As an investor, you may end up buying various types of real estate, from rental properties to fix-and-flip properties. At some point, you’re bound to want to make renovations, whether it’s to flip a fixer-upper or to improve the value of your long-term investment properties. Depending on the extent of the renovations required, odds are you’re going to need to take out a loan. However, renovation loans are a lot different than home mortgage loans. The following is a guide to help you better understand the different types of renovation loans that you can apply for.
What Is A Renovation Loan?
A renovation loan is pretty much what it sounds like: a loan that you can get for renovating real estate. They’re often used to finance home improvement projects, such as repainting walls or installing new flooring in your house. However, renovation loans are also commonly taken out by real estate investors who want to make repairs and upgrades to the properties that they own. Renovation loans tend to be easier for investors to qualify for because lenders understand that they are being used to turn a profit.
How Do They Work?
Renovation loans can vary widely in how they work. Some renovation loans are more like real estate mortgages, where you’re borrowing a certain amount of money and have to pay it back with interest over time. Other renovation loans may require you to pay the loan off all at once after the renovations are complete or through monthly payments while the property is being fixed up.
The Risks Involved
When it comes to real estate, there’s no such thing as a risk-free investment. As with any other real estate transactions involving borrowing money from the bank or investors, renovation loans come with risks of their own. For real estate investors, one of the biggest concerns is that you may not be able to sell your real estate property for what it’s worth after renovations are complete. Such a situation can leave you with an investment property that isn’t generating returns, along with a hefty amount of debt to deal with.
Who Is Eligible For A Renovation Loan?
If you want to take out a renovation loan, you’ll want to be sure you qualify. Each lender is different and will have different guidelines. Some lenders want you to have good credit and some will not. Although not always required, it will also help if you can prove that you have the appropriate skills and experience for renovating real estate properties, such as your knowledge of construction trades or previous work history with real-estate renovations.
Real estate investors may also need to show that they have enough funds left in their real estate budget after making necessary repairs and renovations. Lenders will want to ensure you don’t take out a loan to renovate real estate if it means there’s not enough leftover money to cover the costs of buying, holding onto, and selling real estate.
It can also help to prove that you have various real estate-related assets and transactions on your resume. Such proof can help you get approved for renovation loans because it shows that you have experience with successful real estate investing, which will put lenders at ease. It will also show lenders that you have other sources of income (or potential income) to cover your loan should the current investment not work out. The bottom line is each lender is different so it is smart to shop around and find the right one for you.
What Are The Eligible Properties?
Renovation loans can be used for real estate properties of all types, including multifamily properties and commercial real estate. However, renovation loans are most commonly taken out on single-family homes or small multi-unit buildings that don’t require much structural work or extensive construction. The required documentation to get approved for real estate renovation loans can be lengthy and complex for larger real estate properties. However, that’s not to say it’s impossible to secure renovation loans for bigger projects.
Generally speaking, housing units must be in good condition or capable of being restored to a habitable state before getting approved for real estate renovation loans from lenders.
Why Take A Loan To Renovate A Home?
As an investor, you want to keep the amount of money you put into a property as low as possible. However, it can be advantageous to invest money into renovations. As the saying goes, sometimes you have to spend money to make money. With that in mind, the following are a few specific reasons why you should consider taking out a loan to renovate your investment properties:
Add Value To Your Property
Real estate investors make money by adding value. Renovations can add real value to real estate properties, which means you’ll be able to sell a property for more money than it would have been worth before renovations were completed. Once a renovation is done and there is a beautiful home available to buy, many buyers would be interested in paying top dollar.
Gain Access To Higher Income-Level Tenants
If you are keeping the property as a rental to produce income, improving your rental properties by renovating them can attract higher-income tenants that are willing to pay more for real estate units in better condition or that have upgraded features. Not only do you improve the property value, but you’ll be able to charge higher rent rates.
Ensure Continuous Income Stream
Newly renovated rental properties attract tenants much faster than properties that aren’t in top-notch condition or are outfitted with older features and appliances. As such, you’ll have an easier time attracting tenants and keeping them over the long term, thereby providing you with a continuous income stream that you can depend on.
Investor Renovation Loan Options
If you’re planning to invest in renovations to your property, then there are several types of renovation loans that you’ll want to consider based on your needs. The following are some of the most common renovation loan options available:
Local real estate banks are good options for real estate investors looking to finance renovations. These types of lenders typically offer renovation loans with the lowest interest rates but typically require high minimum credit score requirements and large down payments.
Lines of Credit
Lines of credit can be a real estate investor’s best friend when it comes to financing renovation projects. Many lines of credit have no application fees, low monthly interest rates, and long repayment terms. The way it works is simple: using the equity you have in the property you’re renovating or another property you own, you can secure a line of credit. You can then take what you need from that line of credit whenever you need it (meaning, you don’t have to take the entire sum out at once).
So if you have a $10,000 line of credit, you can withdraw $1,000 one week and have $9,000 left to take out at any point during the loan term. Additionally, you’ll only be charged interest on the amount you’ve withdrawn. Any money you pay back will go back into your line of credit and become available to you again. This renovation loan is helpful for investors planning multiple renovations on a property over a more extended period.
Cash-out refinancing is a type of real estate renovation loan you’ll want to consider if you already have equity in your real estate property.Cash-out refinancing allows you to refinance the property using new financing to pull equity out of the real estate and pay for renovations with that money. One of the major perks of cash-out refinancing is that you can take out more than you need for the renovations if you have enough equity in the property.
Many real estate investors turn to personal loans when they want to finance renovation projects. Personal loans can be a good option for real estate investors looking to borrow smaller amounts of money because it’s simpler than going through the process of applying for larger bank loans or lines of credit that may take months before being approved.
Hard Money Loan
A real estate hard money loan is typically a short-term lump sum of financing that real estate investors use for large renovation projects. On the bright side, you can acquire these loans very quickly with little to no credit or down payments. They are usually approved in just days (or even hours) as well. However, it’s important to note that real estate hard money loans are often expensive and carry high interest rates, which means real estate investors need to plan accordingly. Because they’re short-term loans that are easy to qualify for with limited underwriting, hard money loans benefit fix-and-flip investors.
Use Renovation Mortgages To Build Your Portfolio
When real estate investors look to finance renovation projects, they should consider all their real estate loan options. In some cases, it may be wiser for real estate investors to choose a renovation mortgage or line of credit; in other situations, real estate hard money loans will make more sense. Regardless of the real estate loan option real estate investors choose, it’s important to remember that renovation finance options are available for real estate investors and will help you grow your portfolio. Give us a call about your renovation project and we will help guide you through this process to be sure you are selecting the right loan for you.