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Financing Your Nashville Investment Property: Options and Strategies

Lee Blackburn

As you plan your strategy around investing in a Nashville property, you’ll have to decide how you’re planning to pay for that investment. Maybe you’re paying in cash. Probably not, but maybe. If you’re like most investors, you’re planning to finance this property. And to do that, you’ll need a plan. Will you take out a conventional mortgage or do something different? 

Let’s take a look at some of the most common options and the smartest strategies. The best choice for you will depend on a number of factors, including what you’re buying, how your financial position feels currently, and whether you’re leveraging any of your existing properties to increase your portfolio. 

We’ll talk about what most of the investors we work with do, and we’ll also remind you about an important but nuanced financing tool: the 1031 exchange.

Let’s dive in and talk about financing.

How to Finance your Nashville Real Estate Investment 

Here are some of the most common ways that investors pay for their Nashville rental properties. 

• Traditional Mortgage Loans

When it comes to investing in real estate, a traditional or conventional loan is one of the most common options available. These loans are typically offered by banks and other financial institutions. Traditional loans require you to have a good credit score and verifiable income as well as an acceptable debt to income ratio. These 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 beginning to come down from historically high levels. If you have avoided the conventional loan because of the cost, you might find that this option is opening up for you again. 

• 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. The process will move faster, allowing you to be a more competitive buyer.

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. You’ll also be expected to pay them back sooner, so only consider a hard money loan if you’re planning to refinance or sell before the end of the loan term.

• 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 offers some protection against default.

If you’re a veteran with VA benefits, the VA loan will work the same way. You do have to live in one of the units, but there’s more good news: a lot of VA loans require no down payment at all. 

• 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.

Leveraging your Home Equity

Think about the property you already own and whether you can tap into the equity or leverage its value to fund the purchase of your next Nashville investment. 

A home equity loan or a home equity line of credit are the two most common vehicles for investors who choose this method of financing for their acquisition. A home equity loan offers you a lump sum of money that’s borrowed with an interest rate that is fixed but tends to be higher than the interest rate you’d get with a line of credit. A home equity line of credit (HELOC) provides you with only the cash that you need, and while the interest rate you get is likely to be lower, it can also fluctuate. The cost of your line of credit won’t be fixed.

Which is better when you are buying an investment property? It really depends. You’ll be able to get all the money you need at once with a home equity loan, but the HELOC gives you more flexibility when it comes to repayment and typically a lower interest rate.

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 Nashville. 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. 

There are several ways to do this, and as your Nashville property management resource, we’re always happy to help you uncover financing options. Please contact us at Omni Realtors & Property Management and we’ll talk about it.