An investor rehab loan, sometimes called a fix and flip loan, is used by both short-term and long-term investors. Short-term investors are who give the loan its slang name, because they are often looking for properties to repair and resell for profit. They have no intention of holding onto the property any longer than necessary. Long-term investors seeking such a loan are often seeking to finance renovations on new or existing rental properties. For both types of investors, rehab loans combine property and rehabilitation costs into a single, short-term loan.
Types of Rehab Loans
Real estate investors have access to two types of rehab loans:
- Permanent Mortgage Loans for Rehabs – These are HomeStyle Renovation (HSR) loans offered by Fannie Mae, for owner-occupied renovations or single-unit investment properties. Very much like the FHA 203(k) mortgage, there are strict requirements for borrowers and strict guidelines for the loan.
- Hard Money Investor Rehab Loan – This type of rehab loan is offered by private lenders to assist investors with the purchase and renovation of investment properties. They are commonly used to finance single-family homes as well as multiple-unit properties. There is no set limit to the amount of properties that can be financed by a single investor. This is by far the most common type of rehab loan.
Why Should I Use an Investor Rehab Loan?
There are obvious benefits to using a rehab loan for purchasing and renovating property. Rehab loans typically have an abbreviated process that leads to quick approval. Moreover, they boast short financing terms, but have high interest rates and lender fees. With these loans, you can fund both the purchase and renovation costs of properties, whether single-family homes or multi-unit properties. In addition, rehab loans usually offer interest-only payments, therefore making it a great option for investors.
An investor rehab loan is granted as a percentage of a particular property’s anticipated after-repair-value (ARV). This is the amount the property is expected to bring when resold after renovations are completed.
Consider the following example: A property is listed for sale at $200,000; however, with approximately $75,000 in renovations, the property’s resale value would jump to $350,000. The ARV for this property would be $350,000. Most rehab lenders would agree to finance 70%-80% of the $350,000.
If you are examining properties for either long-term or short-term purchase or renovation, give us a call at Red Door Funding. We can answer all your questions regarding an investor rehab loan and provide the funding you need to get your project off the ground. Call (832) 539-1099 or contact us online for more information.