Buying a condo to rent out works when two things line up: the condominium association allows the kind of tenancy you’re planning, and the project itself qualifies for an investment-property mortgage. Everything else, from your credit score to your cash reserves, only matters after those two gates open. Plan on at least 15% down, six months of housing expenses in reserves, and a careful read of the association’s documents before you sign a contract.
Read the Association’s Documents Before You Do Anything Else
Ask for the Covenants, Conditions, and Restrictions, the bylaws, the current budget, the reserve study, and recent board meeting minutes. Sellers typically provide these during the due diligence period, and if what you find kills your rental plans you can usually walk away from the contract during that window.
Two provisions decide whether the unit is even a candidate. The first is a rental cap. Many associations limit how many units in the complex can be leased at one time, and if the cap is already met you go on a waiting list with no promised date. The second is a minimum lease term. Plenty of associations prohibit rentals shorter than six months or a year, which rules out short-term and vacation-style strategies entirely. Read these clauses word for word. A unit that pencils out on a spreadsheet is worthless as an investment if the association won’t let you place a tenant in it.
Special assessments are the other item to look at hard. These are one-time charges the board levies for major repairs like a roof replacement or elevator work. An assessment approved before closing is typically the seller’s responsibility to pay in full at settlement, but assessments approved after you take ownership are yours. The reserve study and recent minutes tell you whether the association is funding future repairs out of dues or setting up an assessment surprise. Underfunded reserves are a warning sign.
Confirm the Project Qualifies for an Investment Loan
When you apply for a conventional condo mortgage, the lender evaluates the entire project, not just you. Fannie Mae requires a full review of established condo developments, and a project that fails is called non-warrantable.1Fannie Mae. Full Review Process
The provision that traps investors is the owner-occupancy ratio. For an investment-property loan on a unit in an established project, at least 50% of the total units must be owned by people who use them as a primary residence or second home.1Fannie Mae. Full Review Process If the complex is already majority-investor-owned, your loan gets rejected no matter how strong your file is. The requirement doesn’t apply when someone is buying in the same complex as a primary residence or second home, so investor-heavy buildings grow harder to finance for the next investor.
Lenders also look at the project’s insurance, reserve funding, and any pending litigation. Non-warrantable condos can sometimes be financed through portfolio lenders or specialty programs, but with larger down payments and higher rates. Ask your lender to run a project eligibility check before you spend money on inspections or appraisals.
What Lenders Require from You
Investment-property mortgages carry stiffer requirements than loans for a home you’ll live in.
- Down payment: Fannie Mae allows up to 85% loan-to-value on a one-unit investment property through automated underwriting, meaning 15% down. Manual underwriting caps LTV at 80%, requiring 20% down. Individual lenders often add overlays, so 20% to 25% down is common in practice.2Fannie Mae. Eligibility Matrix
- Credit score: Under manual underwriting, Fannie Mae requires a minimum 720 score when LTV is above 75%, and 680 when LTV is 75% or lower. Automated underwriting may accept lower scores, but 720 and up generally unlocks the best rates.2Fannie Mae. Eligibility Matrix
- Debt-to-income ratio: Fannie Mae’s baseline maximum is 36% of stable monthly income, with approvals up to 45% when there are strong compensating factors. The ratio includes the proposed investment-property payment.3Fannie Mae. Debt-to-Income Ratios
- Cash reserves: At least six months of total housing expenses in liquid or near-liquid accounts, covering both the investment property and your primary residence. Retirement and brokerage accounts count, though lenders discount their value for withdrawal penalties and market movement.4Fannie Mae. B3-4.1-01, Minimum Reserve Requirements
Documentation runs heavier than a primary-residence purchase. Expect to produce two full years of personal federal tax returns with all schedules, plus business or existing rental returns if applicable; your most recent pay stub, dated within 30 days of the application, with year-to-date earnings visible;5Fannie Mae. B3-3.1-02, Standards for Employment Documentation two months of statements for every account used for the down payment and closing costs, with large deposits traceable to a documented source; and current statements for the investment or retirement accounts you’re using to satisfy the reserve requirement. Organizing all of it before you submit the application saves weeks. Underwriters request missing items one at a time.
Using Projected Rent to Qualify
If you need the condo’s rental income to hit the debt-to-income limit, the lender will require a Single-Family Comparable Rent Schedule (Fannie Mae Form 1007) for one-unit investment properties.6Fannie Mae. Appraisal Report Forms and Exhibits An appraiser fills it out by pulling comparable rentals and estimating fair market rent. The lender then counts 75% of that estimate as qualifying income; the 25% haircut accounts for vacancy and maintenance.7Fannie Mae. B3-3.1-08, Rental Income
DSCR Loans as an Alternative
Investors who are self-employed, whose tax returns are complicated, or who would rather not document personal income can look at a Debt Service Coverage Ratio loan. A DSCR loan qualifies the property rather than the borrower by comparing expected rental income against the total monthly obligation (mortgage, taxes, insurance, HOA). A ratio of 1.0 means rent exactly covers the payment. Most DSCR lenders want to see 1.25 or better. In exchange, expect a larger down payment, often 25% or more, and higher rates than a conventional loan.
Insurance and Local Rental Licensing
Your standard HO-6 condo policy protects you as an owner-occupant and does not cover you once someone else is living there and paying rent. You need either an HO-6 endorsed for rental use or a standalone landlord policy. Landlord coverage adds liability protection for tenant injuries and typically includes loss-of-rent coverage that replaces income if the unit becomes uninhabitable after a covered event. Liability limits of at least $300,000 are a reasonable floor, though the real exposure on a rental often runs higher, which is why a $1 million umbrella policy layered on top is a common and relatively inexpensive addition. Your policy won’t cover a tenant’s personal property, so require renter’s insurance in the lease.
Many municipalities also require a rental occupancy permit or business license before a tenant can move in. Applications often ask for square footage, maximum occupancy, and property manager contact information, and some jurisdictions require a safety inspection covering smoke alarms, egress, and electrical. Check with your local housing department or city clerk before you advertise the unit.
Fair Housing and Lead Paint Duties
Renting the unit out makes you a housing provider under federal law. The Fair Housing Act prohibits discrimination in rental housing based on race, color, religion, sex, national origin, familial status, or disability.8eCFR. Part 100 Discriminatory Conduct Under the Fair Housing Act In practice, you cannot steer applicants, impose different lease terms, or reject tenants based on any of those characteristics, and families with children cannot be restricted to certain floors or denied access to building amenities.9U.S. Department of Justice. The Fair Housing Act If you hire a property manager, you remain liable for the screening decisions they make on your behalf.
If the building was constructed before 1978, federal law requires you to disclose any known lead-based paint hazards to prospective tenants before they sign a lease, provide the EPA lead paint pamphlet, and include specific disclosure language in the lease itself.10U.S. Environmental Protection Agency. Lead-Based Paint Disclosure Rule – Section 1018 of Title X This applies even to renovated units unless testing confirms the unit is lead-free.
Taxes on a Rental Condo
Rental income is taxable, but the code also allows deductions that meaningfully reduce what you owe.
Depreciation
The IRS lets you depreciate the building portion of a residential rental over 27.5 years using the Modified Accelerated Cost Recovery System.11Internal Revenue Service. Publication 527, Residential Rental Property Land isn’t depreciable, so you split the purchase price between structure and land using assessed values or an appraisal. On a $300,000 condo with $250,000 allocated to the building, that’s roughly $9,090 per year in depreciation, a paper loss that reduces taxable rental income without any cash outlay.
Passive Activity Loss Rules
Rental income is generally classified as passive, and passive losses can normally only offset other passive income. The important exception: if you actively participate in managing the rental (approving tenants, setting rent, authorizing repairs), you can deduct up to $25,000 of rental losses against ordinary income.12Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited That $25,000 allowance begins phasing out once modified adjusted gross income passes $100,000 and disappears entirely at $150,000.13Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules Unused losses carry forward.
1031 Exchange on the Way Out
When you eventually sell, you can defer capital gains by reinvesting into another investment property through a 1031 like-kind exchange. The deadlines are strict. You have 45 days from the sale to identify potential replacement properties in writing, and 180 days to close on one.14Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment The IRS doesn’t grant extensions outside of presidentially declared disasters, and a qualified intermediary must hold the sale proceeds throughout; if the money touches your account, the exchange is disqualified.
Ongoing Costs That Move Your Returns
HOA fees are the expense first-time condo investors underestimate. Unlike a single-family rental where you control maintenance, HOA dues are a fixed monthly obligation that the board can raise by vote. A $400 monthly HOA on a unit that rents for $2,000 consumes 20% of gross rent before the mortgage, taxes, and insurance. Model current dues and the association’s history of increases into your cash flow projection.
If you won’t self-manage, budget 5% to 12% of gross monthly rent for a property manager, which typically covers tenant placement, rent collection, and maintenance coordination. Some managers charge a flat fee instead, averaging around $250 per month for a single unit. Either way, the cost belongs in the investment math from the start, not after you decide that managing from across town isn’t practical.