Many investors in recent years, attracted to the idea of securing a steady stream of passive income, have decided to purchase rental property. Such an investment offers several advantages to a prospective buyer.

However, there are some important considerations that first-time rental property owners should consider as they explore the options available to them. The following information will discuss five of these key factors and how you can make an informed decision.

1. Considering the Down Payment

Most rental property financing involves a minimum down payment of 15%. Of course, it may be better to set aside a down payment anywhere from 20 to 30% of the total price. In general, the larger the down payment, the lower the interest rate on the corresponding loan. Thus, it is important to think about how much you can give as a down payment, since this will play a key role in your selection of property.

2. Selecting the Type of Rental Property

Another factor that a prospective rental property owner should give attention to is the type of dwelling that he or she wants to invest in. Single-family units typically come with lower price tags than their multi-family counterparts and are usually easier to maintain.

On the other hand, investing in a multi-family unit can be especially lucrative. If you are planning to live on-site in one of the units, this can provide several advantages with regards to access and maintenance. Most critically, though, is the benefit that you could receive from government-sponsored programs. For example, if you are a first-time homebuyer, and plan to live in one of the multi-family units, then you may qualify for an FHA loan. Which leads into our third point:

3. Exploring Loan Options

You’ll need to determine whether you should go for a conventional bank loan or take the home equity loan route. But, what are the differences between the two options?

  • conventional loan adheres to government-regulated guidelines. Investment property loans usually require a down payment between 20-30% of the amount borrowed. Most lenders will expect you to have at least half a year’s worth of cash set aside to cover mortgage payments and property-related expenses.
  • Home equity loans allow you to refinance your current home and borrow as much as 80% of your current equity. A home equity loan will cause an extension of your current mortgage term, which usually leads to substantial costs from increased interest.

If neither of the above courses of action are feasible in your situation, then you can investigate another possibility: asking the seller directly about financing options.

4. Asking About Seller Financing

Some property owners may be willing to negotiate a monthly payment plan, along with an initial down payment. There could be several benefits from financing directly from the seller, including a reduced interest rate, and more flexibility with payment due dates.

On the other hand, the majority of sellers will not want to deal with an extended payment plan and may push for a 7 or 5-year term. In many cases such agreements come with a large “balloon” payment at the end of the loan period.

5. Gathering Investors

Yet another financing option would be to enlist the aid of other investors to help fund the venture. Whether these investors would include family and friends, or consist strictly of business partners, it is important to set down in writing the financial and material obligations of each party involved in the contract.

While there are many more factors involved in successful rental property investment other than those discussed above, these five points can serve as helpful guidelines throughout your decision making process.