The Silvano Group

What we are talking about is financing for an investment property that needs rehabilitation (a rehab, a foreclosure, a handyman special, a renovation project, a fixer-upper, a condemned home, etc.). We will review how an investor can purchase and rehab a property using various financing methods.

Before we discuss the different ways to finance investment properties and the pros/cons of each method, we will need to review some of the factors to consider when investing in rehab properties. More often than not, there will be competition when making an offer. Often times, the sellers will be banks looking to sell off their portfolio of foreclosures in order to rid their balance sheets of non-performing assets. Sellers not only want the highest offer to maximize their profit, the seller wants to be certain the buyers financing is solid. We all know that a pre-approval letter isn’t always worth the paper it is written on. However, when the buyer knows their financing is solid they can be bold enough to make their earnest money deposit non-refundable. This alone shows the seller that you or your client you are a professional buyer and that your offer is real (this is the best pre-approval I know of). Often times, this is the difference in a competitive offer scenario.

Let’s now turn to the many ways to finance rehabs. This financing should include funds for acquisition of the property, renovation costs, and closing costs. Some of these methods will not surprise you but you will have clarity as to the best financing method upon conclusion.

1. CASH: Cash is king but only if you have it. It’s that simple. Cash helps on offers because you do not need a pre-approval letter, however, you should be prepared to provide proof of funds. The negative side of using cash is that you are tying up your personal assets until the property is sold or refinanced.

1. LINE of CREDIT: If you already own real estate with substantial equity than this is the next best thing to cash. Be prepared to show proof of your line of credit when requested by seller.

1. A PARTNER: You may have a partner who has cash – other people’s money (OPM) at it’s finest. The down side is that you have to split the profits and probably do most of the work. This has the potential of a marriage a 50/50 chance for divorce. In addition, you do not have the security of knowing the funds will be available since the funds are not yours. Partners often times will get cold feet prior to closing and back out of the loan.
2. BANK FINANCING: Yes, there are loans available from banks for purchase rehab money only. Usually, these are local banks and it’s always good to have a relationship with a local banker especially as you move on to bigger and better projects. In order to qualify for this type of financing, you must have a good credit history, a good debt-to income ratio, and good tax returns for two years. The downside is that they will require tons of paperwork, the process will be long and drawn out, and lastly you will have to come up with at least 20% of the purchase and 100% of the renovation costs plus all of the closing costs. Not bad if you have money lying around, you are patient, like paperwork, and don’t mind making monthly payments on a vacant house. Like any real estate financing, the lender will limit you to a loan to value (LTV) but in this case it will be calculated off of the after repaired value (ARV) (LTV’s are rehab loans are usually 70-80% of the ARV). The will usually have a six month term on this type of loan which would also be the case in the following types of loans as well. Six months is plenty of time to renovate and sell or refinance the loan.

1. HARD MONEY: You can borrow 100% of your purchase, renovation and closing costs. These are great loans because they are “NO MONEY DOWN” loans. One of the best ways to use OPM. The downsides are that these local deep pockets individuals who will loan you this money are expensive!!! Expect to pay no less than 10 points (a 10% fee added to the loan principal) and no less than 15% interest. Not bad if you consider that it is a cost of doing business and in most cases this is not a concern because you found a motivated seller and you will still have some great equity left in the property. As with Banks there will be an LTV (loan to value) usually 65-75% of the subject to value. THE REAL DOWNSIDE to this type of loan is the monthly payments that will be required. These payments can be pretty steep especially when you consider that the property is vacant and no one is paying rent while you are renovating and marketing to sell or in the process of refinance. These lenders will give you between three to six month loan term. They charge high fees (typically an additional 5 points) for loan term extension. They are however more lenient than the local bank regarding paperwork and sometimes on the credit score minimum.

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