As you begin to think about your investments and how to buy a property for the first time or grow an existing portfolio, you need a grasp on how you’ll finance those acquisitions.
The right financing is crucial for success. Understanding how to finance an investment property can make or break your investment venture. You also need to know if you’re financially ready to invest. The real estate market in Jackson, Mississippi offers investors some relatively affordable options. But, you have to factor in more than the sales price. You’ll also need a budget for renovations that may be necessary in order to prepare the property for the rental market. You’ll have to pay for ongoing maintenance and repairs and upgrades. There will be marketing costs and property insurance and potential HOA fees. You’ll have to pay for professional services such as Jackson property management.
Let’s explore some of the best financing options available for investment properties and how to know you’re ready to spend the money on a rental property in Jackson.
How to Know You’re Ready (Financially) to Invest
As local real estate and property management professionals, we have seen a lot of investors succeed because they’re prepared financially. They understand the Jackson real estate market, and they understand which properties fit their investment goals. They’re also willing to ask from help from professionals like us.
We’ve also seen investors fail because they lack investment goals or direction, they try to do everything on their own, and they make impulsive decisions that aren’t based on facts or experience. There is an especially high failure rate when investors are not prepared for the money that’s required not only to buy a rental investment but to maintain it and improve it.
Here are some of the indicators that will tell us (and you) that you’re financially prepared to invest in a rental property.
- You Have a Well-Documented Budget
Even if you’re not financially ready to invest, it’s a good idea to absorb the information in this blog because it takes time to prepare yourself financially. Financial goals actually need to be set and achieved several years before you buy an investment property.
Put together a budget for what you’re able to spend on the initial acquisition and what you expect to spend going forward. Make sure you’re taking rising costs and inflation into account as you budget. This is the only way to be fully prepared financially for an investment. Interest rates rise and home buying becomes more expensive, and your budget needs to reflect that year after year.
Remember, too, that the way you finance your investment impacts your cash flow and your ROI. In some cases, using the leverage of someone else’s cash can help you earn more on your investment.
Unless you’re paying in cash, you’ll need a loan. We’re going to talk about the different types of loans available to you, but on a high level, you probably know what those lenders will look for financial stability when deciding whether or not to offer a loan. They’ll want to see your income, your assets, and your debts. They may request tax returns. Be prepared.
You cannot buy a large investment like a rental property in Jackson without a solid financial footing. If you know you’re going to buy the property by borrowing money but you don’t have enough for a down payment, keep saving. You’re not financially ready yet.
If you’ve developed a wealth strategy, set and achieved financial goals, and managed to save some money to support your investment career, you’re financially ready to explore investing in real estate.
Ways to Finance Your Jackson Real Estate Investment
Here are some of the most common ways that investors pay for their properties.
- Traditional Mortgage Loans
When it comes to investing in real estate, traditional loans are one of the most common options available. These loans are typically offered by banks and other financial institutions. Traditional loans require a good credit score and may take a long time to process, but they offer lower interest rates and long repayment terms. They are ideal if you are planning to hold onto the investment property for a longer period.
Right now, interest rates are historically high. This should not preclude you from getting a traditional loan, it’s simply something to be aware of as you shop around for the best rates and evaluate your own creditworthiness.
- Hard Money Loans
Hard money loans are a popular financing option for real estate investors, especially those who need quick cash to take advantage of a good investment opportunity. Hard money lenders are private investors who lend their own money and typically have a less stringent approval process than banks and traditional lenders.
You do need to understand, however, that hard money loans will often come with higher interest rates and points than traditional loans, so they should be used judiciously.
- Portfolio Loans
A portfolio loan is a kind of mortgage that a lender originates and retains instead of selling on the secondary mortgage market. They remain within the lender’s portfolio. Usually, these are more flexible than traditional loans. They can provide a range of financing options, including lines of credit, refinancing, and cash-out refinancing. Portfolio loans are ideal for investors with multiple properties who want to streamline their financing and payment processes.
- FHA Loans
Federal Housing Administration or FHA loans are designed for investors who will buy a multi-unit property (up to four units) while living in one of the units. If this sounds like your investment strategy, you’re in luck: FHA loans require a lower down payment (as low as 3.5 percent), consider borrowers with lower credit scores, and offer better interest rates. These loans also come with mortgage insurance, which can increase the monthly payments but offer some protection against default.
- Seller Financing:
Seller financing is a great option if you can’t get a loan from a traditional lender or need more flexible repayment terms. In this option, the seller agrees to finance the purchase directly. The terms of the loan, including interest rates and repayment terms, are negotiated between the buyer and the seller. However, not all sellers are willing to offer seller financing, and it may come with higher interest rates and stricter repayment terms than traditional loans.
Creative Financing for Investors Who Own a Property Already: The 1031 Exchange
You can also finance an acquisition by selling an existing property. Instead of cashing out of the rental property you’re selling, you can re-invest those proceeds into another property. This can make sense for a lot of different investors, but there are strict timelines and requirements.
Let’s say you want to buy a single-family rental property in Jackson. Maybe you own a duplex that hasn’t been bringing in the rents you expected. Or, the maintenance costs are recurring and rising. You can sell that duplex and use the money that you earn from the sale to finance the purchase of a single-family home. This allows you to buy what you want without getting approved for a new loan. If you’re building a portfolio and you have several income-producing properties in it, your options are even wider. An additional benefit is that you defer the taxes you might have been responsible for on the sale of the initial property.
Pro Tip: Make Sure You Have Adequate Cash on Hand
However you decide to finance your investment, it’s important that you have some cash available leading up to, during, and even after the deal closes.
When you’re getting a mortgage through a traditional bank or lender, don’t expect to get 100 percent financing. Those days are long gone, you’ll need cash upfront for the down payment. The amount will depend on a number of things, including the property that you’re buying, your own credit history, and the strength of the economy at the time you apply for the loan. Typically, banks will want to see more than 20 percent down for an investment property.
You’ll need cash for inspections, closing costs, and all the cleaning and remodeling that you’ll likely do once you have the property and prepare to rent it out. This is easy to forget in your budget.
While we’d encourage you to be creative if you don’t have the money immediately available for that large down payment, don’t set up ways for you to fail. For example, you can move retirement funds into a self-directed IRA if you want to buy a property and you don’t want to take on a lot of expensive debt. But, how much is in your retirement account? Are you willing to shift all or most of it into an investment property? Talk to some lenders and mortgage brokers. Include your CPA.
Financing is an essential part of real estate investing, and choosing the right option can mean the difference between success and failure. Consider the options available, and explore the benefits and drawbacks of each. Remember to work with a qualified lender who can help you make the best decision for your investment strategy. Talk to a property manager, too. We’d be happy to help. Contact us at Lucroy Residential if you need any help investing in Jackson, Mississippi.
