One of the ways investors can make money in the real estate industry is by buying properties, renovating them, and then selling or even renting them out at higher prices. This makes it possible for them to earn a lot of money from rental income or selling the houses at higher prices.
However, where do they get the financing to rehabilitate properties? Traditional mortgages might not be the best option when it comes to property rehab due to things such as long closing periods and limited property qualifications.
So, are there house rehab loan options available for real estate investors? Well, they are there! Investors who do not have enough money for property renovations can consider the options available to them. Here is a guide to rehab loan options for investors.
HomeStyle Renovation Loans
HomeStyle renovation loans are some of the most flexible house rehab loans that every real estate investor needs to consider. To start with, they come with a low down payment of about 5%. In addition, you can borrow a maximum of 85% of the property’s value after repair.
The loan does not even limit investors on the kind of renovations they can undertake. It does not matter what the renovation is, even if it is a luxury. As long as the value of the property is increased, then you are good to go.
However, this loan gives lenders powers to oversee what you are doing. For example, they make sure that you have hired insured and licensed contractors no matter the size of the renovation. They have to approve any contractors that you plan to work with.
This might be a blow to investors since some contractors might be unwilling to participate in such review processes or even have someone inspecting their work every time. The loan gives investors up to twelve months to complete rehabilitation.
Hard Money Loans
These are some of the most confusing loans among real estate investors. Most of them associate hard money – its name – with money that could be related to something mysterious. Well, it is called hard money because the loan requires a tangible asset.
When lending these loans, most lenders, especially the private ones do not look at your credit history or worthiness. They are more interested in the returns on investment (ROI). You need to be good at decision-making when getting a hard money loan.
One of the biggest advantages of hard money loans is that they lack red tape. For instance, getting financing from banks requires you to follow a lot of regulations. On the other hand, hard money loans do not necessarily require you to follow these regulations.
You can even get all the money you have requested within a few days or weeks after applying. However, this might depend on your lender. Even if you are a new player, you will be treated like a person who has been in the business for years. All you need to do is show that your deal is worth what you are asking for.
FHA 203(k) Loans
This is one of the most popular options available especially for new real estate investors. This is because of how easy it is to get an FHA 203(k) loan for the purchase of investment houses. The downpayment – at about 3.5% – is one of the lowest among other rehab loan options.
However, investors need to understand everything about these loans. This loanDepot article explains what 203(k) loans are and has more detailed information about what investors need to know before applying for these loans.
Currently, investors can borrow a sum equivalent to the mortgage limit of the location of the property. This varies from one place to another. However, the house should meet some energy efficiency and code requirements after being rehabilitated.
Unfortunately, it can be challenging to find brokers dealing with the FHA 203(k) loan products. This is because most lenders are more familiar with the normal loan products. In addition, they come with financing limits and might be dictated by your neighborhood. You also have to complete everything within six months.
Finally, real estate investors looking for a house rehab loan can also consider the Investment Property Line of Credit (LOC) option. However, they have to be current property owners for them to qualify for a LOC. This is because this loan option allows them to use their current property’s equity to finance the rehabilitation of their new properties.