New to Real Estate · Cameron, NC · Member since 2023 · 10 posts · 3 votes
I am just a couple weeks into my REI journey and I am learning a lot! I am a bit confused on when it comes to the financing on BRRRR or fix and flips. How does one get the financing for the renovation costs? Is that factored into the initial loan when purchasing the house or is a separate construction loan or additional financing methods needed to cover the rehab costs? Thanks!
Rehab is either covered with cash or the loan product. Could be a construction loan or hard money. If you use a hard money loan or construction loan then you would refi into a longer term product
Rehab is either covered with cash or the loan product. Could be a construction loan or hard money. If you use a hard money loan or construction loan then you would refi into a longer term product
Most hard money lenders will ask if they are funding the rehab or if you are. They will want to see a very detailed scope of work filled out (usually on their form, and yes the form changes with every lender. not convenient!) The loan terms will vary depending on who funds the rehab, but not by much. Proof of funds is the biggest difference. If the lender funds the rehab, you will need to pay for the initial work to be completed. Then start a draw process. When you initiate a draw, the lender will typically send out a photographer to confirm the work you claimed is complete is actually completed. The draw amount will need to match up to the cost listed on the scope of work.
So you do junk hauling and lvp flooring. You pay the 10k upfront to get that work completed. floors must be installed, cannot just have materials purchased, then when work is verified you will receive a wire reimbursement for $10k. The trick is the draws cost money as well. So, the fewer the better.
It's a good question, and how the financing is structured for fix & flips & BRRRRs can be a bit confusing at first glance.
Let's use a fix and flip loan through a hard money lender as an example.
Typically, the hard money lender will finance both the purchase and renovation, however the purchase funds will be disbursed at closing (to actually buy the property) and the renovation funds are typically disbursed on a reimbursement basis.
What this means is that you typically need to front the first portion of the renovation costs, then you request an inspection, an inspector comes out, looks at the work that was done, sends a report back to the lender, and the lender disburses the funds.
So, the financing is typically structured as one loan, however the timing of the disbursement of funds differs.