Notice the plethora of Investment properties on the market that are in need of repairs or rehabbing that would make them more desirable to home buyers? I recently saw quite a few Zillow foreclosure and short sale listings in need of repairs across the US – just to even rent them they require some fixing.
What do you do with a property that appears to be a good real estate investing deal but is in need of repairs? Offer a contract to purchase the investment property at a discounted price that accounts for all of the rehabbing that would bring the property up to code or comparable to the area.
Many of the buyers and real estate investors that we come across that focus on “distressed properties” are using “rehab loans”, “hard money lenders” and working with other investors who have capital to their investment properties rehabbed and back on the market quickly. Hard money rehab loans are by far the easiest loans to get for real estate investors who are buying and selling investment properties Did you not know that “rehab loans” exist?
Many Hard Money Lenders, Private Lenders, and Contractors that specialize in working with investors offer money or lines of credit that are guaranteed by the investment property. A hard money/private lender rehab loan is generally based on the value of a property after the repairs are completed. Here is how it often looks:
Investment Purchase Price: $100,000
After Repairs Value (ARV): $175,000
Rehab Loan Value @45%ARV: $78,750
Rehab Loans Work For Real Estate Investors
Loans used to purchase investment property is usually based on a percentage of the purchase price and not on a percentage of the After Repaired Value when using Hard Money Lenders and borrowing from Private Lenders. What make a rehab loan different? Most rehab lenders will lend based on a percentage of the After Repaired Value – along the lines of 40% to 65% of the After Repaired Value.
One of the benefits of using non-traditional financing is that Hard Money & Private Lenders usually fund deals within 7- 14 days. Drawback is that your quick money will cost you in higher interest rates, fees and points. Expect to pay 10% to 14% interest only on a hard money rehab loan and about 1 -3% of the purchase price in fees/points. The loan term is usually given for 6 months to 1.5 years.
Example of Rehab Loan Used By A Real Estate Investor
A short sale property needs work and was approved by a bank negotiator to buy for $125,000. The property needs new appliances, front door, flooring, paint, etc. It will cost approximately $10,000 to repair the property and get it back on the market for sale. If repairs and upgrades to the investment property are completed, the property could be listed for $200,000.
The Investor could get a hard money or private lender rehab loan to purchase the property AND do the repairs. If the lender gives the buyer 70% of the After Repaired Value of $200,000 he could get a loan for as much as $140,000 towards the purchase price of $125,000. The investor then closes on the property using the rehab loan to purchase it and the balance to complete the repairs. They may hold the money in escrow to make sure that everything stays on track. The monthly interest payment is $1,400 – $1600 based on a 10-12%, interest only rate. Once the property is sold the rehab loan gets paid off – Voila!