Whenever I tell people that I buy, rehab, and sell distressed properties for a living, the first question out of their mouth is about how I get the cash. My answer: easily. There’s no question investing in real estate is capital intensive, but that doesn’t mean it has to be out of your reach.
But, I can relate to their concerns. I began thinking about investing in distressed real estate several years ago but quickly brushed off the idea. I didn’t have a ton of money sitting in the bank or an inheritance waiting in the wings. How was I going to come up with the cash to purchase a property let alone renovate it?
A chance conversation in a deli a few months later changed everything. Waiting in line, I met Tim, who happened to be a real estate investor. I told Tim it was always a dream of mine but I lacked the cash to purchase a house and rehab it. He looked surprised and asked, “Why don’t you borrow the money?” A simple question—one that, surprisingly, never dawned on me but that kick-started my real estate investing career.
Now that I’m a seasoned professional real estate investor, when folks ask me about choosing a renovation loan for investment property, I tell them there are lots of options. I also warn them that not every borrowing option is going to make sense for them.
Types of Renovation Loans for Investment Property
When it comes to raising the capital for investment properties there are a lot of borrowing options available. They run the gambit from government-backed lenders to private companies that have money to lend. Understanding the details and fine print of each type will help you make an informed decision. Here’s the rundown of what you can generally expect.
A first stop when choosing a renovation loan for investment property is often the FHA 203(K) loan. It’s one loan that covers the purchase and renovations, which means it’s easy to pay each month and requires less accounting. You can even put down as little as 3.5%. That makes it a pretty low barrier of entry for new investors who may not have the cash on hand yet to bankroll the purchase.
But there are limitations to using an FHA 203(K) loan for buying a house to renovate and sell. First, you only have six months to complete the renovations. That’s a short amount of time, particularly for someone with little or no rehabbing experience. Finding a mortgage broker well versed in 203(K) loans can also be challenging because not many lenders even offer it. This loan is also generally geared toward people who plan to take up residence as the FHA requires you to live in the home for at least 12 months. That is simply too long to wait to purchase your next property.
Fannie Mae HomeStyle Renovation Loan
The Fannie Mae Homestyle Renovation loan gives you more flexibility but the downpayment is higher than the 203(K) loan at 5%. You can borrow as much as 85% of the value of the home after you make the necessary fixes, or the after repair value (ARV). There are no limits on what type of renovations you can do. And, depending on the loan-to-value of your investment property, you might not even have to carry mortgage insurance.
This loan sounds great on paper but there’s one big drawback. No matter how handy or well-versed in project management you are, there’s a ton of oversight. All renovations have to be completed by approved contractors, who may have to show the lender the plans in advance of the work beginning. And, once the renovation is complete, an appraisal is ordered before the contractors get paid. This may be too many hoops for contractors to go through, limiting the pool of talent you can draw from.
If you have a retirement account, you might consider using your self-directed IRA to fund the purchase and renovations of an investment property. This type of retirement account allows you to direct money toward alternative investments, including real estate. If all goes well, this allows you to build your retirement and your business at the same time.
This is a reasonable funding strategy for very experienced real estate investors, but it is too risky for those without a lot of experience and confidence. The last thing you want to do is blow a good chunk of your retirement savings on a bad real estate deal.
Hard Money Loans
That leaves hard money loans, which are a popular way to go when choosing a renovation loan for investment property. Hard money loans are short-term, private loans that are secured by the value of the property. There’s a lot of reasons to like them. They are easy to apply for and approval time is quick. You can have the money in hand within days or weeks. Often, the terms of these loans can be negotiated including the interest rate, terms and how much you borrow. The lender cares about the deal more than anything else.
The thing about hard money loans is that they’re based on the investment property your buying and your investing experience. Lenders want to work with investors who have a successful track record buying and rehabbing properties. But, how do you get enough experience if you can’t get a hard money loan?
The answer: It’s easy—if you know what I do.
Getting Hard Money to Fund Your Investments Can Be Easy
Being caught up in a double-bind of needing both experience and hard money doesn’t have to hinder your dream of building a professional real estate investing business. You see, Tim told me something else on that day in the deli: As an independently owned and operated HomeVestors® franchisee, you can be set up with both.
When you become a HomeVestors® franchisee, you not only receive comprehensive one-week training and ongoing mentorship, but you also gain access to some of the best hard money lenders nationwide. If the deal is a good one, you can have these lenders actually competing to provide your business funding—with rates and terms that are often better than what they offer to other investors. Tim didn’t have to tell me this twice—I picked up the phone that very day and have been steadily growing my investment business since.
If you’re ready to build your professional real estate investing experience with top funding options available, request more information from HomeVestors® today.
Each franchise office is independently owned and operated.