To buy a building and rent it out, you evaluate whether the property’s rental income covers its costs at a profit, line up investment-property financing with at least 20 percent down, complete inspections and paperwork through closing, meet the federal rules that apply the moment you become a landlord, and place tenants through a written, consistent screening process. Most lenders want a credit score of 680 or higher, and the timeline from accepted offer to first rent check usually runs 60 to 120 days.
Start With the Numbers, Not the Building
Whether a rental building makes money is a math question, and you answer it before you fall in love with a property. The core figure is net operating income: annual rent minus operating expenses like property taxes, insurance, maintenance, and management. The mortgage payment is not part of NOI, because NOI measures what the property earns on its own.
Divide NOI by the purchase price and you get the capitalization rate. A building producing $60,000 of NOI at a $1,000,000 price has a 6 percent cap rate. Cap rates in the 5 to 7 percent range often signal balanced markets with steady demand. Major cities tend to run lower, in the 3 to 5 percent zone, reflecting lower risk and more competition. Cap rates above 8 percent can mean stronger returns paired with more volatility or deferred maintenance.
Cap rate tells you about the building. Cash-on-cash return tells you about your money. Divide annual pre-tax cash flow (rent minus every expense, including the mortgage) by the total cash you put in (down payment, closing costs, immediate repairs). Many investors aim for 8 to 12 percent, adjusted for market and risk tolerance.
Build vacancy into the projection. A common assumption is 7 to 8 percent of gross rent, roughly one empty month per year. Set aside another 5 to 15 percent for maintenance and capital reserves; older buildings sit at the higher end. If the deal still works after vacancy, reserves, and management costs, it’s worth pursuing.
Set Up the Ownership and Financing Side
Most investors take title through a Limited Liability Company rather than in their own name. The LLC puts a legal wall between the property and your personal assets, so a lawsuit from a tenant or visitor stays with the building. A single-member LLC is a pass-through for federal taxes, so rental income or loss flows to your personal return without a separate corporate filing. Multi-member LLCs file an informational return and pass each owner’s share through the same way.
Lenders will still look at you personally, because investment loans almost always require a personal guarantee. A credit score of 680 is a typical floor; scores above 720 unlock better rates. Down payments run 20 to 30 percent, well above the 3 to 5 percent common on a primary residence, and reflect the higher default risk lenders attach to rental property. Expect to show liquid reserves covering several months of mortgage payments after closing.
Match the Loan to the Property Type
Unit count decides the financing track. One to four residential units qualify for conventional residential loans, which carry longer terms and lower rates. Five or more units push you into commercial loan territory: shorter terms, higher rates, and underwriting driven more by the building’s income than your personal finances.
Mixed-use buildings that combine ground-floor retail with apartments above often need specialized appraisals that value the residential and commercial pieces separately. Some lenders apply a blended approach, others require a commercial loan regardless of unit count. Pin the property type down early, because switching loan products mid-process burns weeks and can force a new application.
Due Diligence Between Offer and Closing
What the Lender Will Ask For
Have two years of personal tax returns ready, three to six months of bank statements showing the source of your down payment, and a schedule of any other real estate you own. If you already own through an entity, bring its returns too. Residential investment properties with four or fewer units use the Uniform Residential Loan Application.1Fannie Mae. Uniform Residential Loan Application Larger commercial deals use lender-specific forms that weigh the building’s financials more heavily than your income.
What to Demand From the Seller
Ask for at least two years of profit and loss statements and a current rent roll listing each unit, tenant name, monthly rent, and lease expiration. These let you test the seller’s income claims against actual performance. For commercial or multi-family buildings with existing tenants, request tenant estoppel certificates. Each tenant uses the certificate to confirm the lease terms, any modifications, and whether the landlord owes them anything. Once signed, the tenant cannot later claim the lease said something different.
Inspections and Environmental Review
A professional building inspection finds structural problems, deferred maintenance, and code issues that hit value or force immediate spending. The lender orders its own appraisal to confirm the property is worth the loan.
On commercial properties, order a Phase I Environmental Site Assessment. Under federal Superfund law, a property owner can be held responsible for cleaning up hazardous substances even if someone else caused the contamination decades earlier. The only path to an innocent landowner defense is showing you conducted “all appropriate inquiries” into the property’s environmental history before buying.2Office of the Law Revision Counsel. 42 USC 9601 – Definitions Cleanup costs can exceed the building’s value, so this is not the step to skip.
Closing the Purchase
Once the seller accepts, the deal enters escrow. You wire an earnest money deposit, usually 1 to 5 percent of the price, into a neutral account while inspection, appraisal, and underwriting run. If a contingency written into the purchase agreement fails (a bad inspection, a low appraisal, denied financing), the deposit typically comes back to you.
Plan for closing costs of roughly 2 to 5 percent of the purchase price on top of the down payment. These include lender origination fees, title insurance, the appraisal, attorney or escrow fees, county recording fees, and prepaid property taxes and insurance.
At closing you sign the mortgage note or deed of trust, giving the lender a security interest until the loan is paid. The title company records the deed with the county, transferring ownership to you or your LLC. The building is yours, and the landlord obligations start that day.
Federal Rules That Apply Before You Rent
Lead-Based Paint Disclosure
If the building was constructed before 1978, federal law sets specific steps before any lease is signed. You must give every tenant an EPA-approved lead-hazard pamphlet, disclose in writing any known lead-based paint or hazards, and share any inspection reports you have. The lease itself must carry a lead warning statement, and the tenant must acknowledge receiving the disclosures.3eCFR. 24 CFR Part 35 Subpart A – Disclosure of Known Lead-Based Paint Hazards Upon Sale or Lease of Residential Property Every new lease and every renewal.
Accessibility if the Building Has Commercial Space
If any part of the building is commercial space open to the public, the Americans with Disabilities Act applies. New construction and major alterations must follow the ADA Standards for Accessible Design, covering accessible routes, parking, doorways, ramps, and service areas. For existing buildings, you have to remove architectural barriers whenever doing so is “readily achievable,” meaning without significant difficulty or expense given your resources.4ADA.gov. Businesses That Are Open to the Public What counts as readily achievable scales with the size of the business and the cost of the fix. Purely residential buildings sit outside the ADA public accommodations rules, though state and local accessibility codes may still apply.
Habitability
Nearly every state imposes an implied warranty of habitability on residential landlords. Every unit must meet basic health and safety standards: working plumbing, heating, and electrical; weather-tight walls and roof; clean and pest-free conditions. You cannot waive this in the lease. A cracked tile is cosmetic; a broken furnace in January is a habitability violation. Requirements vary, so check your state and local codes before listing any unit.
Finding and Screening Tenants Without a Fair Housing Problem
List units with clear photos, honest descriptions, and the rent, term, and any pet or parking rules stated upfront. Vague listings pull in vague applicants.
Screening is where new landlords get into legal trouble. The Fair Housing Act prohibits discrimination based on race, color, religion, sex, disability, familial status, or national origin.5Office of the Law Revision Counsel. 42 USC 3601 – Declaration of Policy Run credit checks, verify employment, and call prior landlords. Apply the same criteria to every applicant. The moment your standards shift from one applicant to the next, you have a Fair Housing exposure.
Penalties are real. HUD administrative fines run up to $26,262 for a first offense under the current inflation-adjusted schedule.6Federal Register. Adjustment of Civil Monetary Penalty Amounts for 2025 If the Attorney General files in federal court, civil penalties reach $50,000 for a first violation and $100,000 for repeat offenses, on top of compensatory and punitive damages.7Office of the Law Revision Counsel. 42 USC 3614 – Enforcement by Attorney General
Once you pick a tenant, every adult who will live in the unit signs the lease. Collect the first month’s rent and a security deposit before handing over keys. Most states require the deposit to sit in a separate account, not commingled with your personal funds. Do a written and photographed move-in inspection with the tenant, room by room, and both parties sign it. That record is what settles disputes about pre-existing damage when the tenancy ends.
Insurance Built for Landlords
Standard homeowners insurance does not cover a rental property. You need a landlord policy, which typically includes building coverage for fire and weather damage, liability coverage for injuries on the property, and fair rental income coverage that replaces lost rent when a covered event makes the building uninhabitable. The liability piece is the one new landlords underestimate; a single slip-and-fall claim can push past a base policy’s limits.
A commercial umbrella policy layers additional liability coverage on top, and the premiums tend to be modest against the exposure. Your tenants’ belongings are not covered by your policy. Require tenants to carry renters insurance as a lease condition, which shifts that risk off you.
Ongoing Costs and the Management Question
The mortgage is one line among many. Property taxes, insurance, maintenance, landscaping, pest control, and periodic capital projects all come out of rent before profit shows up. A working budget puts 5 to 15 percent of gross rent into a reserve for repairs and larger items like a roof or HVAC replacement, with older buildings toward the higher end.
The biggest operational choice is whether you manage the building yourself or hire a property management company. Self-managing saves money and costs time: tenant calls, repair coordination, rent collection, late-night emergencies. Professional managers charge 8 to 12 percent of monthly rent for long-term residential properties and handle tenant placement, rent collection, maintenance, and eviction processing. Whether the fee earns its keep depends on unit count, how close you live to the building, and what your time is worth.
If a tenant stops paying or breaks the lease, eviction is a court process with filing fees, possible attorney costs, and weeks or months of lost rent. Budget for the possibility rather than assuming it away. The cheapest eviction is the one you avoid by screening carefully at move-in.
Tax Advantages Worth Knowing From Day One
Depreciation
The IRS lets you deduct the cost of the building (not the land) over its useful life, even while the property may be appreciating. Residential rental depreciates over 27.5 years; commercial uses 39 years.8Internal Revenue Service. Publication 946, How To Depreciate Property On a $500,000 residential building, that’s roughly $18,180 a year in paper loss offsetting rental income without a dollar of actual spending. Depreciation is a large part of why rental income is taxed more lightly than the cash flow suggests.
The $25,000 Passive Loss Allowance
Rental real estate is generally a passive activity, so losses cannot normally offset wages or business income. The exception: if you actively participate in managing the property, you can deduct up to $25,000 in rental losses against other income.9Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Active participation means making management decisions such as approving tenants, setting rent, or authorizing repairs; you do not need to swing the hammer yourself.
The $25,000 allowance phases out as modified adjusted gross income rises above $100,000, dropping 50 cents on the dollar and disappearing at $150,000.10Internal Revenue Service. Instructions for Form 8582 – Passive Activity Loss Limitations Unused losses carry forward, so nothing is lost, only delayed.
1031 Like-Kind Exchanges
When you eventually sell, a 1031 exchange lets you defer capital gains taxes by rolling the proceeds into another investment property. The replacement must be identified within 45 days of the sale and the exchange closed within 180 days.11Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Since 2018, only real property qualifies, and the exchange must run through a qualified intermediary who holds the sale proceeds until the replacement closes. It’s not a tool for your first purchase, but knowing it exists shapes how you think about the exit from the beginning.