Investment rehab loans are financial products real estate investors can use to buy and restore property that needs repair or updating. These rehab loans provide financing for both the purchase of the property and the cost of rehabilitation, and they can be very useful to investors who want to house flip or rehab rental homes.
- These loans also pay for repair, renovation, and even conveyancing expenses.
- In addition to paying for the acquisition cost itself.
- In most cases, the aim is to help investors restore properties and place them back into value so that this can be used to facilitate a sale for a good gain or generate rental income.
Types of Investment Rehab Loans
There are several different types of rehab loans, each with its own specifications to accommodate the needs of other investors and renovation scopes. The most famous is the FHA 203(k) loan, a government-insured loan with low down payments and easy credit requirements.
This loan especially appeals to new investors or those whose credit rating or income level is not high enough to qualify for traditional financing.
Another well-liked choice is the Fannie Mae HomeStyle Renovation loan, a conforming loan that has more flexibility for higher-end remodels and can be used to buy either a primary residence or an investment property, both, which you can read about here. However, unlike the FHA 203(k), the HomeStyle Renovation loan usually involves a higher credit score and more down payment.
Investors with large projects or higher-level remodels in mind may potentially have access to the HomeStyle Renovation loan to finance bringing in the money to make major overhauls to a property.
Hard money loans are also an alternative for investors who want to buy investment properties that need front-end repair or have poor credit. Short-term asset-backed loans from independent lenders are optimal for fast flips or construction.
However, they have higher interest rates and shorter term repayment plans than traditional loans, so they are ideal for those experienced with short-turnaround real estate deals.
How Do Investment Rehab Loans Work?
Rehab investment loans are different from standard home loans in that they are used to cover the repair and purchase costs. The loan is generally calculated on the property’s after-repair value (ARV) or the estimated market value when the repairs are done. This gives the investor more funding power than a standard loan, which considers the property’s existing value.
To be eligible for an investment rehab loan, investors must submit detailed renovation plans, including contractor bids, timelines, and a breakdown of costs. The lender will then base its decision about hard money loans and whether the project proposed will yield a high return on investment, and whether the borrower will be able to carry out the renovations. The loan is disbursed in phases after approval, also known as “draws,” and each payment is tied to a particular renovation phase.
- Normally, the first disbursement is used to purchase the property.
- Progress payments are made as the work proceeds, and lenders disburse funds once progress has been achieved, such as finalizing the foundation or framing.
- Inspection is normally mandatory before every disbursement to ascertain that the work meets the lender’s standards.
Advantages of Investment Rehab Loans
Rehab loans offer several advantages to property investors and are hence a popular choice for those looking to purchase and renovate distressed properties. The biggest benefit is that one can finance the acquisition price and the repair cost under a single loan.
This eliminates the need to secure separate financing for different aspects of the project, making it easier and reducing administrative burden. Reference (https://forum.manager.io/t/investment-property/40260). These ones are also useful because they enable investors to tap into the value of the properties in their current state.
- Through the application of an investment rehab loan, investors can undertake the repairs and renovations needed in the property.
- This raises its market value and eventually becomes more profitable once sold or leased out.
- This has made rehab one of the preferred choices for investors looking to maximize return on investment.
Another benefit is that certain investment rehab loans, such as the FHA 203(k) loan, can be financed with lower down payments and credit requirements, something that might interest new investors or those with lower-than-desired credit. Rehab loans can be used for both cosmetic improvements and more comprehensive work, giving users flexibility based on the extent of the project.