Renovation Loan Options

Rental Property Investor · Honolulu, HI · Member since 2020 · 1 post · 1 vote

Hi BP Friends,

My question is, what are our renovation loan options? What has worked for you?

A little background:

My husband and I are looking for our first house-hack on the island of Oahu. The market moves quick here and many of the homes are outfitted to be multigenerational, which leads to great potential for turning a large home into multiple units.

We are both active duty military and asked both our lender and a mentor of ours about the VA Reno loan, but were advised that there isn't very much flexibility if we were to take that path.

Looking forward to your input and any additional advice you may have,

Casandra

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Paul Welden

Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes

Your most common renovation loan options are:

FHA 203k
Fannie Mae Homestyle
Freddie Mac ChoiceRenovation
VA Renovation (VA temporarily suspended this in March 2020 until further notice)

When house hacking, a good tip to remember if you want to sell it within a few years is to occupy the property as your primary residence for 2 years during any 5yr period which should qualify you to get the profits TAX FREE from the sale (check with your CPA & IRS for tax advice). Of course you could probably 1031 it if it's an investment to defer your taxes.

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David Pere
Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
6y
@Casandra Espenschied the biggest issue is that the VA renovation loan got paused with everything going on. There are some really cool options with it though when you can use it!
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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Casandra Espenschied even if the Renovation can't work out for you guys, you should still go ahead with a house hack. There is not better way to house hack than using the VA loan!
Best of luck!
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Dave S.
Rental Property Investor · TX · Member since 2020 · 12 posts · 3 votes
6y
We did a 203k renovation loan. It worked great, but you need to find the right contractor. Our guy was experienced in the VA loans and 203k. So the contractor doesn't get paid until the job(s) is done, so he needs to have deep pockets to cover the materials and labor until the job is signed off. If he runs a good business he'll have the tens of thousands of dollars to cover the running costs until the bank pays him. If not, you're going to have problems. Whoever you hire needs to know and fully understand this concept upfront. Hope that helps...
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Paul Welden
Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
6y
Your most common renovation loan options are:
- FHA 203k
- Fannie Mae Homestyle
- Freddie Mac ChoiceRenovation
- VA Renovation (VA temporarily suspended this in March 2020 until further notice)
When house hacking, a good tip to remember if you want to sell it within a few years is to occupy the property as your primary residence for 2 years during any 5yr period which should qualify you to get the profits TAX FREE from the sale (check with your CPA & IRS for tax advice). Of course you could probably 1031 it if it's an investment to defer your taxes.
4 Reply
Brandon Dumbuya
Atlanta, GA · Member since 2018 · 32 posts · 21 votes
6y
@Casandra Espenschied

I'm set to close on my first house hack next week and I'm using a HomeStyle loan like @Paul Welden mentioned.
It works well for what I'm doing: SFH with a detached guest house.
Because it's still single family, I can get up to 95% LTV and the rehab budget is more or less the difference between the appraisal value and purchase price. The max LTV does drop for multiple units so I'm not sure if this will work for what you're trying to do. There's also no requirement to occupy the property.

More info here: https://www.fanniemae.com/HomeStyle/lender/index.html

Note: If you use a renovation loan, either you or someone on your team needs to be very familiar with the loan product and be able to communicate well. There's a nontrivial amount of additional work/documentation involved in the process as opposed to a conventional loan that you'll need to be aware of.
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Ryan Mapes
Lender · Austin, TX · Member since 2018 · 40 posts · 16 votes
2y
Once you have a few units under your belt, it's worth exploring revenue based financing (RBF) as a way to fund renovations or even a down payment on your next rental. With RBF, you trade a portion of your future rental income (on your existing properties) in exchange for cash upfront. It won't count as debt and typically works just fine even if you have an existing mortgage. It also doesn't require you to give up any equity (many private investors require this).
Happy to chat if you're interested in this route.
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Jay Chang
Developer · Los Angeles, CA · Member since 2017 · 151 posts · 84 votes
2y
Hey, congratulations on starting out into real estate investing. There are a few renovation loan options to consider.

The standard Home Equity Line of Credit (HELOC) is the first option. If you own a property or can borrow one from your parents, you can use the equity to fund your renovations. It's adaptable and typically has lower interest rates, but keep in mind that you're using your property as collateral, so there's some risk. Personal loans are another possibility. They do not require collateral because they are unsecured, however the interest rates may be higher.
In today's market, 8% is a reasonable rate for construction financing. The interest rate on most construction loans is P+1%. The prime rate is denoted by the letter P.

They're perfect for minor repairs or if you don't own a property yet. Another option is a 203(k) loan. These are specifically designed for home improvements and are FHA-insured. They may need more paperwork, but they can be an excellent option if you're trying to buy a fixer-upper. Finally, consider obtaining a construction loan. These are designed for home building or renovation. They are best suited for larger projects and have variable interest rates.
It is vital to comparison shop and compare rates and terms.
Remember that a competent team is crucial in the world of real estate investing. Best wishes, and good luck with your investments!
It is vital to comparison shop and compare rates and terms.
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