Tips for new real estate investors: The 7 mistakes that cost the most

Written by Samantha SheltonNMLS 1647301Updated October 2026

This article is general education for people considering their first rental property. It is not tax advice, not investment advice, and not an offer or solicitation to buy or sell any security. Depreciation, passive-loss limits and entity choice depend on your facts, take those to a CPA, and take title and landlord-tenant questions to a Michigan attorney. Align Lending is an independent Michigan mortgage broker, not a broker-dealer, investment adviser, or property manager.

The mistakes that sink a first rental are rarely dramatic, and almost all of them are made before closing. Start with the one your lender has already priced in: under Fannie Mae’s Selling Guide, a lender qualifying you on market rent multiplies the gross monthly rent by 75%, because “the remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.” If your own spreadsheet counts twelve collected months at full rent, you are underwriting a building on terms the lender itself refuses to accept.

That gap, between the rent you imagine and the rent the building produces, is where most beginner losses live. Below are the seven mistakes that cost new investors the most, and the discipline that prevents each. For the sequence of getting started, see how to become a real estate investor; for choosing between buy-and-hold, house hacking, flipping and passive vehicles, see real estate investment strategies for beginners. Both sit under our real estate investing guide and the investing basics hub.

Key takeaways:

• Your rent number is already 25% too high: Fannie Mae has lenders count 75% of gross market rent toward qualifying, with the other 25% absorbed by vacancy and ongoing maintenance, so a worksheet built on 100% of rent is not conservative, it is wrong.
• The down payment is not the cash requirement: A one-unit investment purchase caps at 85% loan-to-value, so plan on at least 15% down, plus six months of the property’s principal, interest, taxes, insurance and association dues in reserves, plus 2% of the aggregate balance on other financed properties.
• Appreciation is not a plan: The FHFA House Price Index rose 2.1% nationally between the second quarter of 2025 and the second quarter of 2026 (a nominal figure, before inflation) and past performance never predicts future results, so the deal has to work on rent alone.

Why do new investors underestimate what a rental costs to own?

Because they budget for repairs and forget capital expenditures, and the two are not the same line. A repair keeps the building working this year. A capital expenditure replaces something with a ten- to thirty-year life (roof, furnace, water heater, windows) and it arrives whether or not you saved for it.

The tax code draws the same line. The IRS says an expense is an improvement, to be capitalized and depreciated rather than deducted this year, “if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.” Ordinary repair and maintenance costs may generally be deducted currently. One blended “maintenance” line blurs a distinction your bank account and your return both insist on.

Every row is an omission rather than an error, which is why they survive review. For the line-by-line build that catches them, see evaluating a property’s cash flow potential, and check the IRS rules on reporting rental income and expenses before assuming a cost is deductible.

Is buying for appreciation instead of cash flow a mistake?

Yes, when appreciation is the reason the deal pencils. National home prices rose 2.1% between the second quarter of 2025 and the second quarter of 2026, and 0.3% quarter over quarter, in the FHFA House Price Index released August 25, 2026. Those are nominal figures, not adjusted for inflation, and they describe what already happened. Past performance never predicts future results.

A rental that loses $150 a month is a subscription you pay to hold an asset whose price you don’t control. If prices go flat for four years, cash flow is what carries you.

• Label your heuristics as heuristics: The 1% rule and the 70% rule are screening shortcuts investors trade, not laws and not underwriting. They tell you which listings deserve a spreadsheet, nothing more.
• Name the index and the period: “Real estate goes up” is not a figure. The FHFA index is a repeat-sales measure built from Fannie Mae and Freddie Mac mortgages since January 1975; other indexes cover different transactions and give different answers.
• Separate nominal from real: A nominal 2.1% gain is not a 2.1% gain in purchasing power. Any appreciation figure that doesn’t say which one it is deserves a second look.

Forced appreciation, renovation that raises rent and value, is a different bet with its own risks; see investing in fixer-uppers before you count on it.

How much leverage is too much on a first rental?

Enough that closing empties your accounts. Financing sets the floor: Fannie Mae’s Eligibility Matrix caps a one-unit investment property purchase at 85% loan-to-value, so at least 15% down, and the Selling Guide requires six months’ reserves based on the qualifying PITIA. Own other financed properties and you owe additional reserves of 2% of the aggregate unpaid principal balance at one to four properties, 4% at five to six, and 6% at seven to ten.

Reserves are not a formality. They are cash that must still exist after closing, because the lender knows what a first year of ownership does to a bank account.

Run it on a $200,000 single-family rental.¹ At 15% down you bring $30,000, plus roughly $6,000 in closing costs. If the qualifying PITIA is $1,450, six months of reserves is $8,700. Carry a $180,000 mortgage on your own home and the 2% tier adds $3,600. That is $48,300 against a $200,000 price, about 24% of the purchase, before you replace a single water heater.

• Fund the capex reserve at closing, not later: The furnace doesn’t wait for your savings plan. Treat it as part of the acquisition cost, the way the lender treats PITIA reserves.
• Stress the deal, not the best case: Model it one vacancy and one major capital repair worse than your base case. If it survives, you have margin; if it doesn’t, you have a price problem.
• Get the financing quoted before you write the offer: Down payment, term, product and lender pricing all move debt service, usually the largest line on the sheet. Start with how to finance a real estate investment and buying a home as an investment property.

Two- to four-unit buildings change the down payment, the reserve math and the rent analysis at once, see our guide to investing in multi-family properties. If you later want equity back out, the limits tighten again; see how to refinance an investment property.

What goes wrong when you plan to manage the property yourself?

The plan usually holds until it doesn’t, and the spreadsheet never priced the day it stops. Self-management is a legitimate choice that saves real money. Leaving management at zero on the pro forma is a different decision, and it hides a cost that reappears the moment you take a new job, move away, or buy a second building.

Screening is where the money is made or lost, and where new landlords create legal exposure. The Fair Housing Act bars discrimination based on race, color, national origin, religion, sex, familial status and disability, and Michigan’s Elliott-Larsen Civil Rights Act names its own protected classes in real estate transactions. Your protection is a written standard applied identically to every applicant, not a judgment call made one applicant at a time.

• Write the criteria before you advertise: Income multiple, credit threshold, rental history and screening order, fixed in advance and applied to everyone. Consistency is both the fair-housing defense and the better decision.
• Buy the right policy, not the one you have: A homeowners policy is not a landlord policy. Confirm coverage for the rental use, liability and loss of rents in writing before the first tenant moves in.
• Learn the deposit rules before you collect one: Deposit limits, notice deadlines and itemization requirements are statutory, and the penalties for missing them fall on the landlord.

Cash flow is what all of this feeds; if the term is new, start with cash flow in real estate. On the financing side, the CFPB tools for understanding the mortgage process are the neutral reference.

What does a landlord owe an applicant before the lease is signed?

Three federal rules reach a first-time landlord on day one, whether you own one door or ten. The first is lead. For housing built before 1978, the EPA’s lead disclosure rule requires the landlord to give the tenant the pamphlet “Protect Your Family From Lead in Your Home,” disclose any known lead-based paint and hazards along with the records and reports available, and include a Lead Warning Statement in or attached to the lease. Under 24 CFR 35.92(c), the lessor keeps a copy of the completed disclosure for no less than 3 years from the start of the leasing period. According to the EPA, the rule does not require the landlord to order a paint inspection.

The second is the screening report. According to the CFPB’s November 2022 Consumer Snapshot on tenant background checks, the Fair Credit Reporting Act requires a landlord to give an adverse action notice when an applicant is denied, or is required to take on lease terms not required of others, because of information in a screening report. The notice tells the applicant about the right to get the report from the company that compiled it and to dispute inaccurate information directly with that company, and it gives the company’s contact information. The same publication lists what these reports can include: identity, income and employment verification, credit reports and scores, criminal record checks, eviction records, rental payment history, and bankruptcies and other civil judgments. The CFPB reported that landlords who took adverse action did not consistently tell applicants about their dispute rights, so build the notice into your process before the first application arrives.

The third is the listing itself. 42 U.S.C. 3604(c) makes it unlawful to publish any notice, statement or advertisement for the rental of a dwelling that indicates a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status or national origin. Describe the property and the terms, never the tenant you picture.

For the day-to-day side of the job, see becoming a landlord and our guide to rental property management.

Which beginner mistakes turn into legal or tax problems?

Two, and the first is a federal crime. Investment financing carries higher down payments and reserves than owner-occupied financing, which is why some buyers are tempted to call a rental a primary residence. Section 6 of the Fannie Mae/Freddie Mac uniform security instrument (in Michigan, the Mortgage on Form 3023) requires you to occupy the property as your principal residence within 60 days of signing and to keep occupying it for at least one year. Making a false statement to influence a covered lender’s action on a loan application carries a fine of up to $1,000,000, imprisonment of up to 30 years, or both, under 18 U.S.C. 1014. Tell your loan officer what the property actually is.

The second is treating depreciation as free money.² Residential rental property is depreciated over 27.5 years using the straight line method and a mid-month convention, and land is never depreciable, so basis must be allocated between land and building. On sale, basis is reduced by depreciation you deducted or could have deducted, the “allowed or allowable” rule, so skipping the deduction doesn’t avoid the consequence, and unrecaptured section 1250 gain is taxed at a maximum 25% rate.

• Losses may not be deductible when you expect: The special allowance for active participation in rental real estate is up to $25,000, reduced by 50% of the amount modified adjusted gross income exceeds $100,000, and gone entirely at $150,000. Those thresholds are not inflation-indexed.
• Real estate professional status is a high bar: It requires more than 750 hours of services during the year in real property trades or businesses in which you materially participated, and more than half of all your personal services performed in those businesses.
• Get the CPA in before closing: Basis allocation and entity choice are decided at acquisition, not at filing.

How do you split the purchase price between land and building?

Depreciation starts with an allocation, because only the building wears out. IRS Publication 527 says to divide the cost by the fair market values of the land and the building at the time you buy, and if you are not certain of those values, you can divide it using the land and building values on the property tax assessment. In the IRS’s own example, a $200,000 purchase with an assessment showing $136,000 for the house and $24,000 for the land puts 85% of the price, $170,000, in the building and $30,000 in the land.

The month you place the rental in service changes the first-year number, because the 27.5-year table builds in the mid-month convention. Per Publication 527, Table 2-2d gives 3.182% for the first year of residential rental property placed in service in February.

Hypothetical example, not an offer. Using the IRS allocation above, a $170,000 building basis placed in service in February produces a first-year deduction of about $5,409 ($170,000 x 3.182%), and about $6,182 in a full year after that ($170,000 divided by 27.5). Put the whole $200,000 into the building by mistake and the first-year figure becomes $6,364, which overstates the deduction by $955 because land is never depreciable. The allowed-or-allowable rule above means the correct figure is the one that follows you to the sale. Our guide to real estate depreciation covers recovery periods and recapture in more depth.

What Michigan investors should know

Michigan’s lower entry prices are real, and so are two tax surprises that arrive in year one. The Midwest rental vacancy rate was 6.9% in the second quarter of 2026, against 7.3% nationally, per the Census Bureau’s Current Population Survey/Housing Vacancy Survey, useful backdrop, but no substitute for vacancy data on your street.

• No principal residence exemption on a rental: Michigan’s PRE exempts an owner-occupied principal residence from up to 18 mills of local school operating tax. A rental is non-homestead property and does not qualify, so the tax line on a rental runs above the owner-occupied bill for the identical house.
• The seller’s tax bill is not your tax bill: Under MCL 211.27a, taxable value uncaps to state equalized value in the calendar year following a transfer of ownership. On a long-held building the jump can be substantial, get the projected number from the local assessor before you set your rent.
• File the Property Transfer Affidavit within 45 days: MCL 211.27a(10) requires the new owner to notify the local assessor of the transfer within 45 days, separately from recording the deed.
• Deposits are capped at 1 1/2 months’ rent: Michigan caps a residential security deposit at 1 1/2 months’ rent and requires an itemized list of damages mailed within 30 days after the tenant moves out.

Take entity formation and landlord-tenant questions to a Michigan attorney, and the property-tax math to a tax professional.

How have home prices in Michigan’s census division moved?

The FHFA reports prices by census division as well as nationally, and Michigan’s division has run ahead of the national number. The East North Central census division rose 4.5 percent from the second quarter of 2025 to the second quarter of 2026, compared with 2.1 percent nationally, according to the FHFA release of August 25, 2026. That division is Illinois, Indiana, Michigan, Ohio and Wisconsin, per the Census Bureau’s list of regions and divisions. Like the national figure, it is nominal and backward-looking. For what uncapping does to your bill, see how property tax assessments work and run the address through Align’s Michigan property tax calculator; for reading local rent data, see analyzing rental market trends.

What paperwork deadlines does Michigan set for a new landlord?

Michigan attaches a deadline, and usually a dollar penalty, to the paperwork around a rental.

• A late transfer affidavit costs more on a rental: Under MCL 211.27b, a buyer who misses the 45-day notice owes the additional taxes that would have been levied from the date of transfer, plus interest and penalty, and on property not classified commercial or industrial a further $5.00 per day after the 45 days. That penalty caps at $200.00 for a home the owner occupies as a principal residence and at $4,000.00 for all other property.
• Turning your own home into a rental starts a 90-day clock: MCL 211.7cc(5) generally requires an owner to file a rescission of the principal residence exemption with the local tax collecting unit not more than 90 days after the property stops being used as a principal residence. Missing it carries a penalty of $5.00 per day after the 90 days, up to $200.00, which the Department of Treasury may waive.
• The deposit notice is due within 14 days: Under MCL 554.603, a landlord may not require a security deposit unless, within 14 days after the tenant takes possession, the landlord gives written notice of the landlord’s name and address, the financial institution or surety holding the deposit, and the tenant’s duty to provide a forwarding address in writing within 4 days after moving out. MCL 554.604 requires the deposit to be held in a regulated financial institution, unless the landlord deposits a cash bond or surety bond with the Secretary of State.
• The move-in checklist and the 45-day deposit deadline: According to Michigan Legal Help’s overview of security deposits for landlords, a landlord must give the tenant two blank copies of a move-in checklist listing every item in the home, which the tenant returns within 7 days after taking possession. If you neither return the deposit nor start a court case within 45 days after the tenant moves out, the tenant can sue for double the deposit, provided the tenant took the steps the law requires, such as giving a forwarding address.
• An LLC is a state filing: Under MCL 450.4202, a Michigan limited liability company is formed by filing executed articles of organization, and the company exists from the effective date of those articles. If you and your attorney choose one, the articles go to LARA’s Corporations Division, which asks filers to use its MiBusiness Registry Portal rather than mail. Forming the company does not put the property in it: moving title is a separate step, the one the LLC question in the FAQ below says to raise with an attorney and your lender first.

FAQ: Starting out as a real estate investor

Here are answers to common questions about starting out as a real estate investor.

How much money do I need to start investing in real estate?

It depends on the strategy. A pure rental purchase typically needs 15% or more down plus closing costs and six months of reserves, so a $200,000 property can require a total in the mid five figures, roughly $48,000 in the worked example above. House hacking a property you live in requires far less down. Publicly traded real estate investment trusts trade for the price of a share, with different risks entirely; see real estate investment trusts.

What is the best strategy for a first-time investor?

There isn’t one best answer. It depends on your capital, your timeline and how much operational work you want. House hacking is commonly recommended because owner-occupied financing terms and rental income work together; flipping and short-term rentals carry more operational risk. Compare them side by side in real estate investment strategies for beginners.

How do I know if a rental property will cash flow?

Build the whole worksheet, not a shortcut. Estimate gross rent from comparable listings, subtract a vacancy allowance, then operating expenses including taxes, insurance, maintenance, capital reserves and management, to reach net operating income. Subtract annual debt service. If the result isn’t comfortably positive on conservative rent, the deal doesn’t cash flow. Our guide to cash flow in real estate walks through it.

Should I form an LLC before buying my first rental?

Many new investors buy in their own name first, because residential financing is simpler and cheaper for individuals, then revisit the question as the portfolio grows. An LLC can add liability separation but may raise due-on-sale and commercial-pricing questions, and by itself it doesn’t change your tax outcome. Talk to a Michigan attorney and your lender before transferring title.

Is a security deposit taxable rental income?

Not when you receive it, if you plan to return it at the end of the lease, according to IRS Publication 527. If you keep part or all of it because the tenant did not meet the lease terms, the amount you keep is income in that year. A deposit meant to serve as the final month’s rent is advance rent, which is income in the year you receive it, whatever period it covers.

Can I deduct points and loan costs on a rental property mortgage?

Partly, and not all at once. Per IRS Publication 527, points paid solely for the use of money are prepaid interest, so you generally deduct them over the term of the loan under the original issue discount rules rather than in the year paid. Other costs of getting the mortgage, such as mortgage commissions, abstract fees and recording fees, are not interest; they are capital expenses that become part of your basis.

Can I sell a rental property without paying capital gains tax right away?

A like-kind exchange can defer the gain when you exchange real property held for business or investment for other like-kind real property. Under 26 U.S.C. 1031(a)(3), you identify the replacement within 45 days of transferring the old property and receive it within 180 days, or by that year’s return due date if earlier. Property held primarily for sale does not qualify, according to the IRS. See 1031 exchange rules and benefits.

How much notice does a Michigan landlord give for unpaid rent?

Seven days, unless the lease or another law requires longer. MCL 554.134(2) lets a landlord end a tenancy for unpaid rent with a written 7-day notice to quit, and the state court form, DC 100a, is commonly called a 7-Day Notice. The court instructions for DC 100a list proper service and say that leaving it outside the door, attaching it to the property or mailing it signature-required is improper.

The bottom line on tips for new real estate investors

The best tip for a new real estate investor is to underwrite the way your lender does. Fannie Mae counts 75% of gross market rent because the other 25% goes to vacancy and maintenance, caps a one-unit investment purchase at 85% loan-to-value, and requires six months of PITIA in reserves that still exist after closing. Adopt all three, fund repairs and capital expenditures on separate lines, price management even if you’ll do it yourself, and require the deal to work on today’s rent with zero appreciation. National prices rose 2.1% in the year through the second quarter of 2026, nominal and before inflation, a bonus, not a business plan.

If you’re ready to buy your first rental, talk to Align Lending. We’ll shop your scenario across our lender network and show you the down payment, reserve and payment numbers side by side before you write an offer. Call 248-506-5727 or start online. Take tax questions to a CPA and title, lease and landlord-tenant 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 $200,000 purchase price, $30,000 down payment, approximately $6,000 in closing costs, $1,450 qualifying PITIA, $8,700 reserve figure, $180,000 outstanding balance on another financed property, $3,600 additional reserve, and $48,300 total are Align Lending illustrations shown to demonstrate how down payment and reserve requirements combine. Actual loan amounts, reserve requirements, closing costs and terms depend on your application, the property, program guidelines, and market conditions. Return to text.

2. This is general information, not tax advice. Depreciation recovery periods and conventions, basis allocation between land and improvements, depreciation recapture, the passive activity loss rules and the special allowance, real estate professional status, and entity choice all depend on your individual circumstances and change over time. Consult a qualified tax professional about your situation before you buy and before you file. Return to text.

Sources: requirement that a lender calculate rental income by multiplying gross monthly rent from Form 1007 or Form 1025 by 75%, with the remaining 25% absorbed by vacancy losses and ongoing maintenance expenses, Fannie Mae Selling Guide B3-3.8-01, Rental Income. Six months’ reserves based on the qualifying payment amount for investment property transactions, and additional reserves of 2% of the aggregate unpaid principal balance for one to four financed properties, 4% for five to six, and 6% for seven to ten, Fannie Mae Selling Guide B3-4.1-01, Minimum Reserve Requirements. Maximum 85% loan-to-value for the purchase of a one-unit investment property, Fannie Mae Eligibility Matrix, incorporated by reference into the Fannie Mae Selling Guide. Occupancy covenant requiring the borrower to occupy, establish and use the property as a principal residence within 60 days after executing the instrument and to continue occupying it for at least one year, Section 6, Fannie Mae/Freddie Mac uniform security instrument, Michigan Mortgage Form 3023. Penalty of a fine of not more than $1,000,000, imprisonment of not more than 30 years, or both, for knowingly making a false statement or report, or willfully overvaluing land or property, to influence the action of a covered institution on a loan application, 18 U.S.C. 1014. U.S. house prices up 2.1% between the second quarter of 2025 and the second quarter of 2026 and up 0.3% quarter over quarter, nominal and not adjusted for inflation, and FHFA House Price Index methodology as a weighted repeat-sales index built from mortgages purchased or securitized by Fannie Mae or Freddie Mac since January 1975, Federal Housing Finance Agency, FHFA House Price Index Report, 2026 Q2, released August 25, 2026. National rental vacancy rate of 7.3% and Midwest rental vacancy rate of 6.9%, second quarter 2026, U.S. Census Bureau, Current Population Survey/Housing Vacancy Survey, Quarterly Residential Vacancies and Homeownership, Second Quarter 2026, release CB26-116, July 28, 2026. Residential rental property depreciated over 27.5 years using the straight line method and a mid-month convention, land not depreciable, allocation of basis between land and buildings by relative fair market value or assessed values, the requirement to include in gross income all amounts received as rent, the capitalization standard for expenses that better, restore, or adapt property to a new or different use, and the reduction of basis by depreciation deducted or that could have been deducted, Internal Revenue Service, Publication 527, Residential Rental Property. Maximum 25% rate on unrecaptured section 1250 gain, Internal Revenue Service, Topic No. 409, Capital Gains and Losses. Special allowance of up to $25,000 for active participation in rental real estate, reduced by 50% of the amount modified adjusted gross income exceeds $100,000 and eliminated at $150,000, and the real estate professional test of more than 750 hours of services in real property trades or businesses in which the taxpayer materially participated plus more than half of all personal services performed in those businesses, Internal Revenue Service, Publication 925, Passive Activity and At-Risk Rules. Fair Housing Act prohibition on discrimination because of race, color, religion, sex, familial status, national origin and handicap, 42 U.S.C. 3604; Michigan protections in real estate transactions, Elliott-Larsen Civil Rights Act, 1976 PA 453, MCL 37.2502. Principal residence exemption from up to 18 mills of local school operating tax, MCL 211.7cc; uncapping of taxable value to state equalized valuation in the calendar year following a transfer of ownership and the 45-day property transfer notice to the local assessor, MCL 211.27a. Residential security deposit cap of 1 1/2 months’ rent and the 30-day itemized damage notice, 1972 PA 348, MCL 554.602 and MCL 554.609.

This article is for informational purposes only and is not intended to provide legal, financial, tax, or investment advice, and is not an offer or solicitation to buy or sell any security. Loan program requirements, underwriting guidelines, tax rules, statutory rates and market data change and vary by program, property, borrower and locality; confirm current figures with your loan officer, confirm tax treatment with a qualified tax professional, and confirm title, 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. Past performance does not predict future results. Align Lending is an independent Michigan mortgage broker, NMLS #2041154, and is not a broker-dealer, investment adviser, or securities issuer.

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