{"id":170313,"date":"2024-04-08T10:23:52","date_gmt":"2024-04-08T16:23:52","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=170313"},"modified":"2024-07-04T03:59:42","modified_gmt":"2024-07-04T09:59:42","slug":"will-construction-loans-replace-hard-money-loans-for-investors","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/will-construction-loans-replace-hard-money-loans-for-investors","title":{"rendered":"Could Rehab Loans Replace Hard Money Loans for Investors?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC1997259504\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">As most&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/how-to-flip-houses\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">house flippers<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;or&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">BRRRR<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;landlords will tell you,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/real-estate-companies\/hard-money-lenders\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">paying for hard money<\/span><\/a><span data-preserver-spaces=\"true\">\u2014with high interest rates and points tacked on top\u2014can take huge chunks of profit out of a project. For landlords, extra expenses are involved in making monthly payments and paying to refinance into a regular mortgage, further eroding the bottom line.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It&#8217;s generally a big pain and a reason many would-be-flippers and landlords stay on the sidelines or prefer to find private lenders, content to get paid once a deal sells or secures long-term financing post-rehab.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many landlords don&#8217;t realize there are alternatives to hard money. For years, primary homeowners financing ground-up construction have used&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bankrate.com\/mortgages\/construction-to-permanent-loans\/#how-it-works\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">construction-to-permanent loans<\/span><\/a><span data-preserver-spaces=\"true\">. These finance the construction of a new house, then convert to a regular mortgage on completion. They only require one closing, with draws made at each period during the construction.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The same thing exists for investors.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How Rehab Loans for Investors Work<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The loan structure for a rehab loan is similar to a construction loan or&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/fha-203k-loan\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">FHA 203(k) loan<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for owner-occupied residences. There are generally specific criteria that need to be adhered to with such loans.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">80% LTV after-repair value (ARV) price<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is fairly standard lending criteria. The amount you can borrow is based on 80% of the subject property&#8217;s value after improvements are made. Some lenders require more skin in the game.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Renovations must substantially add value<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">You&#8217;ve probably heard the phrase &#8220;lipstick on a pig.&#8221; Basic cosmetic upgrades probably wouldn&#8217;t qualify for an investor rehab loan, as they do not substantially increase the property\u2019s value. The lender would require a detailed work scope to see how the construction would increase the property&#8217;s value to meet their loan criteria.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Exterior additions such as an above-ground pool would not increase a home\u2019s value. However, essential improvements such as new plumbing and electrical, roofing, and kitchen and bathroom upgrades would count.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Single and multiunit buildings qualify&nbsp;<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Renovation or rehab loans are fine for both single-unit, multiunit, and mixed-use investments, with loan criteria based on credit score and ARV values.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Terence Young, a mortgage broker with&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/efundercapital.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">eFunder<\/span><\/a><span data-preserver-spaces=\"true\">, has secured many such renovation loans for his investor clients. He told BiggerPockets:<\/span><\/p>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">&#8220;Most people are under the impression that if you&#8217;re an investor, the only option open to you is hard money. That&#8217;s not the case. Usually, you have to go outside the big lenders to get a renovation loan.\u201d&nbsp;<\/span><\/em><\/p>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">\u201cMany of my deals come through community banks. They have specialized loan products that will benefit the neighborhood in the long term. Often, they want to know that you&#8217;ll keep the property as an investment and are not simply looking to do a flip. They want to see skin in the game\u2014so [a] 20% or more down payment. You get one mortgage that covers the construction and long-term financing with an interest rate of Prime +1, which can&#8217;t be beat compared to hard money.\u201d<\/span><\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How to Use a 203(k) Loan for an Investment Property<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A 203(k) loan is the original all-in-one construction loan, but technically it is only available for primary residences. However, many investors also use them strategically. If you buy a two- to four-unit building and state you plan to live in one of the units for a minimum of 12 months, you can renovate the entire building using a 203(k) loan.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">After 12 months from the completion of the project, you can move out and rent the unit you were living in, thus increasing your cash flow to fund your investment.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Advantage of Using a 203(k) Loan for an Investment<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Because the building is being used as a primary residence, you&#8217;ll benefit from lower interest rates and a lower credit score requirement than an investment property. While there are&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.lendingtree.com\/home\/fha\/multiple-fha-loans\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">guidelines<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;regarding the number of times you can get an FHA mortgage, using this strategy\u2014whether consecutively with a 203(k) loan or a renovation loan\u2014is ideal for newer investors looking to build their investment portfolio. As long as they don&#8217;t mind moving from year to year, they can reap the rewards of a single closing while forgoing the expense of a mortgage or rent, as their tenants\u2019 rent payments cover it while building equity and benefiting from depreciation.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Will Renovation Loans Take the Place of Hard Money?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Young believes hard money and renovation loans both have their place. He adds:&nbsp;<\/span><\/p>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">&#8220;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 long-term. Another factor is speed. If you need to close quickly, you do not want to go through the hoops that a renovation will put you through, which is like qualifying for a regular mortgage with additional criteria.\u201d&nbsp;<\/span><\/em><\/p>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">\u201cI get my investor&#8217;s hard money in as little as seven to 10 days. A renovation loan can take 45 to 60 days. In real estate investing, time is money. Also, not everyone is aware of renovation loans because they tend to be very place-specific and are often offered by community banks, so they are not generally out there as mainstream loan products.\u201d<\/span><\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you intend to buy and hold property and are not in a rush to close, searching out a renovation loan product instead of borrowing hard money and refinancing could be a less expensive way of financing the deal. However, if you are looking to fix and flip or BRRRR with a quick closing, there are better ways to go about things than using a renovation loan because of the time and paperwork involved.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Ultimately, there&#8217;s no one size fits all. You&#8217;ll need to customize your loan product to suit your investment project.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It\u2019s also worth noting that, in times of high interest rates, real estate&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/real-estate\/commercial\/the-money-has-stopped-flowing-in-commercial-real-estate-43c003d3\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">financing has become more difficult<\/span><\/a><span data-preserver-spaces=\"true\">, especially for&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-fundamentals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">commercial<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;buildings (five residential units or more). Borrowing hard money and hoping to refinance into a conventional loan could be risky. Securing long-term financing from the start of a project and not having the stress of refinancing could be an easier way to go until rates drop.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_9b4ecb7a77644420475e9321d6a76d0d\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_010df6ff85f4dc97141b21db32a702b8\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_52481f3ab48fe870b9351eed7c62e371 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/will-construction-loans-replace-hard-money-loans-for-investors&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/will-construction-loans-replace-hard-money-loans-for-investors&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>As most&nbsp;house flippers&nbsp;or&nbsp;BRRRR&nbsp;landlords will tell you,&nbsp;paying for hard money\u2014with high interest rates and points tacked on top\u2014can take huge chunks of profit out of a project. For landlords, extra expenses [&hellip;]<\/p>\n","protected":false},"author":613725,"featured_media":170316,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8,7119],"tags":[],"class_list":["post-170313","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/170313","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613725"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=170313"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/170313\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/170316"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=170313"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=170313"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=170313"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}