Best way to finance a rehab while owner occupying?

Question

What's the best way to finance a rehab? I am planning a house hacking strategy and I am specifically looking for properties that I can add value to (by adding a bedroom, bathroom, etc). The thing is that I do not want to use my own capital unless I really have to (capital is currently tied up in stocks, crypto, etc).

If I don't want to use my own cash to finance a rehab, what would be the best way of doing so? I've talked to a few people and they stated that I can get a traditional rehab loan (as an owner occupy) for around 5-10% interest (based on risk). In addition, I've heard of people using credit cards where there's no interest if it's paid back in a year or something like that.

Here's my thought process. Let's say I close a property for 100k and it needs 20k worth of repairs done. Can't I just take a bank loan for 20k with like 10% interest or something pretty easily? And after I finish the rehab, let's say the property is worth 150k. Can't I just refinance the property, pay off my debt of 20k plus interest, and have around 30k cash on hand?

Does that work? Is this a good way of financing a rehab? Or are there better ways that I have not thought of?

Brandon Dumbuya · Answer

@Jimmy Lieu

You may also be able to use a Fannie Mae HomeStyle renovation loan and put down 5% without the need to occupy the property. The down payment increases significantly if the property is more than one unit though. The interest rate I got was below 5%. Your renovation allowance would be the difference in appraised ARV and your all-in cost.

Jimmy Lieu · Answer

Hi, I was told that 203k loans come with a lot of additional closing costs so it's similar to getting a hard money loan. Would you say so as well too? Basically, I know that for a 203k loan, you need to know the rehabbing costs ahead of time and there's a lot more paperwork involved for all parties.

Philip Ganz · Answer

@Jimmy Lieu The FHA 203k loan is superior to the Fannie Mae HomeStle for single and multis because

1) You can go to 110% with FHA 203k of the ARV vs 95% of Homestyle

2) You only need 3.5% down payment versus 5.0% down payment

3) a HUD inspector is involved upfront helping you make better decisions

Stephanie P. · Answer

@Jimmy Lieu

You can go up to 110% of the value with a 203K loan.  Most conventional lenders, if you're going for a 2nd mortgage, would only go to 90% max (I would think).  The days of the 125% 2nds are way behind us.  Thanks @David M. for the assist on the explanation.:)  I guess I wasn't clear.

David M. · Answer

@Stephanie P.

Hey no problem!  Your explanation was clear, but I think Jimmy Lieu needs to get his head wrapped around how real estate loans are structured.  We know they don't work like a credit card...  :)

David M. · Answer

@Jimmy Lieu

I don't think you are understanding.  A second loan would mean a second lien.  Its riskier for the lender and thus higher interest rate and tougher to get.  Furthermore, you'd be paying for another loan as in fee to lender (they have to make money somehow) and another closing, for example.  Also, why would they lend you another $20k on the property?  Did you buy that much under the market that there is that much equity left to be loaned out (when considering LTV)?  Conventional loans aren't going to consider a future apraissed value.

Jacob Trogan · Answer

I think I responded to you on another thread and even though this thread is old I found this comment funny... haha it aged poorly we love those interest rates

Matt Nico · Answer

@Jimmy Lieu

I have used a 0% APR credit card for rehabbing. I bought a house with an owner occupied 5% conventional. Moved into it, used the credit card for rehab. A year and a half later i gained 50k in equity, paid my card off, generating cashflow, and the PMI should drop off within another year.

Just be strategic about it. You probably have options if you are savvy enough to think of something creative.

Happy Housing,

Matt

Jimmy Lieu · Answer

Hi David,

Oh, that was exactly the explanation I was looking for. That makes complete sense. :)

Jimmy Lieu · Answer

Thank you for your reply Stephanie. Just a quick question, but can't I just get a separate loan? After I close the property, can't I just get a completely separate loan specifically for a rehab? After I have closed the property with conventional financing and let's say I want 20k for rehabbing after close, can't I go to a lender or bank or portfolio lender who can give me a loan for my rehab project? And after the rehab project, get the property appraised and do a refinance and pay off the loan?

Would it me smart for me to do a separate new loan for rehabbing? Or are you saying a 203k loan or home style loan is definitely the way better option?

Best way to finance a rehab while owner occupying?

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