Chapter 3: Can you afford to be a landlord?
The internet says Marcus and Tina's $240,000 rental costs $60,000 to buy. The truthful number is $82,644, and the gap between those two figures is where first-year landlords get hurt. The down payment is just the cover charge. Closing costs, lender-required reserves, and the repairs every inspection report surfaces are all due in cash, around the same few weeks, before the first rent check ever clears. This chapter prices the whole entry ticket, then adds the line item that saves careers: the reserve you keep after closing.
Before any of this: the order of operations
The Personal Finance Guide spends its early chapters building an order of operations, and a rental property does not get to cut that line. A rental is a concentrated, illiquid, levered asset that occasionally demands $6,000 on a random Tuesday. It belongs on top of a stable financial base, never instead of one.
Handle these before a down payment (PF guide, chapters 4–6)
- Emergency fund: 3–6 months of household expenses, in cash, untouched by this purchase
- Employer retirement match captured: it outearns any rental on day one
- High-interest debt gone: no rental reliably beats 22% credit card interest
- Stable income you expect to continue: lenders will check, and so should you
If a rental purchase would drain the emergency fund or pause the match, the honest move is chapter 2's answer: a REIT fund slice now, the rental in a year or two. The houses will still be there.
The real entry price, itemized
Four piles of cash, each with its own rules.
Pile one: the down payment. Investor conventional loans require a minimum of 15% down on a single-family rental and 25% on a 2–4 unit, with the best pricing near 25%. Marcus and Tina chose 25% on a single-family ($60,000) for the better rate. The famous exception is the house hack: live in the property and owner-occupied financing opens up at 3.5% down (FHA) or 5% (conventional), the engine of chapter 8.
Pile two: closing costs. Loan fees, title, appraisal, prepaid taxes and insurance: 2–5% of the price, per the Home Buying Guide's full breakdown. We use 3% here: $7,200.
Pile three: lender reserves. Investment-property lenders commonly require around six months of PITIA in the bank at closing. PITIA is the full monthly carrying cost: principal, interest, taxes, insurance, and any association dues. For Marcus and Tina that is the $1,234 mortgage payment plus $340 a month of taxes and insurance ($4,080 a year from chapter 1, divided by 12), so PITIA is $1,574 and six months is $9,444. The lender does not take this money; they verify it exists. Some programs ask for more, especially when you own several properties, so treat six months as the floor.
Pile four: day-one repairs. Every inspection report contains a short list of items that are cheaper to fix during the vacancy than after a tenant moves in. Marcus and Tina's report priced out at $6,000: a water heater at the end of its life ($1,400), electrical corrections ($900), new locks plus smoke and carbon monoxide detectors ($350), gutter and grading work ($650), paint and deep cleaning ($1,200), a failing range ($800), and a $700 contingency because inspection lists grow. Budgeting zero here does not make the list disappear; it just moves the list into month two with a tenant in the house.
| Cash required | Amount |
|---|---|
| Down payment (25%) | $60,000 |
| Closing costs (3%) | $7,200 |
| Lender reserves (6 months PITIA at $1,574/mo) | $9,444 |
| Day-one repairs (inspection list, priced) | $6,000 |
| All-in cash to buy | $82,644 |
That is the number nobody posts: $82,644 to buy a $240,000 house, about 34% of the purchase price in cash, of which only $60,000 shows up in the mortgage paperwork as "down payment."
The stack shrinks dramatically when you live in the property. Alana's $420,000 duplex in chapter 8 needed just $14,700 down at FHA's 3.5%, because owner-occupants get the cheapest leverage in the entire financial system. Her closing costs, reserves, and day-one list still existed, but the total entry came in under half of Marcus and Tina's, on a property worth nearly twice as much. That asymmetry, not a secret market or a seminar technique, is why house hacking keeps winning the first-deal conversation for people with more income than savings.
Try your own deal's version of this stack here, with your price, your down payment percentage, and your market's tax bill:
The reserve that stays after closing
The lender's six-month requirement checks that the money exists at closing. Your job is harder: keep an operating reserve of 3–6 months of PITIA per door, in its own account, for the life of the property. On this house that is $4,722–$9,444, and it sits on top of your household emergency fund, not inside it. The household fund protects your family from a job loss; the property reserve protects the property from itself. The moment those two funds merge, a furnace failure starts competing with your groceries, and the Personal Finance Guide's chapter 6 logic applies twice over.
The reserve is not pessimism. Chapter 1 budgeted 7% vacancy and 12% maintenance and capex as smooth monthly percentages, but reality pays those bills in lumps. The percentages tell you the average; the reserve absorbs the arrival times. With cash flow at −$140 a month in year one, Marcus and Tina's reserve also quietly carries the routine shortfall while rents catch up.
Ray's quarter from hell
Twenty-two years a landlord, and the year Ray still tells new investors about started with $12,000 in the reserve account for a single-family rental that collected $1,400 a month against a $1,150 PITIA. In January the furnace died: $5,600 installed, no negotiating in a Minnesota cold snap. In February his tenant of four years gave notice. March and April were vacant: two months of PITIA ($2,300) with no rent coming in, plus $2,400 of turnover paint and carpet and a $700 leasing fee to fill it fast. By May 1 the reserve held $1,000. The property was never in danger, his credit cards stayed cold, and the new tenant signed at $1,475. Ray's summary: nothing about that quarter was unusual. The furnace was 24 years old, the tenant left for a job, and the math worked because the reserve existed before the quarter did.
Run Ray's quarter against an unreserved version of the same property and the story changes shape entirely. The furnace goes on a card at 22%, the vacancy months strain the household budget, the leasing fee gets skipped to save money, the house sits empty longer, and a solvent investment becomes a forced sale. Identical house, identical events, different preparation.
Fund all four piles before you offer: down payment, closing costs, six months of PITIA for the lender, and the priced inspection list. Then keep 3–6 months of PITIA per door, in a separate account, forever. If the full stack is out of reach, the answer is not a thinner cushion; the answer is a cheaper property, a house hack, or chapter 2's passive route while you save.
The approval math, briefly
Two gatekeepers stand between you and the loan, and both are beatable with preparation.
Credit. Investor conventional loans generally want a 680+ score, and pricing improves from there. The Home Buying Guide's credit chapter applies unchanged.
Debt-to-income (DTI). Lenders divide your monthly debt payments by your gross income, and a second house payment looks alarming until the rent enters the math. Lenders typically credit 75% of the expected rent toward your income, the 25% haircut standing in for vacancy and expenses. On this house: 75% of $1,950 is $1,463, set against the $1,574 PITIA, so the property adds only about $111 a month to the debt side of Marcus and Tina's ratio. A property that clears chapter 4's deal math usually walks through DTI; a marginal deal limps.
This is also why the second rental is easier than the first. By then the first property's rent shows on your tax return as established income rather than a projection, your reserves and team already exist, and you have receipts proving you can operate. The first purchase is the credibility purchase. Lenders, like everyone else, prefer landlords with a track record, and chapter 6 covers how the financing menu widens as you build one.
Where people go wrong
- Saving exactly the down payment. The other $22,644 is not optional, and discovering it during underwriting kills deals and deposits.
- Counting the lender reserves as spendable. That money's job starts after closing. Showing it to the lender and then spending it on furniture defeats the entire point.
- Merging the property reserve into the household emergency fund. One bad quarter at the property then becomes a bad quarter for the family.
- Skipping the day-one repair budget because the house "looks fine." The water heater's age does not care about the paint color. Price the inspection list before you close, not after.
- Stretching DTI with an optimistic rent number. Use the lender's 75% haircut in your own planning. If the deal only works at 100% of projected rent, it does not work.
Key takeaways
- The honest entry price for Marcus and Tina's $240,000 rental is $82,644: $60,000 down, $7,200 closing, $9,444 of lender reserves (6 months of the $1,574 PITIA), and $6,000 of priced day-one repairs.
- The Personal Finance Guide's order of operations comes first: emergency fund, employer match, and high-interest debt are all senior to a rental.
- Keep 3–6 months of PITIA per door ($4,722–$9,444 here) in a separate account permanently. Reserves are what turn a furnace-plus-vacancy quarter from a crisis into an anecdote, as Ray can testify.
- Approval math: roughly 680+ credit, and lenders count 75% of projected rent toward DTI, so this house adds only about $111/mo to the ratio.
- The second property is easier than the first: documented rental income, existing reserves, and a working team. Buy the first one only when the full stack is funded.
Sources: Fannie Mae Eligibility Matrix · CFPB: Owning a Home · Finvest Personal Finance Guide · Finvest Home Buying Guide