Buying a home as an investment property: A step-by-step guide

Written by Samantha SheltonNMLS 1647301Updated September 2026

This article is general information about financing rental real estate. It is not tax, legal or investment advice, and it is not an offer to sell or a solicitation to buy any security. Take depreciation and entity questions to a qualified tax professional, and lease and landlord-tenant questions to a Michigan attorney. Align Lending is an independent mortgage broker, not a broker-dealer, investment adviser or property manager.

Buying a home as an investment property is the same transaction as buying a home to live in, with a different set of rules attached to the word “occupancy.” Freddie Mac caps a one-unit investment purchase at 85% loan-to-value and a two- to four-unit investment purchase at 75%, so 15% down is the floor on a single-family rental and 25% is the floor on a duplex against 95% financing, or 5% down, on the same properties as your principal residence.

Occupancy also changes your pricing, your reserves, how much of the rent counts as income, and what your insurance policy has to be. Learn what lenders require, why the loan prices higher, how rental income is counted, why occupancy fraud is a federal crime, and how house hacking gets you in for less. New to this? Start with our Real Estate Investing guide and the Investing Basics hub.

Key takeaways:

• Plan on 15% to 25% down: Freddie Mac’s maximum LTV is 85% on a one-unit investment purchase and 75% on a two- to four-unit, versus 95% on the same property as a principal residence.
• Occupancy is priced, not just recorded: Freddie Mac’s credit fee grid charges 1.125% to 4.125% of the loan amount purely because the property is an investment, and Fannie Mae requires six months of reserves where a one-unit principal residence has no minimum.
• Only 75% of the rent counts, and sometimes none of it: Fannie Mae multiplies gross monthly rent by 75%, and a borrower with no current housing payment cannot use rental income to qualify at all.

What counts as an investment property, and why does the label matter?

An investment property, in Fannie Mae’s words, is a property “owned but not occupied by the borrower”, and that one line sets the down payment, the price and the reserves for the whole loan. Lenders sort every purchase into three occupancy buckets, and they are not interchangeable.

• Principal residence: The home the borrower occupies as their primary residence. It gets the highest LTV limits and the lowest pricing, because owners default on the house they sleep in last.
• Second home: A one-unit property the borrower occupies for some portion of the year and keeps exclusive control over, and that is not a rental property or a timeshare. Fannie Mae specifically bars agreements giving a management firm control over occupancy, which is what disqualifies most short-term-rental plans from this bucket.
• Investment property: Owned but not occupied. Rental income may be used to qualify, and price adjustments apply.

How much cash does an investment purchase actually take?

Budget 15% to 25% of the price for the down payment, plus six months of payments sitting in reserve after closing. Those are two separate requirements, and the reserve is the one first-time investors forget.

Here is how the three occupancy types compare on the numbers a lender applies, using Freddie Mac’s maximum LTV requirements for conforming loans and Fannie Mae’s minimum reserve rules.

Two more limits shape how far a portfolio goes. Fannie Mae allows a maximum of 10 financed properties on second home and investment transactions, and reserves stack once you own other financed property: 2% of the aggregate unpaid principal balance at one to four financed properties, 4% at five to six, 6% at seven to ten. Debt-to-income runs to 50% through automated underwriting, and 36% manually, rising to 45% when credit score and reserves support it. The 2026 baseline conforming loan limit is $832,750 on a one-unit property. Our guide to how to finance a real estate investment walks the options.

Why does an investment property loan price higher?

Because the agencies charge an explicit fee for it, and the fee climbs steeply with leverage. Freddie Mac’s Exhibit 19 credit fee grid assesses 1.125% of the loan amount on an investment property at 60% LTV or below, 1.625% above 60%, 2.125% above 70%, 3.375% above 75% and 4.125% above 80%. Charged purely because the occupancy is “investment.” A second fee of 0.375% to 0.625% stacks on for any property with more than one unit.

These are fees in price, usually absorbed into your rate rather than written on a check. That is why an investment quote looks worse than a primary-residence quote from the same lender on the same day: it carries points of adjustment before anyone mentions market rates.

Run it on a $250,000 rental house.¹ At 15% down you borrow $212,500 at 85% LTV, and the investment credit fee is 4.125% about $8,766. At 25% down you borrow $187,500 at 75% LTV, and the fee falls to 2.125% about $3,984. The extra $25,000 down buys roughly $4,780 of fee relief on top of the smaller loan, which is why the honest answer to “how much should I put down?” is usually “more than the minimum.”

• Watch the LTV cliffs: The grid steps at 60%, 70%, 75% and 80%. Landing at 80.5% LTV instead of 80.0% costs real money on the same house.
• Credit still moves the base: The occupancy fee sits on top of the standard credit-score-and-LTV grid, so a weaker score compounds it rather than replaces it. Ask for the adjustments in writing on your Loan Estimate.

How much of the rent counts toward qualifying you?

Seventy-five percent of it at most, and sometimes none of it. Fannie Mae instructs lenders to “calculate the rental income by multiplying the gross monthly rent(s) by 75%”. The missing 25% is the built-in allowance for vacancy and maintenance. A $2,000 lease supports $1,500 of qualifying rent.

Rent is documented by an appraiser, not by your estimate: Form 1007, the Single-Family Comparable Rent Schedule, on a one-unit property, and Form 1025 on a two- to four-unit. Pressure-test the number yourself first, our walkthrough on how to analyze a property’s rental potential shows how to build rent comps that survive an appraisal.

Then the file gets sorted by your experience, and this is the rule that surprises people. Under Fannie Mae’s rental income requirements, a purchase of a one- to four-unit investment property is treated three different ways:

• Current housing payment plus management experience: Rental income used in qualifying has no restrictions. Positive net rental income is added to your income; a net loss is added to your monthly obligations.
• Current housing payment, no management experience: The rental income can only offset the new property’s full payment. It cannot create surplus income.
• No current housing payment: No rental income can be used in qualifying at all. A borrower living rent-free with family qualifies on their own income alone.

Management experience is documented, not asserted, typically a Schedule E showing rental income and fair rental days. Starting from zero? Becoming a landlord covers what you are signing up for.

What happens if you call a rental your primary residence?

You commit a federal crime. Occupancy fraud. Telling a lender you will live in a property to get the lower down payment and better pricing, when you intend to rent it out. Is a false statement made to influence a federally related mortgage lender. Under 18 U.S.C. § 1014, a person who knowingly makes one “shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”

It is not a paperwork technicality. FHA states plainly that it “will not insure a Mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining Investment Properties,” even where the borrower owns no other FHA-insured home.² You sign an occupancy affidavit at closing, and lenders and servicers audit against mailing addresses, tax filings, insurance policies and utility records.

The rule turns on intent at closing, which is why a genuine change of circumstances is different. Buying as your home, living there, then later moving and renting it out is ordinary life, FHA asks for occupancy within 60 days of signing and intent to continue for at least one year. Buying with a tenant already lined up is not. If your plan is to rent, price the investment loan and tell the truth on the application.

What changes about insurance, taxes and holding costs?

Your homeowners policy stops being the right policy the day a tenant moves in. Homeowners forms are underwritten for owner occupancy; a rented dwelling generally needs a landlord policy, written on a dwelling fire form, covering the structure, your landlord liability and typically loss of rents, not the tenant’s belongings. Renting on a homeowners policy risks a denied claim at the worst possible moment.

• The lender sets a floor, not a ceiling: Fannie Mae requires “Special” form coverage on a replacement cost basis, with a maximum deductible of 5% of the coverage amount. Meeting that is not the same as being covered as a landlord.
• Budget vacancy and maintenance in cash, not optimism: The agencies already assume 25% of gross rent disappears into those two lines. Your own model should not assume less.

Taxes are the other structural difference, and they cut both ways. Residential rental property is depreciated over 27.5 years under the general depreciation system, land is never depreciable so basis must be allocated, and the mid-month convention applies.³ The part people miss is the exit: you must reduce basis by the depreciation “allowed or allowable, whichever is greater,” so it comes off whether or not you ever claimed it, and the resulting unrecaptured section 1250 gain is taxed at a maximum 25% rate rather than at long-term capital gain rates. The IRS rules for residential rental property are the starting point, our look at the tax benefits of real estate investing covers the mechanics, and a CPA should apply both to your return.

Can house hacking get you in for less?

Yes. It is the largest lever a first-time investor has. Financing a two- to four-unit property as your principal residence keeps the 95% LTV limit and avoids the investment occupancy fee entirely: you live in one unit and rent the others.

Compare the same $250,000 duplex two ways.⁴ Bought as an investment property at the 75% cap, you put $62,500 down and borrow $187,500, carrying a 2.125% investment fee plus a 0.375% multi-unit fee, roughly $4,688 in credit fees. Bought as your principal residence with 5% down, you put $12,500 down and borrow $237,500, with no investment fee and a 0.625% multi-unit fee, roughly $1,484. That is $50,000 less cash to close and about $3,200 less in fees. The trade-off is real: a 95% loan carries mortgage insurance that a 75% investment loan does not, and you have to actually live there.

FHA is the other route in, at 96.5% LTV with a minimum required investment of 3.5% of the adjusted value and maximum financing at a 580 credit score. One catch matters: on three- and four-unit properties, FHA applies a self-sufficiency test where PITI divided by monthly net self-sufficiency rental income may not exceed 100%. That income is the appraiser’s fair market rent for every unit, including yours, minus the greater of the appraiser’s vacancy and maintenance estimate or 25% of the rent. Plenty of triplexes fail it; duplexes are exempt.

If that appeals, read investing in multi-family properties next, and know the exit: once you move out, a later refinance of the investment property is priced under the investment grid.

What should you check before you write the offer?

Check that the property clears the financing math and the rent math on the same page, because a deal that works on only one is not a deal. The screening heuristics investors quote are filters and nothing more: the 1% rule, which asks whether monthly rent equals at least 1% of the purchase price, is a rule of thumb with no lender or agency behind it. It tells you what to look at next, not whether to buy.

• Verify achievable rent before the appraiser does: Your qualifying income depends on the appraiser’s Form 1007 or 1025 estimate, not the seller’s pro forma.
• Underwrite the exit as well as the hold: Location, layout and condition drive what the property sells for later, see how to assess a home’s resale potential.
• Know which strategy you are running: Buying to renovate and resell is a different business, with a different tax character, than buying to hold. Our look at flipping houses: risks and rewards explains why a flip is generally ordinary income, not long-term capital gain.
• Count every holding cost: Taxes, insurance, vacancy, maintenance, capital reserves and management. Cash flow is what is left after all of it, not after the mortgage payment.

Past performance never predicts future results, and appreciation is not a plan. If the property does not work on today’s rent and expenses, it is speculation with a mortgage attached.

FAQ: Buying a home as an investment property

Here are answers to common questions about buying a home as an investment property.

How much down payment do I need for an investment property?

At least 15% on a one-unit conventional investment purchase, where the maximum LTV is 85%, and at least 25% on a two- to four-unit property, where the cap is 75%. Lenders also want six months of payments in reserve after closing, and pricing improves at 25% or 30% down. See how to finance a real estate investment.

Is buying a home as an investment property a good idea?

It depends on whether the property produces positive cash flow after the mortgage, taxes, insurance, vacancy, maintenance and management. Real estate can deliver rental income, appreciation and depreciation deductions, but it is illiquid, leveraged and management-intensive. It is a poor fit if you would stretch to reach the 15% to 25% down payment. Start with our Real Estate Investing guide.

What is the 1% rule in real estate investing?

The 1% rule is a screening heuristic: gross monthly rent should equal at least 1% of the purchase price, so a $200,000 house would need about $2,000 a month. It is a filter, not a verdict, and no lender or agency recognizes it. Follow it with a full cash flow analysis, and remember that lenders count only 75% of gross rent. See how to analyze a property’s rental potential.

Can I use rental income to qualify for the mortgage?

Often, yes, but only 75% of gross rent, documented on an appraiser’s Form 1007 or Form 1025. With a current housing payment and documented management experience, there are no restrictions. Without management experience, the rent can only offset the new payment; with no current housing payment, none of it counts. See investing in multi-family properties.

The bottom line on buying a home as an investment property

The property is the same; the loan is not. Freddie Mac caps a one-unit investment purchase at 85% LTV and a two- to four-unit at 75%, so plan on 15% to 25% down plus six months of reserves, and expect a credit fee of 1.125% to 4.125% of the loan amount for occupancy alone. Only 75% of gross rent counts toward qualifying, and none of it counts if you have no current housing payment. Never solve that by calling a rental your primary residence. That is a federal crime carrying up to $1,000,000 in fines and 30 years. If the numbers are tight, house hacking a two- to four-unit property is the legitimate version of the same idea.

If you’re ready to buy your first rental, talk to Align Lending. We’ll shop your scenario across our lender network, price the owner-occupied and investment versions side by side, and show you the numbers before you write an offer. Call 248-506-5727 or start online today. Take tax questions to a qualified tax professional and lease and entity questions to a Michigan attorney.

Footnotes:

1. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. The $250,000 purchase price and the resulting $37,500 and $62,500 down payments, $212,500 and $187,500 loan amounts, and $8,766 and $3,984 credit fee illustrations are Align Lending calculations applying the published Freddie Mac credit fee percentages to those loan amounts, shown to demonstrate how occupancy and LTV drive pricing. They exclude interest, taxes, insurance, mortgage insurance and other closing costs. Your loan amount, fees and terms depend on your application, the property, program guidelines and market conditions, and will be itemized on your Loan Estimate and Closing Disclosure. Return to text.

2. Align Lending is not acting on behalf of or at the direction of FHA or HUD. All FHA statements in this article, including occupancy requirements, the minimum required investment, credit score tiers, rental income treatment and the three- to four-unit self-sufficiency test, are set by HUD in Single Family Housing Policy Handbook 4000.1 and are subject to change. Return to text.

3. This is general information, not tax advice. Depreciation method and recovery period, allocation of basis between land and improvements, deductible rental expenses, passive activity limits and the treatment of depreciation on sale depend on your individual circumstances and change over time. Consult a qualified tax professional about your situation. Return to text.

4. Example figures are hypothetical and for educational purposes only and are not a rate quote or an offer of credit. The $250,000 duplex illustration, the $62,500 and $12,500 down payments, the $187,500 and $237,500 loan amounts, and the approximately $4,688 and $1,484 credit fee totals are Align Lending calculations applying the published Freddie Mac credit fee percentages for investment occupancy and for properties with more than one unit at the stated LTV ratios. They exclude interest, taxes, insurance, mortgage insurance and other closing costs, and they assume the borrower qualifies under the applicable occupancy and underwriting requirements. Return to text.

Sources: maximum LTV/TLTV/HTLTV ratios of 85% for a one-unit and 75% for a two- to four-unit investment property purchase and no cash-out refinance, 75% for a one-unit and 70% for a two- to four-unit investment property cash-out refinance, 95% for a one-unit and 95% (Accept) for a two- to four-unit primary residence purchase and no cash-out refinance, and 90% for a one-unit second home, Freddie Mac Single-Family, Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages. Investment Property Credit Fees in Price of 1.125% at LTV of 60% or less, 1.625% above 60% through 70%, 2.125% above 70% through 75%, 3.375% above 75% through 80%, and 4.125% above 80%, and Number of Units greater than one Credit Fees of 0.375% above 60% through 75% LTV and 0.625% above 75% LTV, Freddie Mac Single-Family Seller/Servicer Guide Exhibit 19, Credit Fees, Bulletin 2026-09, effective 07/01/2026. Definitions of principal residence, second home and investment property occupancy types, including the second home requirements of one-unit occupancy for some portion of the year, exclusive borrower control, and no rental property, timeshare or management-firm occupancy agreement, Fannie Mae Selling Guide B2-1.1-01. Rental income calculated by multiplying gross monthly rent by 75%, documentation on Form 1007 for one-unit and Form 1025 for two- to four-unit properties, the three qualifying scenarios for a one- to four-unit investment property purchase, and the definition of rental management experience, Fannie Mae Selling Guide B3-3.8-01. Minimum reserves of six months for investment property transactions, two months for second home transactions, and no minimum for one-unit principal residence transactions, plus additional reserves of 2% of aggregate unpaid principal balance at one to four financed properties, 4% at five to six, and 6% at seven to ten, Fannie Mae Selling Guide B3-4.1-01. Maximum of 10 financed properties on second home and investment property transactions through Desktop Underwriter, Fannie Mae Selling Guide B2-2-03. Maximum DTI of 50% through Desktop Underwriter, and 36% rising to 45% with qualifying credit score and reserves on manually underwritten loans, Fannie Mae Selling Guide B3-6-02. Property insurance written on a Special coverage form, on a replacement cost basis, with a maximum deductible of 5% of the coverage amount for one- to four-unit properties, Fannie Mae Selling Guide B7-3-02. 2026 baseline conforming loan limit value of $832,750 for one-unit properties, an increase of $26,250 over 2025, with a high-cost ceiling of $1,249,125, announced November 25, 2025, Federal Housing Finance Agency. Penalty of a fine of not more than $1,000,000 or imprisonment of not more than 30 years, or both, for knowingly making a false statement to influence a federally related mortgage lender, 18 U.S.C. 1014. FHA maximum LTV of 96.5% on purchases, minimum required investment of 3.5% of adjusted value, maximum financing at a minimum decision credit score of 580 and a 90% LTV cap at 500 to 579, owner occupancy within 60 days of signing the security instrument with intent to occupy for at least one year, the prohibition on insuring a mortgage where the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, and the three- to four-unit self-sufficiency standard that PITI divided by monthly net self-sufficiency rental income may not exceed 100%, with net self-sufficiency rental income calculated from the appraiser’s estimate of fair market rent for all units less the greater of the appraiser’s vacancy and maintenance estimate or 25% of fair market rent, U.S. Department of Housing and Urban Development, FHA Single Family Housing Policy Handbook 4000.1. Residential rental property recovery period of 27.5 years under the general depreciation system, the non-depreciability of land, the mid-month convention, and the 80% gross rental income test defining residential rental property, IRS Publication 527. Requirement to reduce basis by depreciation allowed or allowable, whichever is greater, and the 39-year recovery period for nonresidential real property, IRS Publication 946. Maximum 25% rate on unrecaptured section 1250 gain from the sale of section 1250 real property, IRS Topic No. 409.

This article is for informational purposes only and is not intended to provide legal, financial, tax or investment advice, and is not an offer to sell or a solicitation to buy any security. Loan program rules, LTV limits, credit fees, loan limits, reserve requirements and tax treatment change and vary by property, county, program and lender; confirm your figures with your Loan Estimate and Closing Disclosure, confirm tax treatment with a qualified tax professional, and confirm lease, entity and landlord-tenant obligations with a Michigan attorney. Figures shown are illustrative, are not a rate quote or an offer of credit, and do not constitute an advertisement of credit terms. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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