Many popular television shows depict real estate investing as a simple way to make guaranteed profits. However, these shows often fail to reveal the challenges and difficulties that investors face behind the scenes when acquiring and renovating properties.
If you are new to real estate investment property buying, use these three smart financing strategies for an investment property in MO to reduce your stress and improve chances of profitability.
3 Smart Financing Strategies for an Investment Property in MO
1. Consider Financing That Includes Rehab Costs
Many investment properties in Kansas City require renovations. Whether you plan to rent out the property or resell it, there are usually necessary improvements to be made. Severe cases may even call for a full renovation from the ground up.
When investing in real estate in Kansas City, factor in all costs of rehab into your budget. If the cost is considerable, consider including a contractor’s estimate for the cost of remodeling the property. Look for a mortgage lender in Kansas City that funds loans covering construction costs. There are smaller, niche-specific lenders that specialize in this type of financing. Additionally, explore FHA lending programs that incorporate construction costs into a single, comprehensive loan package.
Securing funding to cover these costs not only provides the necessary funds for property repairs but also consolidates the entire loan into a single note. This approach typically results in lower interest rates and more manageable payments. It’s always advantageous to have your own cash on hand whenever possible.
2. Make a Large Down Payment
While it may seem tempting, new investors should be cautious about the misconception of purchasing a property with 0 to 5 percent down. Although some lenders might offer financing under these conditions, the interest rates are usually elevated and limited to seasoned investors with established track records and additional assets to secure the property.
Lenders perceive investment properties as the primary assets that individuals are likely to liquidate in times of financial difficulty. In essence, if you were to encounter significant financial challenges, you would probably prioritize making payments on your primary residence while potentially delaying payments on investment properties. Consequently, investment properties carry a higher risk of foreclosure, underscoring the importance of providing a down payment of 20 percent or more.
Most financial institutions mandate a minimum down payment of 20 percent for investment properties. Moreover, the higher the down payment you can afford, the more favorable your interest rates and loan terms will be. It is essential to ensure that you have sufficient cash reserves to safeguard your personal finances and to cover any necessary expenses for preparing the property for rental or sale.
Experienced investors frequently leverage a home equity line of credit on their primary residence to secure a substantial down payment. Subsequently, they refinance the equity line on the new property to settle their personal HELOC. This strategic use of leverage debt is a popular tactic within the real estate investing community.
3. Ask for Owner Financing
Owner financing is an investment strategy that is often overlooked. With loans widely advertised by financial institutions, it has become standard practice for buyers to secure financing through them. However, historically owners often financed property sales.
You may discover excellent investment properties with owners open to financing the transaction. Owner financing can be a very viable option when the property owner has no mortgage, is looking to downsize, or has inherited the property.
When considering real estate investments in Kansas City, it is always wise to inquire if the owner is open to financing options. Owner financing typically involves a short-term loan with a reasonable down payment and monthly payments over a set period. Securing such deals can be challenging but highly rewarding in the long run.