Real Estate

Can Renovation Loans Replace Hard Money Loans For Investors?

As the most House flippers or BRRR Landlords will tell you, Paying for hard moneyWith high interest rates and points on top – a project can take a huge chunk of profit. For landlords, additional costs include making monthly payments and refinancing into a regular mortgage, further reducing the bottom line.

This is usually a major pain and a reason why many flippers and landlords stay on the sidelines or prefer to find private lenders, long-term financing once the deal is sold or after a rehab. Content to receive payment if received.

Many landlords don’t realize that there are alternatives to hard money. For years, primary home owners have used land construction financing Construction to Permanent Loans. These finance the construction of a new home, then convert to a regular mortgage upon completion. They require only one stop with a draw per round during construction.

The same holds true for investors.

How Renovation Loans Work for Investors

The loan structure for a renovation loan is similar to a construction loan or FHA 203(k) Loan For owner occupied residences. With such loans there are usually certain criteria that need to be followed.

80% LTV after repair value (ARV) value

This is a fairly standard lending criteria. The amount you can borrow is based on 80% of the value of the subject property after improvements. Some lenders require more skin in the game.

Renovations should add substantial value.

You’ve probably heard the phrase “lipstick on a pig.” Basic cosmetic upgrades probably won’t qualify for an investor renovation loan, because they don’t add significantly to the property’s value. The lender will need a detailed scope of work to see how the construction will add value to the property to meet their loan criteria.

Exterior additions such as an above ground pool will not increase the value of the home. However, essential improvements such as new plumbing and electrical, roofing, and kitchen and bathroom upgrades will be counted.

Single and multi-unit buildings are eligible.

Renovation or rehabilitation loans are fine for both single-unit, multi-unit, and mixed-use investments, with loan criteria based on credit score and ARV values.

With Terence Young, a mortgage broker eFunderhas secured many such renovation loans for its investor clients. He told BiggerPockets:

“Most people are under the impression that if you’re an investor, the only option open to you is hard money. That’s not the case. Generally, you have to pay a lot to get a renovation loan. Creditors have to go out.”

“A lot of my deals come through community banks. They have special loan products that will benefit the neighborhood in the long run. Often, they want to know that you will keep the property as an investment and Don’t just want to flip. They want to see skin in the game. [a] 20% or more down payment. You get a mortgage that includes construction and long-term financing with a prime +1 interest rate, which can’t be beat with hard money.

How to Use a 203(k) Loan for Investment Property

A 203(k) loan is basically a construction loan, but technically it’s only available for primary residences. However, many investors also use them strategically. If you buy a two- to four-unit building and say you plan to live in one of the units for at least 12 months, you can renovate the entire building with a 203(k) loan. .

After 12 months of project completion, you can move out of the unit you were living in and rent it out, thereby increasing your cash flow to fund your investment.

The benefit of using a 203(k) loan to invest

Since the building is being used as a primary residence, you will benefit from lower interest rates and a lower credit score requirement than an investment property. While there are Instructions How often can you get an FHA mortgage using this strategy—whether with a follow-up 203(k) loan or a renovation loan—ideal for new investors looking to build their investment portfolio? . As long as they don’t mind moving year-to-year, they can reap the rewards of one closing, forgoing mortgage or rental costs, because their tenants’ rent payments benefit from building equity and depreciation. Covers it while lifting.

Will Renovation Loans Replace Hard Money?

Both hard money and renovation loans have their place, Young believes. He adds:

“None of the banks I deal with for renovation loans allow them to be used for fix-and-flips. They are for landlords who want to hold the property for the long term. A And the factor is speed. If you need to close quickly, you don’t want to go through the hoops that a renovation will throw you through, which is like qualifying for a regular mortgage with additional criteria. ”

“I get my investor’s hard money in seven to 10 days. A renovation loan can take 45 to 60 days. In real estate investing, time is money. Besides, everyone is renovating.” “I’m not familiar with home improvement loans because they’re very niche and often offered by community banks, so they’re not usually out there as a mainstream loan product.”

Final thoughts

If you plan to buy and own the property and are not in a rush to close, looking for renovation loan products instead of borrowing hard money and refinancing can be a less expensive way to finance the deal. However, if you want to fix and flip or BRRRR with immediate closing, there are better ways to go about things than using a renovation loan because of the time and paperwork involved.

Ultimately, no one size fits all. You will need to tailor your loan product to your investment plan.

It is also worth noting that, in times of high interest rates, real estate Financing has become more difficultSpecially commercial Buildings (five dwelling units or more). Borrowing hard money and hoping to refinance into a conventional loan can be risky. It may be easier to get long-term financing from the start of a project and not stress about refinancing until rates are low.

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Note via BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.

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