I’m looking for creative, low cost, ways to finance a renovation. Fortunately I purchased my four-family property all cash, but now I’ve very little left over for the renovation. I was considering the below strategy and would love to hear your thoughts:
What are your thoughts? Is there an issue with this strategy that I’m missing?
@Cian R. sorry, I was thinking you already had an option here but I understand your roadblocks here. Aa small, local lender will be your HIGHEST probability of success when trying to find "Line of Credit" lenders on investment properties. The unfortunate thing here is that investment properties foreclose at a higher rate than primary homes so many banks just don't want the exposure to this. But it is 100% possible to find but you have to put in the time or at least know someone that ALREADY has the connection. Here's my 3 suggestions:
Now, I need to provide further information here too.....but I want to create another post here...
The HELOC and credit cards now, and refinance once renovation is completed, is workable, as long as you don't get your DTI too high. Watch the DTI, and make payments on your cards twice a month. My lender recommended that to boost FICO scores. :D
@Cian R. since this is the BRRRR method forum....what's your plan on the REFINANCE step? Meaning, if you have to pay closing costs on your refinance step...why not just get a 30 year fixed renovation loan now?
@Cian R. since this is the BRRRR method forum....what's your plan on the REFINANCE step? Meaning, if you have to pay closing costs on your refinance step...why not just get a 30 year fixed renovation loan now?
Hi Andrew,
That is a great question. I am considering simply taking out the 30-year fixed renovation loan now instead of doing the HELOC. But I ultimately want to take out a 30-year mortgage on the POST-renovation value. And my understanding is that the closing costs on a HELOC are substantially lower than a 30-year renovation loan. So rather than pay closing costs on:
1 - A 30-year renovation loan now
2 - A 30-year mortgage at refi post-renovation
I would instead pay closing costs on:
1 - A HELOC
2 - A 30-year mortgage at refi post-renovation
What do you think? Is there something that I'm overlooking?
@Cian R. ah, so if you got a 30 year renovation loan now...you don't have to refinance later. It's based on the ARV of the property so you would not have 2 refinance steps. But using the Line of Credit option is also fine, especially if you need to pay back your purchase money. If you have trouble finding a lender that will do that check back in and we can brainstorm some more. Thanks!
@Cian R. ah, so if you got a 30 year renovation loan now...you don't have to refinance later. It's based on the ARV of the property so you would not have 2 refinance steps. But using the Line of Credit option is also fine, especially if you need to pay back your purchase money. If you have trouble finding a lender that will do that check back in and we can brainstorm some more. Thanks!
Thanks Andrew, I didn't realize that the 30-year renovation loan is based on the ARV. That would definitely seem to save me a step. Is there typically an option to do interest-only payments for up to 12 months?
One upside to doing the HELOC, if I can qualify, is that I can use it to help fund future projects after this current project has been paid down.
I spoke to six different lenders and I seem to be hitting the following roadblocks when it comes to a HELOC:
It seems that a Rehab loan may be better suited for what I'm trying to accomplish. So I will have to start researching that route. As Andrew pointed out, this will mean that I only have to do one round of financing and not two (HELOC and mortgage). My first question is if they will do interest-only payments for the first 12 months with a 30-year rehab loan.
@Cian R. sorry, I was thinking you already had an option here but I understand your roadblocks here. Aa small, local lender will be your HIGHEST probability of success when trying to find "Line of Credit" lenders on investment properties. The unfortunate thing here is that investment properties foreclose at a higher rate than primary homes so many banks just don't want the exposure to this. But it is 100% possible to find but you have to put in the time or at least know someone that ALREADY has the connection. Here's my 3 suggestions:
Now, I need to provide further information here too.....but I want to create another post here...
@Cian R. One thing I forgot to ask in the beginning...is this your primary home? Or an investment property?
@Andrew Postell it will be my primary residence once the renovation is complete. It's a four-family but I will keep one of the units and rent the other three.
@Cian R. ok, then the Fannie Mae HomeStyle might be the best use for this property. And yes, any HELOC on your primary home would need that home to be livable. I still don't mind them using the purchase price though, it sounds like you just need a portion of what you purchased for the property anyway, so maybe that is ok. Is the home livable right now?
Oh, and in most states you get some tax benefits for living in your home. If you put your primary home in a LLC...you might lose those. Unless there is some specific benefit to you having it in the LLC, I would just leave it in your name.
@Andrew Postell the problem with basing the HELOC, or any loan, on the purchase price is that it was purchased at foreclosure for a 30% discount. And I need the same amount again to complete the renovation (100% of the purchase price or 70% of the pre-renovation value). That's what is making it tricky.
@Cian R. so you are saying you need 100% of the value of the property to get the financing you need to complete the rehab? Do I have that right? Would you mind giving some numbers on this?
Thanks!
@Andrew Postell using simple numbers, but keeping the metrics constant, the deal looks something like this:
@Cian R. Ok, $200,000 for a $250,000 property. That's a reasonable deal. You can structure this a few different ways:
1. Get a Standard Fannie Mae HomeStyle loan - this will allow you to finance JUST the renovation costs into the loan with a 30 year fixed rate loan. You won't have to refinance but you would have a loan of $105,000 or so with this option. In order to get "cash out" going this route you would need to refinance AGAIN after the renovations are complete. Unfortunately, Fannie doesn't allow a renovation loan to also be a cash out loan. So you would have to do it with 2 seperate transactions.
2. File a Lien, then Renovation Loan - What you would do here is file a lien from your LLC in the amount of your purchase price, then use the renovation loan to 75% of the ARV. 75% = $187,500. So you would receive back $82,000 or so, and the $100,000 renovation is included in your new loan. 30 year fixed rate. I think this is the best route with the lowest closing costs.
3. Commercial Loans - you might find a commercial loan that could grant you cash out and renovations...I just don't know of any that would do that but it might be possible to find. This route would have higher closing costs, or a higher rate though. But might be worth searching for if you cannot qualify for Fannie/Freddie type of money.
Hope this helps but feel free to ask any other questions. Thanks!
@Cian R. Andrew provided some really great points above. Another way to fund renovations is through revenue based financing. This is ideal for those that already own 3+ long term rental units. Your original post is several years old at this point. So, it's quite possible (likely??) that you've grown your portfolio.
With this approach, you'd trade a portion of your future rental income on your existing investment properties in exchange for upfront cash. Doesn't count as debt and you don't give up any equity. Funds are typically used for either renovations or for the downpayment on your next rental property. Duration is usually shorter term - 12 to 24 months.
Happy to chat if this looks like a good route for your situation now.