When venturing into a rehab project, you might wonder how you will come up with the funds that are needed to complete the project. When you look at everything that needs funding, you might feel overwhelmed thinking “Where is this money going to come from?” or “Do I really want to put this much of my own money into this project?” If you think about it, there are many things that you will have to pay for when venturing into a Real Estate Project. Some of the things that you will have to pay for are:

  • Purchasing the investment property
  • Paying for closing costs
  • Paying for repair materials and labor
  • Paying for taxes and fees
  • Paying for insurance on the property each month
  • Paying for gas and electric each month

These are just some of the costs that are associated with renovating a property. There could be some “surprise” costs that may arise that you may not see coming such as a water leak in the basement after you just installed the carpet, or a tree falling into your newly repaired roof because of a bad storm. You never know what type of surprises may arise.

So how are you going to fund all of these costs? There are many ways to find funding for real estate deals.

Raising Private Money is one of the best ways to fund your projects. Private money can come from almost anywhere. You can seek private money from your friends or family members, business associates, colleagues, etc. People are always thinking about how to make their money grow so what better way than to present an opportunity for them to grow their money in one of the fastest ways possible. You have the ability to provide them with a higher rate of return than any bank or long term stock market holding can provide. Go to them with your deal, explain what you are going to do with their money, tell them how much you will need, and let them know how much interest they will receive. Show them how their investment will be secured by the property. There is much more to know about raising private money though. We will go into further detail in future posts.
Another form of funding for your deals is going through a Hard Money Lender. Most hard money lenders do not care so much about your credit history. Many will not require a down payment. Also, hard money lenders typically lend up to 60 to 70 percent of the After Repair Value (ARV) of the property in which you are renovating. Hard money interest rates are usually between 12 to 20 percent with added points in the range of 2 to 8. Hard money loans are costly, but they are there for you when you have nowhere else to turn to get the funding needed for your projects. Also, hard money loans usually come with fees. There are processing fees, draw inspection fees, wire fees, and other fees. Many hard money lenders require you to use your own money for your first draw. You will not receive that money back until the end of the project. Keep in mind that hard money loans are only used toward the purchase and repair of the property. They are not used for closing costs or taxes, title fees, or insurance. When obtaining a hard money loan, you will still have to seek carrying cost funds from another source.
If your credit is not so great, find someone that would like to partner with you who has great credit! It’s worth splitting a bit of the deal if you can get good financing. There are plenty of people out there with great credit and good jobs who would love to invest in real estate but do not have the time. Network at your local real estate investors association to find credit partners.
If you have equity in your house or rental property, this is a great strategy to use to fund your deals. The interest rates on home equity lines of credit are typically pretty low. You do not have to pay the points and fees to access the cash like you do for hard money. You will also save the Mortgage Recordation tax you would normally pay when using private or hard money lenders.
Bank financing may be another option for funding. Most banking institutions will offer a loan with less interest rates than a hard money loan. However, when going through a bank to receive a loan, you will need a good credit history and a down payment. Most banks require a 20% down payment of the purchase price of the property in which you are investing. Also, if you are purchasing the property from a wholesaler, most banking institutions will not cover the wholesale fee. Some banks will provide you with a line of credit that you can draw from for each house. They usually need to underwrite each project with its own appraisal, but at least you have a set amount of credit available that you know you can use for future projects. The best place to search for investor friendly banks is through your local and regional banks. The smaller banks tend to keep their mortgage loans in-house and do not have the same kind of underwriting requirements that larger banks have. It’s also much easier to meet with the decision maker at a smaller bank.

The methods discussed are great ways to fund your deals. Is it possible to do a rehab project with no money out of pocket? Yes it is, using a combination of the above methods. For example, using private lenders and partners to provide the funds not covered by a bank or hard money lender. The one thing to remember is to be creative. You may come up with another idea to fund your projects that no one else has yet used. Good luck funding your deals!

 

Michael Moreno has been investing in real estate since 2008. He completed a year of real estate training at Investors United School of Real Estate where he was inducted into the President’s Club. He has attended numerous real estate seminars around the country including David Lindahl’s Apartment House Riches Bootcamp and Syndication Bootcamp, and Robyn Thompson’s Ugly House Renovation Bootcamp, among others. He is a member of the Mid-Atlantic Real Estate Investor’s Association, the Baltimore Real Estate Investors Association, and Steve Cook’s Lifeonaire FlipVIPs mastermind group. He has completed 50+ and counting single family renovation projects in and around Baltimore, and currently holds and manages rental houses in Northern Virginia and Baltimore City.

Pin It on Pinterest