A real estate rehab loan can be beneficial to both the borrower and the lender. Borrowers can get the money they need to buy and renovate a property for resale or to keep as a rental property. Lenders realize a much better return on their investment (ROI) than does a traditional banking institution.
Using a Real Estate Rehab Loan to “Flip” a House
In the real estate industry, a flip is purchasing a house or commercial property to refurbish for quick resale. Many contractors and investors, without enough capital, use a real estate rehab loan to either purchase a property to improve its value through remodeling, gain the money to remodel a property they already own, or both.
Real estate rehab lenders give the borrower enough flexibility to borrow 70 percent or more of the after-repair value (ARV), which could be used to buy and/or renovate the property. Usually, the lender has a private appraiser determine the property’s ARV. the appraiser considers the current value of the property, what similar houses in the area have sold for and the borrower’s remodeling plans to determine its ARV. It is common practice for the lender to include the appraiser’s fee in the amount of the loan or as a separate fee.
Since a real estate rehab loan generally bears a percentage rate of between 7.5 and 15 percent, many wonder why an investor would not use a traditional loan at a lower percentage rate. There are several valid reasons for an investor or contractor to use a real estate rehab loan.
Firstly, these loans are for a much shorter time period. Remodeling usually takes 6 to 8 weeks, and the property is ready for resale, so the interest rate is not nearly as burdensome as a 30-year mortgage. In addition, the borrower is customarily only required to pay the interest payments during the remodel.
Secondly, in most cases, the interest and fees can be written off as an expense of doing business. Keep in mind, income tax rules change frequently, and the developer should check with a licensed tax preparer or a lawyer before making that assumption.
Finally, a real estate rehab loan is quicker and easier to get than a loan from a traditional bank or credit union. Traditional lenders look at creditworthiness and debt-to-income ratios. Many flippers have several projects going at the same time, their income is sporadic, and they have many loans outstanding for property and materials, which makes it difficult to qualify. Plus, traditional lenders take far too long to grant approval when you do qualify. That good deal on a property you’d like to take advantage of might be gone before the speculator can get an approved traditional loan.
Investing Through Providing Real Estate Rehab Loans
Many people who have substantial money to invest find the interest they get from banks and credit unions to be far too small. Therefore, they seek another means of getting a better return. Lending contractors and real estate investors money to rehab a property can result in a better return. Although some borrowers might seem a greater risk, the collateral for the real estate rehab loan is the property.
Although in most cases, the investor is not interested in the property or in finishing the remodeling plans of the borrower, in the case of a default, the lender can take possession. These instances are rare, because this is how real estate developers make their livings. They have solid reputations with building supply companies, real estate agents, lenders and others within the community. One default could ruin their reputation and drive them out of business.
Consider Red Door Funding
In Houston, when you need money to purchase a property to remodel and resell or have money you would like to invest, by providing real estate rehab loans, call the professional lenders at Red Door Funding, (832) 539-1099.
Alternatively, you can start a no-obligation application here. Or contact us by email, email@example.com, to invest in a Houston-area renovation.