How do investors get loans for properties in poor conditions?

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Simmy AhluwaliaPro Member
Lender · Atlanta, GA · Member since 2015 · 1k+ posts · 200 votes
2y

Shivani, these are hard money, short term bridge loans allowing you to improve the property for either sale or rental.  Once the property is "sell or rent" ready, then you can refinance into long term debt if you plan to hold it.

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  • Brandon BeardtPro Member
    Lender · La Crescenta, CA · Member since 2021 · 261 posts · 157 votes
    2y
    Quote from @Account Closed:

    I’ve read countless times that residential lenders will only loan on properties in good conditions. How do investors get loans on value add deals? Are commercial loans more lenient? 


    Hi Shivani, from a lender's standpoint, most investors that look for value add deals gear towards bridge/fix and flip type loan programs. These programs are different from conventional/residential loans in that they give the investors the capital they need to help with the purchase and the rehab of the property. Once the renovation is done, they look into long term financing based on the new appraised value of the property, allowing them to recapitalize most if not all the money they put into the deal. Then they REPEAT the process. It's the BRRRR strategy at it's finest.

    [email protected]818-726-2418
    3Reply
  • Simmy AhluwaliaPro Member
    Lender · Atlanta, GA · Member since 2015 · 1k+ posts · 200 votes
    2y

    Shivani, these are hard money, short term bridge loans allowing you to improve the property for either sale or rental.  Once the property is "sell or rent" ready, then you can refinance into long term debt if you plan to hold it.

    3Reply
  • Curtis Roddy
    Member since 2022 · 5 posts · 2 votes
    2y

    Hi Shivani, I would suggest using a Hard Money lender for short-term financing and fix-up and then refinancing into a longer term loan (if you are holding). That way you get the loan at a higher ARV and lower rate.

    1Reply
  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    Yes absolutely . Can do a fix and flip loan with no income and no doc. What do some of the scenarios look like that you are working on ? 

    0Reply
  • Arthur Schwartz
    Investor · Baltimore, MD · Member since 2019 · 163 posts · 46 votes
    2y

    they get a hard money loan for the property; then they get a draw on a line of credit as they prove to the lender that each item has been rehabbed

    1Reply
  • Account Closed
    OP
    DFW · Member since 2020 · 62 posts · 27 votes
    2y
    Quote from @Simmy Ahluwalia:

    Shivani, these are hard money, short term bridge loans allowing you to improve the property for either sale or rental.  Once the property is "sell or rent" ready, then you can refinance into long term debt if you plan to hold it.

    Hello, Simmy 
    thank you for the advice! Also, I have read that lenders don’t like loaning on properties with liens. When refinancing, Would lenders have an issue with a hard money loan in place? 
    0Reply
  • Account Closed
    OP
    DFW · Member since 2020 · 62 posts · 27 votes
    2y
    Quote from @Jacob Sherman:

    Yes absolutely . Can do a fix and flip loan with no income and no doc. What do some of the scenarios look like that you are working on ? 

    Personally, I don’t have income but have cash. I’m trying to figure out a strategy for getting financing down the line for 5+ units that are in poor condition. 
    0Reply
  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y
    Quote from @Account Closed:
    Quote from @Jacob Sherman:

    Yes absolutely . Can do a fix and flip loan with no income and no doc. What do some of the scenarios look like that you are working on ? 

    Personally, I don’t have income but have cash. I’m trying to figure out a strategy for getting financing down the line for 5+ units that are in poor condition. 

     Can definitely do a commercial fix and flip loan with 30% down on the purchase and receive 100% of the construction 

    0Reply
  • Simmy AhluwaliaPro Member
    Lender · Atlanta, GA · Member since 2015 · 1k+ posts · 200 votes
    2y
    Quote from @Account Closed:
    Quote from @Simmy Ahluwalia:

    Shivani, these are hard money, short term bridge loans allowing you to improve the property for either sale or rental.  Once the property is "sell or rent" ready, then you can refinance into long term debt if you plan to hold it.

    Hello, Simmy 
    thank you for the advice! Also, I have read that lenders don’t like loaning on properties with liens. When refinancing, Would lenders have an issue with a hard money loan in place? 

     Shivani, correct.  Regardless of the type of loan/lender, they almost always need to be in 1st position.  So, if you use a hard money loan to purchase/reno, then you refinance out into long term debt, if you decide to hold.

    0Reply
  • Alex Hunt
    Lender · Member since 2022 · 441 posts · 134 votes
    2y

    Commercial loans are much more lenient than conventional and a lot less red tape. 
    DSCR loans for rent ready properties. Fix n flip loans for value add, then sell or refinance into DSCR.
    Happy to connect on fix n flips or DSCR! 

    1Reply
  • Jalen ScottBusiness Member
    Metro Detroit · Member since 2024 · 8 posts · 2 votes
    2y
    Quote from @Account Closed:

    I’ve read countless times that residential lenders will only loan on properties in good conditions. How do investors get loans on value add deals? Are commercial loans more lenient? 


     Underrated product is fannie mae homestyle/choiceRENO for residential 1-4 properties. Allows you to buy a house needing rehab and finance the cost of rehab into the loan.  Qualify like any other conventional loan but must be owner occupied.  5% down

    If you arent going to be occupying- the only real way is hard money/bridge loans and refinancing into a DSCR loan once rehab is complete

    [email protected]517-214-2952
    0Reply
  • John Otradovec
    Lender · Springfield, MO · Member since 2024 · 46 posts · 20 votes
    2y
    Quote from @Account Closed:

    I’ve read countless times that residential lenders will only loan on properties in good conditions. How do investors get loans on value add deals? Are commercial loans more lenient? 


    I am happy to help you but I have a lender that I use where clients pay $8k for a property and put 80k in it for $150k ARV so there are lots of options for value add. The main concern for you is just finding someone that knows how to get deals done and has a good track record. I have closed 2500 loans over 15+ years. Always happy to chat about a deal. Shoot me a message anytime.

    0Reply
  • Michael Braswell
    Lender · Atlanta, GA · Member since 2016 · 51 posts · 10 votes
    2y

    Apply for a hard money loan that allows you to purchase, rehab, and resell or rent the property. The interest rate and cost is higher than conventional loans but the requirements are less and the closing process is faster.  The loan will be in your business name and won't be reported to credit agencies, which is huge. No W-2s, pay stubs, or tax returns are required. 90% of underwriting is based on the property not the borrower.   Reply if you want more info on a hard money loan.

    2Reply
  • Mike Klarman
    Specialist · NJ · Member since 2022 · 1k+ posts · 649 votes
    2y

    There is a Loan product called a bridge loan with rehab.  It includes money toward acquisition and it includes rehab money held in escrow.

    A very common product for anyone flipping or doing the BRRRR method.

    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    2y

    Generally, when we've gotten loans from banks on properties in poor condition, it's after we have built a good relationship with them by getting loans on fixed up rentals. 

    But as it goes, you just bring to them the inspection, contractor bids, a scope of work and total price estimate and they will hold back the money for repairs in escrow. Then you can get it released as you finish the job (either after it's done or after passing certain benchmarks). So you send them the invoices and maybe pictures and the like and they will release more funds for the rehab. 

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    1Reply
  • Jalen ScottBusiness Member
    Metro Detroit · Member since 2024 · 8 posts · 2 votes
    2y

    Bridge Loans


    many people have commented on them-- all short term financing the idea is to get out of that loan within 6-12 months and have a completed home. That will allow you to refinance into a DSCR loan or more traditional financing

    [email protected]517-214-2952
    1Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    2y
    Quote from @Account Closed:

    I’ve read countless times that residential lenders will only loan on properties in good conditions. How do investors get loans on value add deals? Are commercial loans more lenient? 


     Most pay cash, HM PM, 

    0Reply
  • Dav Pohote
    Member since 2024 · 31 posts · 11 votes
    2y
    Quote from @Brandon Beardt:
    Quote from @Account Closed:

    I’ve read countless times that residential lenders will only loan on properties in good conditions. How do investors get loans on value add deals? Are commercial loans more lenient? 


    Hi Shivani, from a lender's standpoint, most investors that look for value add deals gear towards bridge/fix and flip type loan programs. These programs are different from conventional/residential loans in that they give the investors the capital they need to help with the purchase and the rehab of the property. Once the renovation is done, they look into long term financing based on the new appraised value of the property, allowing them to recapitalize most if not all the money they put into the deal. Then they REPEAT the process. It's the BRRRR strategy at it's finest.


     Who is in charge of appraising the property? 

    if I pay $500k for a property that needs $300k in remodelling, does the fix and flip cover interest on the $800k amount even though it was bought for $500k?

    Once the remodel is done and tenants are living on site, what do lenders look for when refinancing to a 15 yr loan? The rent roll? Or the total cost amount listed on the fix and flip? 

    thank you! 

    0Reply
  • Dav Pohote
    Member since 2024 · 31 posts · 11 votes
    2y
    Quote from @Michael Braswell:

    Apply for a hard money loan that allows you to purchase, rehab, and resell or rent the property. The interest rate and cost is higher than conventional loans but the requirements are less and the closing process is faster.  The loan will be in your business name and won't be reported to credit agencies, which is huge. No W-2s, pay stubs, or tax returns are required. 90% of underwriting is based on the property not the borrower.   Reply if you want more info on a hard money loan.

     Would love it.

    how easy is it to refinance to a conventional loan after 6 months ?

    do the lenders include the renovation cost in the loan principle amount? 

    0Reply
  • Tyler Warrick
    Lender · Chandler, AZ · Member since 2023 · 88 posts · 48 votes
    2y

    Great question! There are three main types of residential financing out there.

    Agency loans: Conventional, FHA, VA and USDA

    NonQM loans: DSCR, 1099, Bank Statement, P&L, Asset utilization etc

    HML/PML: Bridge, fix/flip

    Most investors who are looking to do value add go with a HML/PML as the lender only cares if the deal makes sense (Is there ample equity in the deal if the investor cannot complete the project, will the value be supported after the project is complete). These types of loans are available to simply acquire the property and are short term in nature (6-24 months). If an investors wants to flip, they sell. If an investor wants to hold, they refinance into one of the other types of loans.

    Hope this helps!

    1Reply
  • Dav Pohote
    Member since 2024 · 31 posts · 11 votes
    2y
    Quote from @Alex Hunt:

    Commercial loans are much more lenient than conventional and a lot less red tape. 
    DSCR loans for rent ready properties. Fix n flip loans for value add, then sell or refinance into DSCR.
    Happy to connect on fix n flips or DSCR! 

    For a fix n flip, if your purchase price is 500k and 200k is the remodel, what is your monthly payment on the 6 months of rehab? When it's tenant occupied and time to refinance, would the commercial loan be based on the 700k total?
    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    2y
    Quote from @Dav Pohote:
    Quote from @Alex Hunt:

    Commercial loans are much more lenient than conventional and a lot less red tape. 
    DSCR loans for rent ready properties. Fix n flip loans for value add, then sell or refinance into DSCR.
    Happy to connect on fix n flips or DSCR! 

    For a fix n flip, if your purchase price is 500k and 200k is the remodel, what is your monthly payment on the 6 months of rehab? When it's tenant occupied and time to refinance, would the commercial loan be based on the 700k total?

    When you refinance, the lender will order an appraisal to determine the property value. Every loan program sets a maximum percentage of that value that someone can borrow. For example, if you have 700k in a property, and you can borrow a maximum of 70% LTV (loan-to-value), the property will need to appraise for $1 million for the loan to be approved.

    If the property doesn't appraise that high, you will have to lower your loan amount and won't be able to get back all of the cash that you invested.  If you owe the full 700k, you may need to bring money to closing to pay down that balance.

    You would also need to financially qualify to cover that new monthly payment.   

    [email protected]
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    1Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @Account Closed:

    I’ve read countless times that residential lenders will only loan on properties in good conditions. How do investors get loans on value add deals? Are commercial loans more lenient? 


     You are looking for a "Hard Money Loan" or sometimes called "Bridge Loans" "RTL - Residential Transition Loans" or "Fix and Flip Loans"

    Plenty on the Find A Lender tool here on BP and around the forums

    [email protected]
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    0Reply
  • Alex Hunt
    Lender · Member since 2022 · 441 posts · 134 votes
    2y
    Quote from @Dav Pohote:
    Quote from @Alex Hunt:

    Commercial loans are much more lenient than conventional and a lot less red tape. 
    DSCR loans for rent ready properties. Fix n flip loans for value add, then sell or refinance into DSCR.
    Happy to connect on fix n flips or DSCR! 

    For a fix n flip, if your purchase price is 500k and 200k is the remodel, what is your monthly payment on the 6 months of rehab? When it's tenant occupied and time to refinance, would the commercial loan be based on the 700k total?

     It would be based off the new appraised value if putting that much renovation into it. Some lenders may require a 6-12 month seasoning period to go off the new appraised though. 
    As for the payments during the 6 months are based on how much is drawn, only paying interest on what is drawn. So a phase budget would be needed to say exactly. But imagine the payment slightly increases each time you draw more from the renovation funds

    1Reply
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