income deduction, which allows eligible taxpayers to deduct up to 20% of qualified business income from a rental real estate enterprise. The deduction, originally set to expire after 2025, has been made permanent. There is an IRS safe harbor with record-keeping and hour requirements, and rentals that rise to the level of a trade or business can qualify even without meeting the safe harbor.11Internal Revenue Service. Qualified Business Income Deduction