Securing funds for your next rehab project isn’t as hard or daunting as it may seem.

As a short term real estate investor, your top priority is securing funds in order to finance your next fix-and-flip project. As is usually the case with any project at all, it’s easier to secure funding if you have prior experience in the field. However, first-timers should also be able to drum up the finances they require. In the past, you only had one choice when it came to raising money, and that was making an appointment with your loan officer. However, the times have changed now, and the options you can choose from have increased. Let’s take a look at four of the ways with which you can finance your rehab project.

1)   Cash

The simplest methods can be the best. If you have friends or family who are willing to invest the cash you require for a project, go for it. Many first-timers will resort to this strategy when they start to get their feet wet. It’s an especially attractive option for smaller projects, which don’t need massive amounts of funding to get started. Of course, having family in the equation can cause some business complications, but if you’re able to get around those, you’ll find that using cash has some very real advantages. By using cash, real estate investors should find themselves in possession of the most negotiating leverage, as you can easily provide the seller with the security that financing is no longer the primary concern. Additionally, there are no lender covenants you need to consider at all.

2)   Investors

For bigger projects, you might want to consider going to an investor, or investors, before you approach a bank.  Investors tend to have fewer restrictions than a bank, and operate under fewer regulations too. As long as you are able to prove to your investors that you will be able to provide their returns in due time, you should be able to secure investment.

You will need to show a positive track record, however, since no one want to lose money, after all. You can do this by providing the actual financials from deals you have already completed. While first-timers may have some difficulty with this, it’s a great way to expand into bigger and bigger projects. It isn’t uncommon for short term real estate investors to use cash to fund their initial, small scale projects, and then use the financials from these as a springboard to show investors. Additionally, you can either return the investors their money or some of the profits from the construction value. You get to determine investor return.  

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3)   Hard Money Lender/Specialty Financing

One option that is increasingly becoming the norm for rehab projects is securing finance from a hard money lender or specialty finance company. The rehab loans provided by such organizations are sort of a niche product aimed specifically at the short term real estate developer. Firms and lenders who provide these loans will have technical expertise and a better level of know-how about how rehab projects function, and thus will award you the loan based on their insights into your specific project.

Of course, each rehab loan will differ from the next. However, in essence, they will all aim at helping you modify the existing property you have on hand in order to increase its value upon resale. Now, it’s true that many new rehab investors avoid going to hard money lenders because of their high interest rates in addition to their charging of points as well. However, if you find that your numbers are favorable even after accounting for these interest rates, it’s a good idea to go with them. These loans are more flexible than traditional ones, and applying for one is a far more straightforward process than the one a bank will make you go through. You can be funded within a week after your application is approved.

Additionally, your credit and income history will not be given the same level of significance that a bank would ascribe to them. Sure, personal financials will be a factor to be considered by the organization and you’ll be more likely to get a loan if your balance sheet is strong or if you have an equity partner with a proven track record. However, other factors can be given more consideration depending upon the hard money lender you’re going to. These aspects include the amount you paid for the property, its potential future value, and the extent (and therefore riskiness) of the project. Plus, even if you are currently facing recent issues like a bankruptcy or foreclosure that would prevent a bank from considering you as a candidate, hard money lenders can choose to focus on your equity instead of your assets.

Rehab loans are therefore an excellent way for investors to earn high returns on their real estate projects. While the interest rates can run from 14% to 20%, and there might be origination fees to pay as well, you’ll only have to make interest only payments during the construction process. Plus, these pay for both the purchase as well as the rehab process. And finally, there’s no prepayment penalty, so you can even make all the payments early without incurring any other extra charges.

4)   Financial Institution (Bank)

Most established investors might prefer turning to banks in order to finance their rehab projects. Major projects cannot afford the high interest rates that hard money lenders charge. Banks, on the other hand, typically have the lowest interest rates. This is where personal credit takes on the most importance – banks will conduct a thorough investigation into your financial background. Loans can also be more or less relationship based, so if you have a prior history with a certain bank, you should definitely approach them for a loan. However, some banks might not be willing to take on rehab projects due to their inherent riskiness. In that case, it’s worth your while to shop around for banks that do. Community banks can be a better bet.

Securing funds for your next rehab project isn’t as hard or daunting as it may seem.  Once you get your first loan be sure to investigate other options or see if they can increase your profits.