How to Renovate an Investment Property with an Investment Property Rehab Loan
It’s commonly known that a renovation loan is an option for homeowners, however, it is also possible to secure a rehab loan as an investor. An investment property rehab loan allows you to borrow money to not only purchase an investment property in need of repair or upgrades but also to do the necessary renovations. Non-owner-occupied rehab loans are typically used for short-term investments, such as a property you intend to fix and flip, however they’re also often used to renovate a rental property before securing more permanent financing. Rehab investors will often find that traditional mortgages aren’t suitable for investment property rehab projects, usually due to long closing times and restrictive requirements. This is where investment property rehab loans come in.
If you’re planning to buy or refinance an existing property for the purpose of renovating to sell quickly or rent out, here’s how to do it with an investment property rehab loan.
Step 1: Start with your research
There is a lot to learn about investment property rehab loans and there are many lenders on the market. Since no two loans and no two lenders are the same, it pays to do your research upfront so you know what to look for and what to be aware of.
Some key things to note about rehab loans for investment properties:
- You can use an investment property rehab loan for single-family residences as well as multifamily dwellings from duplexes to condominium complexes
- Compared with traditional loans, real estate rehab loans have higher interest rates. This is due to the risks involved in rehab projects as well as the short loan terms
- Hard money rehab loans have shorter repayment terms compared with traditional loans, which means they are only suited for short-term fix and flip projects
- There are many reputable companies offering hard money rehab loans, including small local rehab lenders and national online rehab lenders
- Hard money lenders for fix and flip projects will lend you an amount based on the after-repair value of the property. You may be able to secure up to 80% of this value
- Hard money rehab loans are usually secured by the investment property
- There is no minimum renovation required. You can use your investment property rehab loan to cover the cost of any renovations, repairs and upgrades to the property, so long as they add value to the property. This may be major structural works, such as extending the property or converting single dwellings into multiple units. It may also include less major works such as remodeling kitchens and bathrooms, upgrading systems including septic systems, heating systems and air conditioning, replacing appliances, flooring and roofing, major landscaping works, and property improvements such as disability access and energy efficiency
Step 2: Seek approval
Once you’ve chosen your rehab lender, it’s time to get approval. A private hard money rehab lender will focus more on the profitability of the investment property you are looking to purchase or refinance, and less so on your own credit-worthiness. Accordingly, it’s usually easier to qualify for an asset based real estate loan, compared with other kinds of rehab financing, regardless of your income and credit score.
It’s important to seek preapproval before you’ve made a move on a property, then secure final approval once you’re ready to purchase a property. Every lender will have a different approvals process, but hard money lenders keep this process as quick and straightforward as possible. Generally, you’ll be required to show your lender:
The purchase contract. This must include the agreed sale prices as well as its terms. Generally, the agreement will be signed by you, the buyer, as well as the seller of the property and will contain a clause specifying that the purchase is contingent on final loan approval.
A renovation budget. The asset-based lender may also want to see how much you expect to spend fixing the property.
Appraisals. Rehab lenders usually require appraisals of the property. This includes both an “as-is” appraisal as well as an after-repair value appraisal. You will most likely be required to pay for these appraisals upfront yourself.
Proof of rehab experience. If you are planning to complete the rehab works yourself, a lender may want proof that you’ve done it before. Alternatively, you can work with a licensed contractor. In that instance, you’ll have to provide the contractor’s information to your lender, including their business details, license number, scope of the works, estimated costs and proposed timeline for completion of the works.
Step 3: Receive your financing, then purchase and renovate
Once approvals are all sorted, you’ll receive the funding to purchase and renovate your investment property. Working with a rehab loan lender means your application can be processed quickly with money arriving to purchase the property even in a matter of days.
For the renovation stage, your fix and flip hard money lender will most likely distribute funds gradually as work is completed. Your lender should let you know before you begin how they’ll distribute funds throughout the renovation, and you’ll need to keep contractors informed of how and when they’ll be paid based on how your lender operates.
Step 4: Exit the property
Once you’ve finished renovating, upgrading or repairing your investment property, it’s time to exit the property. For short-term investors, this is usually achieved by selling the property, and for long-term investors it is done by refinancing with a permanent loan. When planning your schedule and budget, take into account that it can take time to sell a property or find a renter.
If you want to know more about using an investment property rehab loan for your fix and flip project, get in touch with RehabLend today. We offer flexible rehab loans for investors designed to be tailored to your project to maximize your returns.
