An investment property is real estate you own to earn money, by renting it out or reselling it, and don't live in as your main home or a second home. Lenders sort it by occupancy (whether you live there) and the IRS sorts it by use (rental days versus personal days), so the same house can count one way for your loan and another way for your taxes.
Key takeaways
- Under Fannie Mae's rules, an investment property is real estate you own but don't occupy, and that label sets your down payment, cash reserves and loan pricing.
- A one-unit investment property needs at least 15% down and a 2-to-4 unit building needs 25%, per Fannie Mae rules as reported in September 2026.
- If you live in one unit of a 2-to-4 unit building, lenders treat it as your primary residence, which is why house hacking takes much less cash upfront.
- In our example, a $320,000 rental bought with 25% down at 7.93% needs about $102,756 in cash including reserves and loses about $465 a month at $2,400 rent.
- The IRS uses its own test based on rental days and personal-use days, and you depreciate a residential rental building over 27.5 years.
- Calling a rental your primary residence or second home to get a smaller down payment is occupancy fraud.
What counts as an investment property for a mortgage?
Lenders care about one thing first: who lives there. Fannie Mae, which sets the rules most conventional lenders follow, treats an investment property as real estate you own but don't occupy. Lower's comparison of second homes and investment properties (updated September 14, 2026) lays out the three occupancy types side by side. A single-family rental, a duplex you rent out in full and a condo you bought for tenants all count as investment properties.
| Primary residence | Second home | Investment property | |
|---|---|---|---|
| Who lives there | You, as your main home | You, for part of the year | Tenants, or no one |
| Units allowed | 1 to 4 | 1 only | 1 to 4 |
| Minimum down payment | Depends on the loan program | 10% | 15% for 1 unit, 25% for 2 to 4 units |
| Reserves on a purchase (Fannie Mae's automated underwriting) | Depends on the loan | 2 months of payments | 6 months of payments |
| Rent can help you qualify | Depends on the loan | Generally no | Yes, if it meets Fannie Mae's rules |
Source: Lower, citing Fannie Mae rules, as of September 2026. Confirm the limits in [Fannie Mae's eligibility matrix](https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf), dated August 5, 2026.
A second home also has to be under your exclusive control, so you can't hand it to a full-time tenant and keep the label. Fannie Mae adds extra pricing fees (loan-level price adjustments) to investment loans, so expect a higher rate or more points than on your own home. Lower notes there's no fixed premium, which is why you need a real quote.
Where house hacking fits
If you buy a 2-to-4 unit building and live in one unit, lenders treat it as your primary residence. That changes the math a lot. A 2025 guide from Midland States Bank notes FHA loans can need as little as 3.5% down in that setup, compared with 25% for the same building as a pure investment. Conventional minimums for owner-occupied multifamily change from time to time, so ask your lender for current numbers.
Our guide to house hacking covers how to run one from the first showing to the first lease.
How does the IRS define an investment property?
The IRS asks how the property is used: how many days it's rented at a fair price and how many days you or your family use it. IRS Publication 527 covers those day-count tests, which rental expenses you can deduct and how depreciation works. For a residential rental, you depreciate the building (not the land) over 27.5 years.
That's where the two definitions part ways:
- A house hack is a primary residence to your lender, but the rented units are rental property for tax purposes, so you split costs between your unit and theirs.
- A vacation home can be a second home on your loan while the IRS looks at how many days you rented it versus used it yourself.
Your lender and the IRS each answer "is this an investment property?" on their own terms, so check both before you buy.
What does an investment property cost at today's rates?
Freddie Mac's 30-year fixed average was 7.18% as of November 5, 2026, the third weekly drop in a row, per its Primary Mortgage Market Survey. That survey tracks purchase loans lenders send to Freddie Mac and doesn't measure investor loans, so your rate will usually run higher. In the example below, we added an assumed 0.75 percentage points for a 7.93% rate. Swap in your own lender's quote.
Example: a $320,000 single-family rental
| Input | Example value |
|---|---|
| Purchase price | $320,000 |
| Down payment (25%) | $80,000 |
| Loan, 30-year fixed | $240,000 at 7.93% |
| Rent | $2,400 a month |
| Property tax (assumed 1.1% of price) | $293 a month |
| Insurance (assumed landlord policy) | $150 a month |
| Vacancy, maintenance, management, big repairs | 6%, 8%, 9% and 5% of rent |
| Closing costs (assumed 3%) | $9,600 |
Example only, not a quote. Price, rent, tax and insurance are placeholders.
| Monthly result | Amount |
|---|---|
| Rent | $2,400 |
| Operating costs | -$1,115 |
| Net operating income (NOI) | $1,285 |
| Principal and interest | -$1,749 |
| Cash flow | -$465 |
Over a year that's a loss of about $5,576, a cash-on-cash return of -6.2% on the $89,600 you put in at closing. NOI comes to about $15,416 a year, a cap rate of about 4.8%. To break even, this house would need about $3,045 a month in rent, roughly 0.95% of the price.
At today's rates, the rent a deal needs to break even is often well above the rent the house will actually get.
Some deals still work, but they're rarer, so you have to check a lot of them to find one. Rate moves matter too:
| Rate | Principal and interest | Monthly cash flow |
|---|---|---|
| 7.18% | $1,626 | -$341 |
| 7.68% | $1,708 | -$423 |
| 7.93% | $1,749 | -$465 |
| 8.18% | $1,791 | -$506 |
Example, same inputs as above. 7.18% is Freddie Mac's average as of Nov 5, 2026.
Even at the plain average rate with no investor premium, this house loses money each month. Don't forget to rerun it with your own rent comps and loan terms; our rental cash flow analysis guide walks through each line.
If you're screening many listings to find the few that clear break-even, that's the job Operator was built for. Operator runs two agents, the Buy Box Agent and the Rent Monitoring Agent. For new deals, the Buy Box Agent:
- Screens new listings in your markets overnight.
- Pulls insurance estimates and rent comps for each one.
- Runs cash flow at your financing terms.
How much cash do you need to buy one?
The down payment is only the first check. Under Fannie Mae's rules, an investment purchase run through its automated underwriting needs 6 months of payments in reserve, on top of the down payment and closing costs (Lower, September 2026).
| Cash needed | 25% down | 15% down |
|---|---|---|
| Down payment | $80,000 | $48,000 |
| Closing costs (3%) | $9,600 | $9,600 |
| Reserves (6 months of payment, tax and insurance) | $13,156 | $14,556 |
| Total | $102,756 | $72,156 |
| Monthly principal and interest | $1,749 | $1,983 |
Example. The 15% column leaves out mortgage insurance, which adds to both the payment and the reserves.
Putting 15% down saves $30,600 upfront, but the bigger loan makes monthly cash flow worse in a deal that's already short.
How do lenders count rental income?
Lenders typically count about 75% of the rent, according to Midland States Bank's July 2025 guide, which leaves room for vacancy and costs. In our example, 75% of $2,400 is $1,800. Set against a $2,193 monthly payment with tax and insurance, that leaves a $393 gap that counts against your debt-to-income ratio, so your job income has to cover it.
Midland lists 680+ credit and debt-to-income well below 45% as typical. Lower notes Fannie Mae no longer sets a fixed minimum credit score for loans run through its automated system, so your lender's own rules usually decide it.
How does an investment property pay you?
A rental can earn money four ways. Here's year one in our example, assuming land is 20% of the price:
| Return | Year one | What it means |
|---|---|---|
| Cash flow | -$5,576 | Money in or out of your pocket |
| Loan paydown | $2,033 | Equity you build as the loan balance drops |
| Depreciation | $9,309 deduction | $256,000 building value ÷ 27.5 years (full-year figure; the first year is prorated) |
| Appreciation | Not modeled | Depends on the market; we don't forecast it |
You'd also pay about $18,959 in interest in year one, which is deductible along with other rental costs. Depreciation is a paper deduction: no cash changes hands, but it lowers the rental income you're taxed on. Whether a tax loss can offset your other income depends on IRS rules for rental losses, so walk through it with your CPA.
What changes as you buy more properties?
Fannie Mae's rules tighten as your count grows. A lender's April 2026 multiple-properties matrix shows a minimum 720 credit score once you have seven to ten financed properties. The 75% rent rule adds up too, because every property that runs short adds to your debt-to-income ratio.
That's why many investors growing to 10, 20 or more doors move to DSCR loans, which qualify on the property's rent against its payment instead of your personal income.
Once you're past a few doors, the financing plan matters as much as the deal itself. Our guide to building a real estate portfolio covers how investors line up each loan.
Watch out: Telling a lender a rental is your primary residence or second home to get a smaller down payment or a better rate is occupancy fraud. If you'll rent it out, apply as an investment property, and if you say you'll move in, plan to really live there.
Last updated November 12, 2026. Rates and loan rules change, so confirm current figures with your lender.
This is general information, not tax, legal or lending advice. Talk to your CPA, attorney or lender about your situation.
FAQ
Do you have to put 20% down on an investment property?
No. Fannie Mae's minimum for a one-unit investment property is 15% down, and 2 to 4 units need 25%, as of September 2026. At 15% down you'll pay mortgage insurance, which raises the monthly cost.
Is a house hack an investment property?
To your lender, no. If you live in one unit of a 2-to-4 unit building, it's your primary residence for the loan, which allows a much smaller down payment. For taxes, the units you rent out are still treated as rental property.
How much money do you need to buy your first investment property?
More than the down payment. In our example, a $320,000 single-family rental needs about $102,756 at 25% down: $80,000 down, $9,600 in closing costs and $13,156 in reserves. At 15% down it's about $72,156 plus mortgage insurance.
Can a second home be an investment property?
They're separate categories. A second home is one unit you use part of the year and keep under your control. If tenants live there instead, lenders treat it as an investment property, with a bigger down payment and more reserves.
Does real estate create 90% of millionaires?
We couldn't find a primary source for that figure, so treat it as a saying. What we can show is the math on a real deal, like the example above.
