Best way to finance a rehab

10 Replies

My investment partner and I are looking to close on a property around $200,000 in value. We have enough capital for the down payment + closing costs (≈$50,000) but are trying to figure out how to best fund our rehab.

We are assuming a rehab cost of between $20,000 and $40,000 because we will want to add some significant value to the property before we refinance.

Is a short-term construction loan the best option? Or can we get better rates/returns by getting a little more creative?

We're looking to follow the general BRRRR method with this property and those going forward.

Thanks!

@Madison Heck personal capital reserves are the least expensive. A personal loan from a partner could be strong if you have a solid agreement with lower rates and points. HML is probably next.

Chat with your lender about a 203k loan or a similar loan product, it's a loan that wraps the rehab costs in. It can be a burden to set up properly, but if it is your only route I would not rule it out.

Personally, I've had a hard time finding construction loans so I did a lot of hard money up front. Now I use almost completely private money for short term deals (ie 3 - 9 months). I offer guaranteed interest 6 - 10 % annual interest only to friends, family, business associates, members of my local service clubs, etc. I often can get loans for 6 or 8% and I never have to pay points or origination fees. I love this strategy. It helps them grow their money and helps me do a deal without so many hoops and red tape.

Best of Success!

@Bryan Noth Thanks for the advice. We're assuming we won't have the personal capital to fund the rehab, and unfortunately neither of us will be living in the property so a 203k is ruled out I believe.

Any advice for finding investment partners? I know there's many :) but just wondering how you have gone about it.

Thanks again!

@Andrea Weule Great idea! I'm hoping that we can find some people who are willing to lend to us on our first property deal, which may be a little hard-pressed to do.

When you are doing your rehab, what value have you been generally able to add on to a property given what you put into it?

Say you put in $25,000 in rehab work to raise the property value by $30,000 (20% increase in property value relative to rehab cost, not including interest on the loan)

Is there a rule of thumb that you use or an average that you have seen in your own work?

Just trying to calculate what sort of interest rates and points would be our ceiling for procuring rehab money. Hope the question makes sense :) happy to clarify if it doesn't.

@Madison Heck I don't really look at the rehab that way. I'm probably a bit old school, but I focus just on what the property needs to get to Retail (ARV - After Repair Value) I start with Retail (nice) comps and work back from there on my numbers to get my max offer amount. Here's my latest blog where I address this as an intro to numbers:

https://www.biggerpockets.com/member-blogs/12876/91491-intro-to-running-the-numbers

Hope that helps!  Remember, when asking for private money...You're not asking for a favor, you're offering an opportunity.

Best of Success!

Just a word of caution, @Madison Heck . Not for you so much as for your private lender.

It sounds like you have already arranged the purchase money, so that will be a first position loan. Any loan for the rehab would be in second position.

You’ve never done this before, and I suspect any private lender you borrow from will be equally inexperienced and unknowledgeable. Not a problem – everyone starts from somewhere, but second position loans can be very dangerous. If you get in trouble, your first position lender could easily foreclose and potentially wipe out your private lender. Do they understand and accept this risk? Plus, do you know if your first position lender will even allow a subordinate loan? Some will and some won’t.

You might consider a professionally originated hard money loan for at least your first few deals. There are advantages here – especially if you use someone local.

A professional hard money lender will understand your area and your local market. They will do their own evaluation of your property and show you why or why it’s not a viable deal. They will also evaluate your rehab costs at a top level to see if they make sense. This is part of what you’ll pay for. Property evaluation is something you seem to need help with.

In addition, your loan would wrap the purchase price and rehab costs into one loan. You would not be putting anyone else at risk other than yourself and would be learning from others who know what they are doing.

Best of luck to you, Madison.

As an alternative there are conventional Investor rehab & purchase loans available based on 30 year amortization, personal credit scores. One is Choice renovation I have done for others. It is a loan for individuals, not LLCs if you can live with that and lender oversight. An example would be : purchase at 100,000 then add in 50,000 for rehab = 150,000 total; then minimum down payment is 15% of the 150,000 or 22,500 down. Then you have financed both the purchase and 100% of the rehab. The loan rate is based on credit score and down payment but today generally in the high fives but no pre-payment penalty so you can sell whenever. As a bonus the loan forecasts the future ARV as well as future rental income and gives borrowers 75% of gross rent as extra income to qualify beyond their own personal income. So its generally easy to qualify. The lender requires a GC or sub-contractors licensed in the trades, the borrower cannot do the work themselves basically. 10% of the rehab budget is released at Closing to get a quick start, the rest released in Draws as rehab progresses. 6 months is time frame to complete. A 10% emergency reserve is added off the base budget for any cost overruns or unexpected expenses after closing that occur but if never needed it is subtracted from final loan principal. So while not as easy as a hard money loan and with lender oversight, this may be an answer in this situation. My Blog has examples and Im happy to answer questions.

@Jeff S. Thank you for all of the insight. I didn't realize that secondary money could be allowed or disallowed by my primary lender for the mortgage, I will need to check up on that.

As for the private money, you are probably right about the inexperience of an investor that we find. Putting two inexperienced heads together is not much different than one.

Having the guidance of a hard money lender who has incentive to see the project go smoothly may be imperative to our success.

Thanks!

@Perry Farella I've never heard of this type of loan for those who wouldn't be living at the property. This is a very interesting situation.

I'll look more into this to see if it is something that fits our property and plan.

Thank you!!