All investors try to use leverage when investing. Real estate investors in particular try to use “other people’s money” when financing their real estate purchases and this is especially true for quick flipping purchases/sales. The most attractive “flipper” property is one which needs some rehab so finding a rehab loan for investment properties becomes important so the investor does not need to tie-up their own cash. One of the options is a hard money rebab loan.
A hard money loan is an asset-based loan offered by private parties or companies rather than a traditional lending institution such as a bank or credit union. A hard money rehab loan can help investors by offering funds for the purchase and rehab of their investment property. The loan becomes due when the property is sold. Typically the lending guidelines are easier than a traditional lender but the interest rate is also higher due to the risk. Investors using a hard money loan for their real estate investment should minimize the amount of time they need to use the money to reduce interest costs.
Rehab Loans for Investors
A hard money loan is a financing option for investors who want to minimize their out-of-pocket costs when buying and renovating an investment property. Hard money loans can last for as long as a few years for larger projects but typically they are only used for a few months. After than time, they become too expensive to be valuable to the investor.
Rehab loans are issued based on the after-rehab-value (ARV) of a property. Real estate investors provide the lender information about comparable properties in much the same way as a traditional home loan, and then the hard money lender offers a percentage of that assumed value, normally 75-80% of the ARV.
After-Rehab-Value vs Loan-to-Value
Rehab loans combine the property’s initial purchase cost and rehab budget into one loan amount. Hard money loans for investment property can use either the after-rehab-value (ARV) or a loan-to-value (LTV) when determining how much the will lend.
The LTV ratio represents a percentage of the actual purchase price (value) of the property. If the investor is purchasing a property which is in relatively good condition, then normally the hard money lender will use the current value of the property as its benchmark when determining the amount of money they will loan, often about 90%. This type of loan would be most appropriate for investment property in which very little repair or rehab is necessary and the investor has the cash reserves to invest for these costs.
Rehab properties will have loans based on the ARV instead. Generally the most a hard money lender will offer for a rehab loan for real estate investment property is 80% of the ARV, and many offer much less. The more experience a real estate investor has, the greater the possibility of getting the maximum amount from the lender.
Hard Money Rehab Loan Rates, Fees and Terms
Rehab loans for real estate investors range from:
- Interest Rates: 7.5 – 12%
- Points: 1 – 10% of the loan amount
- Loan Term: 12 months – 3 years
Clearly the costs on hard money rehab loans are much higher than a traditional 30-year home loan, but the risk is higher for the lender as well. They are loaning money based on the real estate investor’s ability to complete the renovations in order to achieve their after-rehab-value. The advantage for the real estate investor is their ability to leverage their own funds by using these rehab loans. For investors who work on several projects at once, this can greatly increase their ability to move forward when the right opportunity presents itself.