Rental property has been a proven way for many to make extra money. However, before you jump in with both feet, it is important to learn many of the “ins and outs” thoroughly since purchasing rental investment property is quite different than purchasing a home for yourself.

In the early 1990s, many investors faced bankruptcy and serious tax problems when the real estate market took a dive. This has caused banks and lenders extremely cautious when considering the investment and the requirements have become extremely stringent for being approved for a rental property mortgage.

When purchasing a home for yourself, especially for first time home buyers, only a minimum down payment is required. For rental property, the required down payment can be at least 15% and even up to 25%.

When looking for financing options for investment rental property, there are several choices. Begin with mortgage brokers and your local bank. Credit unions will often offer excellent rates for customers with good credit. Private lenders may be interested in investing. Finally, there is some FHA (Federal Housing Association) financing that may be available under certain circumstances.

Any financing option will require you to prove that the rental income will adequately cover the mortgage payment, insurance, taxes and any maintenance costs. A larger down payment may be necessary if the ratio of income to payment is not suitable to the lender.

Different loan types may be available. Residential loans are a possibility, but are limited to rentals that consist of only up to four units or if the property will be owner occupied. Larger units may require commercial loan arrangements.

Commercial loans are required for properties of five units or more, and may be required for smaller properties that are not owner occupied. Commercial loan terms and requirements are different from residential loans; mainly in terms of the associated fees and rates. Commercial loan rates are usually much higher than residential loans. Commercial loans also require higher down payments than residential loans. Proof of cash reserves is also usually a requirement.

Some investors will seek private party lending options. Occasionally, a current owner will agree to finance the mortgage for the seller. This option means that the current owner will continue to carry the back loan, while the purchaser will make a down payment and pay a fair interest rate to the previous owner. This option can save thousands in lending fees and provide opportunities for lower down payments, though most owners that intend to sell are truly trying to completely sell the property and make their own financial gain.

There is a type of short term financing called a hard money loan. This option means there is a third party that provides a loan to the investor by purchasing the property for them and taking the payments. This option is desirable when a buyer has less than optimal credit or when the property needs major renovations.

Many traditional lenders offer FHA programs for financing. While the FHA does not lend the money to investors, they will insure the investment which can make the purchase more attractive. This option is most typically found for lower income housing, urban redevelopment or other community improvement situations.

Any financing option will leave the possibility for later refinancing if the initial rates and terms are less than desirable, but all costs and possibilities should be carefully considered before any investment purchase is made. For assistance, contact a Michigan property management company.