The right financing is crucial to the success of your rehab projects. Not only do you need access to funding, but you also need the money to come through quickly and at reasonable rates.
Accurately estimating the cost of your rehab project will help you decide how much funding is needed and which financing option will work best for the project. PropStream’s rehab estimator tool uses local material and labor costs to give you a more accurate cost projection.
Once you know how much you need and how long the work will take, you can figure out how best to finance it. Here are three financing options for your next rehab project.
1. Get a Hard Money Loan
Hard money loans are short-term loans (typically lasting somewhere between six months and two years), issued by private investors and secured with collateral. Because of the shorter terms, the interest rates on hard money loans are higher than the interest rates on traditional mortgages. In 2021, you’ll likely pay 8% to 12% for a hard money loan, possibly even higher if there are any credit issues.
Despite the higher interest, hard money loans are often a great fit for rehab projects because:
- It’s comparatively easy to qualify for hard money loans, even with credit issues.
- You can usually secure funding more quickly than with traditional mortgage lenders because hard money loans are issued by private investors.
- The loan can be secured by the investment property.
- The higher interest rate isn’t a bad deal since the term is so short.
Hard money loans are best for investors who have a bit of experience fixing and flipping. Just make sure you have a solid plan for flipping your rehab project quickly. Since the loan is secured by the investment property, you could lose the property if you fail to find a buyer in time to meet the loan terms.
2. Use the Equity in Your Primary Residence
There are two interesting ways to use the equity in your primary residence to fund your next rehab:
- A home equity loan/line of credit
- A cash-out refinance
A home equity loan is essentially a second mortgage. You still have your existing mortgage, and you’re using the same residence to secure a lump-sum loan, which you will use to fund your investment property. Your home equity loan will typically come at a fixed interest rate.
Instead of taking a lump sum, you could opt for a home-equity line of credit (HELOC). This would give you a revolving door of funding, which could be helpful if you invest in rehab projects regularly. The downside is that the interest rates are typically adjustable, and with today’s rates historically low, they will likely increase in the future.
A cash-out refinance, on the other hand, happens when you replace your existing mortgage loan with a new mortgage loan under different terms (as opposed to adding a second mortgage on top of the first). You get a new loan with a higher principal balance and pocket the amount the lender will allow you to cash out — or at least the amount you need for your new rehab project. The key benefit to a cash-out refinance in 2021 is that you get to refinance your entire mortgage at today’s low interest rates.
3. Bridge Loans
If you have a current rehab project that will sell shortly, but you find another deal that’s too good to ignore, you can use a bridge loan to finance the new project.
Bridge loans are specifically designed to "bridge" the gap between the purchase of a new property and the sale of an existing property. So you won’t need to wait until the close of escrow on the current property to access the proceeds from that sale to buy your new property.
Bridge loan terms are even shorter than hard money loans, typically lasting only weeks or months. The downside is that the rates and fees are comparably high. But when you find a gem on PropStream’s Property Finder that will yield a solid return, these expenses will pay for themselves.
Between hard money loans, the equity in your primary residence, and bridge loans, you have plenty of options for financing your next rehab project.