How to buy an investment property

Purchasing investment property can be a great way to generate income and diversify your portfolio. Before making your first purchase, you should understand the basics of this kind of investing, including the different types of investment property, regional differences and the challenges of property investing.

And while doing your research is always critical for any type of investment, it’s especially important to consider the economic environment before investing in property. Interest rates, inflation and market volatility are all factors that can affect your decision.

Types of property investments

There are two main property types for investment: residential and commercial.

• Residential property includes single-family homes, multi-unit properties like apartment buildings and duplexes, and short-term vacation rentals.
• Commercial property includes retail, office and industrial property and other, more nuanced categories.

“Every property and property type will have unique characteristics that provide insights into their potential investment performance,” says Bill Merz, senior vice president and head of capital markets research for the U.S. Bank Asset Management Group. “Buying an investment property often necessitates detailed due diligence on expected rents, expenses and potential surprises to either.”

Jenny Yuen, mortgage sales supervisor at U.S. Bank, notes that she hasn’t seen property investors generate big profits since 2021 due to rising interest rates. “The math can become challenging with interest rates where they are now, unless you’re making a substantial down payment or the property is particularly unique,” she says. “Putting 20% or 30% down often may not be enough in this environment.”

How to find investment properties

Once you decide which type of investment property to buy, the next step is to start looking for the right property. It’s often smart to enlist the services of a real estate agent who specializes in purchasing an investment property. They will bring specialized knowledge and experience that can help you pinpoint property that offers the highest return potential and the lowest potential risk.

• Multiple listing services (MLS) are good places to look for a potential residential investment property. Your real estate agent can help you identify the best MLS based on the type of property you’re looking to buy and the geographic area you’re focusing on.
• Foreclosure/HUD homes are another potential source of residential investment property. A HUD (which stands for U.S. Department of Housing and Urban Development) home is a foreclosed property that is up for resale by the HUD. These homes aren’t listed on MLS. Instead, they’re listed at HUDHomestore.com, where you can search for properties in the area you’re focusing on.
• Coming soon properties are listings not officially on the market but expected to be within a few weeks. A real estate agent can help connect you with coming soon properties.

Importance of cash flow and risk tolerance when investing in property

Merz and Yuen both stress the importance of cash flow when investing in residential and commercial property. 

“Cash flow represents one of the most important drivers of investment performance,” says Merz. Inputs to consider include the amount of rental income a property is likely to generate and the likelihood and timing of receiving this income.

“Property investing is all about cash flow and risk tolerance,” Yuen notes. “It’s easier to be successful if you have ample disposable income, but it’s harder if you’re not financially stable. That’s why it’s important to seek advice from financial professionals and other experts you trust, not just a realtor, before buying property.”

Merz agrees. “You need to consider whether you have the necessary liquidity to cover expenses if a residential tenant vacates, unexpected repairs arise or a commercial tenant goes out of business or defaults,” he says.

This is especially important in an uncertain economic environment or a recession. “Think about how difficult it may be to find a new tenant in these circumstances,” he adds. “This doesn’t mean an empty building or default event makes a property a poor investment, but it does introduce uncertainty and raises the odds of a period of negative cash flow the investor must work through.”

How to start investing in property

Here are five steps to take when investing in property.

1. Obtain mortgage preapproval.

“Work with your lender and other advisors to get preapproved for a mortgage and figure out your bottom line before making an offer on an investment property,” says Yuen. “The lender is going to need to know where your down payment is coming from, so be prepared to demonstrate this.”

2. Crunch the numbers.

Yuen says you need to determine if an investment property will “carry itself” based on the rent and anticipated expenses. “In other words, will the rent charged be enough to cover the monthly mortgage and other expenses after it’s occupied?” she says, adding that vacancy rates shouldn’t exceed 25% in a fiscal year.

3. Consider all the investment costs.

According to Merz, many first-time investment property buyers overlook certain costs that come with owning and operating a property. “Insurance, property taxes, ongoing maintenance and upkeep, and periodic major expenses (such as a new roof and mechanicals) are all a normal part of operating a building and must be included in cost assumptions,” he says. “Things like lawn service and snow removal may seem trivial, but they can absorb rental income quickly for some smaller rental properties.”

4. Protect your investment property by scrutinizing tenant quality.

This can be a big unknown, especially when investing in residential property. “Renters are a big risk, because you never know who you’re going to get,” says Yuen. “It’s critical to perform background checks on renters before leasing to them to help prevent losses. It’s also necessary to understand local rental regulations to understand what criteria is allowed to be used in denying an application.” 

5. Understand your legal obligations as a landlord.

Renters in your investment property have a number of legal rights guaranteed by federal and state governments. These include the right to fair housing, which guarantees that tenants cannot be denied housing based on race, religion, sex, age, nationality, family status or physical disability. Renters also have rights surrounding security deposits and the right to a habitable home that poses no threat to their physical health.

Benefits of buying investment property

Investing in residential property can yield benefits in the right circumstances. Opportunities include:

Passive income

Income generation is one of the biggest draws of owning a residential or commercial rental property, assuming you don’t experience frequent vacancies. If you choose not to hire a property management firm, there will be some active involvement, such as arranging and paying for maintenance and vetting prospective tenants, but the rental income is mostly passive.

Tax benefits  

“Certain tax benefits may be available depending on the property and the investor’s tax situation,” says Merz. “Depreciation represents a non-cash expense that can reduce taxable income, which can lower taxes on every dollar of cash flow. Consulting with a tax professional can be an important part of maximizing your financial benefit and avoiding potential pitfalls.”

The One Big Beautiful Bill Act (OBBBA) passed in 2025 includes many helpful tax changes for rental property investors.

• 100% bonus depreciation. You can now deduct the full cost of qualifying property purchased or in use after January 19, 2025. Eligible items include furniture, appliances, landscaping and interior renovations. You can immediately deduct their full cost in the same year you put them to use.
• Qualified Business Income (QBI) deduction. The 20% QBI deduction for pass-through businesses (LLCs, S corporations, partnerships) is now permanent, allowing eligible taxpayers to reduce taxable rental income by up to 20%.
• Business interest expense deduction. Beginning January 1, 2025, business interest deductions will use an EBITDA-based approach, allowing you to deduct more interest expenses, keep borrowing costs down and increase rental investment profitability.

Property price appreciation

While past performance is never a guide to the future, multifamily residential property prices in the U.S. are rising over the long term, according to the Federal Reserve Bank of St. Louis’s FRED tool. These rising prices may allow you to realize a return on your investment beyond rent payments if you sell the property in the future.

Inflation protection

Inflation has posed a challenge since the COVID-19 pandemic in 2020. While landlords should consider rent prices relative to the cost of living and local demand, rent can often be adjusted for inflation, reducing the losses you might experience if you had kept that money in cash or cash instruments.

Portfolio diversification

Along with stocks, bonds and other investments, investing in real estate provides another way to diversify your portfolio and enhance long-run returns.

Considerations before buying investment property

Along with investment risk, there are important considerations involved in purchasing an investment property. They include:

Location, location, location

“Location, location, location is a classic adage because it’s true. “Identical properties in different locations may have vastly different economics,” Merz says. “For example, compare a strip mall in a bustling high-income suburb with high traffic counts to the same building in a rural location with a lower population and traffic count. The tenant mix and quality, vacancy rate and cash flow will likely be quite different, suggesting the purchase price of the two otherwise-identical properties should be quite different.”

Time is money

Before investing in property, it's important to realistically gauge how much time you’ll have to spend managing the property. “Some properties can be self-managed with a low time commitment, while others necessitate professional property management,” says Merz. “Property management can represent a material cost if it’s outsourced or material time spend if it’s self-managed, which must be factored into the financial projections of any property investment. Many properties require professional management.”

Supply vs. demand

Whether you’re considering investing in residential or commercial property, think about local demand for rental properties not just now but in the medium term.

• How has the rental market weathered past recessions?
• Are there many existing vacant rental properties?
• Is the municipality actively courting businesses to relocate there?
• Are there plenty of sustainable employment opportunities?
• If you’re focusing on residential, is the local public school district a draw for parents?

These questions and others are important ones to ask, so you can paint a full picture of your rental property’s prospects.

Ongoing costs

Ensure ample liquidity at your disposal to pay for expenses related to your investment property, including maintenance, renovations if needed, insurance, property taxes, and a property management company if you’re using one.

Should you buy an investment property?

When you’re considering how to buy an investment property, Yuen stresses that every investor and property is different.

“At the end of the day, it comes down to personal preference,” she says. “Make sure you understand the potential benefits and risks and that you’re comfortable with them. Also seek advice from professionals you trust, including your accountant, banker and financial advisor. They can help you make the right decision.”

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