How to Buy Investment Property: An Expert Shares 6 Tips

2. Choose the right market and property

Not every city or neighborhood makes a smart investment. Johnson recommends starting your search by evaluating locations with strong job markets, population growth, and reasonable entry prices. But don’t stop at the city level. The difference of a few blocks can make or break your deal. Research what local renters want and where they want it.

Also, consider what you prefer to work on. “I like complete remodels, or houses that need complete remodels,” Johnson says. “This way, everything will be new. The middle ground is messy and will eat cash reserves.”

When evaluating a property, Johnson also looks for:

• Low maintenance needs: A newer roof or updated systems can reduce surprises.
• Strong rent-to-price ratio: A monthly rent of 1% of the purchase price is a common benchmark among investors. (More on this in a minute.)
• Low vacancy area: High tenant demand reduces the time your property sits empty.

As you shop around, you’ll learn that rental properties are given a grade, A, B, C, or D, based on four general factors: the property, the affordability, the amenities, and the livability.

• Class A: Represents the highest quality and most desirable properties. They tend to be newer, well-maintained, and attract higher-income tenants willing to pay premium rents.
• Class B: Typically in good condition but may be slightly older than Class A. Still well-maintained but may have lower-income tenants and less professional management.
• Class C: These are generally older properties in less desirable locations. They often require more maintenance and repairs, attracting lower-income tenants, but can offer higher potential.
• Class D: These are considered the lowest quality and pose the highest risk in real estate. They are characterized by older buildings, deferred maintenance, and undesirable locations with high vacancy rates and lower-income tenants.

“D-class areas usually attract D-class tenants, and A-class areas are usually cash-flow negative,” Johnson explains. “Knowing what I know now, I’d aim for A- or B-class properties after renovations in B- or C-class areas.”

3. Run the numbers carefully

Before you buy a rental property, you must do some smart math to estimate whether it will generate positive cash flow. Here again, Johnson says you have to be realistic, and don’t always believe what other local investors tell you.

“If you know people who own rental properties, and they’re talking about how much cash flow they’re making from them, that’s probably a lie.”

Johnson explains that a property might look affordable, but a wise investor will factor in unexpected costs. For example, on a property Johnson owned last year, he can show you a profit and loss statement showing he made $9,600.

“You would think, divide that by 12, and that’s your cash flow, right? Wrong. We had to replace the HVAC, which was $6,000 that went out the door.” After paying for the HVAC and property management expenses, the rental unit actually had a negative cash flow of $900 for the year.

As you run the numbers, here are some formulas to help filter potential deals:

• The 1% rule: A good investment often rents for at least 1% of the purchase price each month. For example, if applying this rule, a $200,000 property should ideally rent for $2,000 a month.
• Cash flow calculation: Take monthly rent and subtract fixed costs (mortgage, taxes, insurance, management fees, etc.). The remainder is your cash flow, but remember to budget for unexpected costs. You may want to experiment with a cash flow calculator.
• Cap rate: This formula helps evaluate return. Divide annual net operating income by the purchase price. Many investors aim for a cap rate of 6% or higher, depending on the market.

“The 1% rule is helpful but hard to find, depending on your state,” Johnson says. “Remember that cash flow does not equal profit.”

In some situations or locations, investors apply a 2% rule, which states that your expected monthly rental income should equal or exceed 2% of the property’s purchase price. Using the same example above, a $200,000 property would need to rent for $4,000 a month.

Once you’ve run your numbers, Johnson recommends you stress test them. Ask: What happens if rent drops? What if the property sits vacant for a month or two? Thinking ahead can help prevent financial strain later.

“One thing I wish I had known before purchasing my first investment property is the risks and reality of cash flow with rentals”, Johnson says. “Our only cash-flowing properties are the ones that were complete renovations or new homes (e.g., roof, HVAC, water heater, and more).” He shares more cash flow insights in this recent Facebook video.

4. Plan your financing

Financing an investment property is different from buying a primary home. For starters, lenders typically require a higher down payment — often 15% to 25% — and you’ll need a stronger credit profile. If you’re planning on repeat investments, Johnson says you’ll want a strategy that keeps cash coming in.

“BRRRR is a great strategy so you never run out of money, which stands for Buy, Renovate, Rent, Refinance, Repeat,” Johnson says.

The BRRRR method focuses on purchasing undervalued properties, renovating them, renting them out, refinancing to recover the renovation costs and equity, and then repeating the process to scale your real estate portfolio.

Here are a few common financing options for investment properties:

• Conventional loan: This is the most common route. Expect a larger down payment and stricter qualification standards than a typical home loan. Depending on your lender, you might need to keep at least six months of funds set aside to cover your loan without income from the investment property.
• Portfolio loan: Some local banks offer more flexible terms and will hold the loan in-house. Lenders set their own terms and qualification criteria, making these a more personalized option, but they can come with higher interest rates.
• HELOC or home equity loan: Investors with equity in their primary home can sometimes tap it for a down payment. A traditional home equity loan provides a lump sum with a fixed interest rate and predictable repayment terms. A HELOC acts as a revolving credit line with variable interest rates but allows you to borrow money as needed up to a predetermined limit.
• Private or hard money loans: These types of loans focus on the property’s value rather than your creditworthiness, making them faster and more flexible. However, they often come with higher interest rates. Investors consider these a short-term bridge tool rather than a more permanent source of financing. They are especially common among house flippers.

Johnson recommends you shop around for lenders familiar with investment loans, and be prepared to show documentation of your income, assets, and a game plan for the property.

5. Understand property management early

Managing a rental property yourself might save money on paper, but Johnson says it’s not always the wisest move for new investors.

“I know people who self-manage, but not us; we spend thousands of dollars every month paying management fees,” Johnson says, adding that in some situations it works. “No one will care about your properties more than you.”

Johnson recommends you decide early: Are you running a business or just buying a property? If you’re taking on landlord responsibilities, he cautions, “One bad tenant can cost much more than a good tenant paying 90% of what you wanted.”

For this and other reasons, many investors like Johnson choose to hire a property management company to handle:

• Tenant screening and lease agreements
• Rent collection and enforcement
• Repairs and maintenance
• Legal compliance and eviction processes

Property managers typically charge 8% to 12% of the monthly rent. While this cuts into cash flow, the right manager can reduce stress, improve tenant retention, and help you scale. If you choose to self-manage, make sure you know your state’s landlord-tenant laws and have a solid system for maintenance requests and rent tracking.

6. Manage your costs wisely

Even a great property can lose money if expenses spiral. Johnson says new investors often underestimate how quickly even small costs — like lawn care, appliance replacements, or minor repairs — can add up.

He advises new investors to build up a cushion by setting aside money from every rent check into a maintenance fund. That way, a busted water heater or AC unit doesn’t wreck the month.

To this end, many investors follow the 50% rule, a guideline suggesting that approximately 50% of a rental property’s gross income should be allocated to operating expenses. This is a general rule of thumb and may not apply in all markets, especially those with high taxes or insurance costs.

If you are managing the property yourself, here are some ways to control expenses:

• Handle small fixes proactively to avoid bigger problems later
• Keep tenant turnover low with responsive service and fair pricing
• Regularly review insurance, tax assessments, and other property fees

Final thoughts: How to buy investment property

Buying an investment property can be a rewarding move, but it takes more than good luck to get it right. Here’s a quick recap of Johnson’s tips for first-time investors:

• Clarify your goals: Know what success looks like before you start your search.
• Pick your market carefully: Focus on stable areas with rental demand and manageable price points.
• Do the math: Use cash flow and cap rate calculations to vet potential properties.
• Line up the right financing: Expect higher down payments and rates than a primary home loan.
• Plan for management: Decide if you’ll self-manage or hire a property manager from the beginning.
• Control your expenses: Budget for repairs, track your costs, and set aside reserves.

Real estate investing isn’t a shortcut to wealth, but it can be a path to long-term financial independence — especially when you learn from experienced investors and make informed decisions along the way.

If you’re thinking about buying an investment property, HomeLight can connect you with a top local real estate agent who understands the rental market in your area.

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Editor’s note: This post is meant for educational purposes and is not intended to be construed as financial advice. HomeLight always encourages you to reach out to an advisor regarding your own situation.

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