It's no secret that real estate investing has become very popular -- almost as popular as mutual fund investing was a decade ago. Investors are seeing quick gains, and those who had real estate in their investment portfolios during the stock market decline were able to hedge their overall losses because of the profits they made in real estate. While it's impossible to predict whether real estate will continue to increase in value, it's safe to say that people are turning to real estate as an investment opportunity more than ever.

Richard West Union Bank of California

Unfortunately, many of these investors learn everything they can about the real estate market before embarking on their first deal, but they fail to learn how real estate investments are financed. Without proper knowledge, some investors will never get funding for their deal no matter how lucrative the property might appear to be.

The most important thing to know is that financing a residential real estate investment property is not the same as financing a primary residence. When you finance a primary residence, you can put a smaller percentage down because the bank knows you're less likely to walk away from your home during financial difficulty. It's your home. You're more likely to do what you can to protect it first before anything else. However, this isn't the case with investment property. When financing investment property, banks typically require a 25 percent down payment because in bad times property values tend to drop and income properties are usually the first thing an investor will let go in a financial crisis. If you have 25 percent of your own money into the property, you're less likely to walk away from it, and if you do walk away from it, you give the lender a cushion if they have to foreclose on you. So when you're looking for investment property, calculate a 25 percent down payment as part of the overall cost when deciding what you can afford to spend.

Some investors tout the "nothing down" system of acquiring real estate. Yet, when you pay nothing down, the loan will cost you much more because you'll have to get it from an alternative lender and the interest rates charged will be much higher to offset the lending risk. You get what you pay for.

Another point to keep in mind is that banks typically use the appraised value or the purchase price, whichever is lower, to determine the value of a home and therefore calculate the down payment. So even if you buy a property way under its appraised value, the bank does not view the difference between the actual value of the property and the price paid for it as equity in the property. For example, if you pay $400,000 for a home appraised at $500,000, the bank does not count the $100,000 difference as equity in the home. The bank sees it as a $400,000 investment and will require you to pay a $100,000 down payment on it before giving you a loan for the property.

An interesting trend we're seeing now is that baby boomers are making investments with their grown children by buying homes as partners. The parents provide the down payment and the grown children use the home as their primary residence, allowing parents to make the investment with much less than 25 percent down. However, to qualify for owner-occupied financing, the person living in the home must be able to prove (through income tax returns, pay stubs and other means) that they can afford to pay 50 percent of the mortgage payment.

Let's say you have the 25 percent down payment for the investment property you want. What other factors are involved in getting a loan?

Credit. You have to have good credit and a good financial history. Banks look at a snapshot in time, which includes your income, expenses, rents for the area in which your investment is located, cash flow of the property, its condition and the type of property, such as whether it's a single-family detached home, a condominium, a duplex, triplex or fourplex. A property with more than four units is considered a commercial property and will require that you seek financing from a bank that makes commercial real estate loans. Single-family detached homes are the most desirable for banks to finance because they're in greater demand and therefore provide more security for a loan than most condominiums would. There is more risk associated with financing condominiums because they have a lot of issues, such as homeowners associations, tenant turnover and other factors. Duplexes, triplexes and fourplexes fall into neither single-family home or condominium category and are seen as unique unto themselves.

Location. Location, location, location is one of the biggest selling points agents and brokers use when marketing properties. Location is just as important when funding properties. Homes in desirable locations are much easier to rent, have lower vacancies, are easier to resell and increase in value more rapidly than those in less desirable locations.

Some real estate investors face a challenge getting a loan once they own multiple properties. When you own more than five or six investment properties, in certain cases it will lower your chances of qualifying for a 30-year fixed loan. This is because the bank won't be able to sell your loan to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) since these institutions won't buy a mortgage if the individual owns more than five or six rental properties. In some cases, investors can get around this by getting an adjustable loan, and if they have all other elements in place, such as good credit, a good track record with the bank, good income and a property in good condition and in a good location.

Many investors hold their properties in a trust, thinking it will help them get around the multiple property limitation mentioned above, but it doesn't. The bank still views the investment the same because the individual still owns the properties as the trustor of the trust.

Finally, the most important step you can take toward your real estate investing is to establish a relationship and track record with a bank. Start by buying a property that complies with all of the bank's policies and make sure you have the financial wherewithal to make the payments. Make the payments on time, maintain a good credit profile, put 25 percent down, and within a couple of years, you will have established a relationship with a bank. All you have to do is start by applying for the loan, which can be done via the Internet, phone or in person at a bank branch.

West is senior vice president and division manager of residential lending for Union Bank of California. A San Diego resident for more than 30 years and a mortgage banker his entire career, West is an expert on the local real estate banking industry. He can be reached at (858) 496-6804 or richard.west@uboc.com.