Hard money rehab loans help you maximize your financial gains by turning distressed properties into profitable investments, as they offer flexible terms and quick access to funds. In this blog, we will learn about different types of hard money rehab loans and their specific uses, which can act as a strong foundation to convert your next run-down property into a profitable asset.
Bridge Hard Money Rehab Loans
Bridge hard money rehab loans are temporary and are short-term quick financing options lasting between 6 months to 12 months for real estate investors and property flippers who want to bridge the gap between purchase and sale or until the existing property is sold. The borrower’s dependency is on existing property value.
Key Advantages
- The focus is on the borrower’s property value rather than the credit score, which helps in the quick approval process.
- The hard money lender gives flexibility in lending terms that can be tailored per the project’s need.
- Helps in the form of transitional funding by purchasing a new property before selling the current one.
Specific Use of Bridge Loans
☑ Funding unconventional or non-conforming properties
☑ Permanent bridge financing for multi-family property investment
☑ Land acquisition and development
☑ Can be used for both residential and commercial properties, and more.
Fix and Flip Hard Money Rehab Loans
Fix and flip rehab loans are suitable for investors who want to purchase, renovate, and resell properties for quick profits. The borrower’s dependency is on the after-repair value of the property. The term loan duration is between 6 months to 18 months.
As per various industry reports, the US fix and flip market was valued at around $48 billion in the year 2023, and it has seen an annual growth rate of over 10% over the past 5 years. The major success factor was the profitability percentage in fix and flip projects, with over 70% of investors going for this option.
Key Advantages
- Are more quickly approved than bridge rehab loans.
- The project mostly covers 100% of renovation costs (purchase price + cost of repairs).
- Borrowers can get a higher loan amount, which is calculated based on the ARV method.
Specific Use of Fix and Flip Hard Money Rehab Loans
☑ Property Acquisition
☑ Renovation and repair for various properties like luxury property flips, conversion projects (single home into multi-family unit), historical property renovation, and more.
☑ Leveraging after repair value and maximizing property value
☑ For bank-owned properties (REOs), foreclosed homes, and other distressed properties, and more
Rehab to Rent Hard Money Loans
The loan amount is used to buy new or renovate existing properties and then rent them out for long-term financing. The rental rehab loan option is gaining a share in the hard money loan market, with 20% of investors going for it.
Key Advantages
- Short-term in nature, with loan duration lasting between 6 months to a few years.
- A passive income generation for the future.
- Helps in increasing cash flows that can be used to refinance into long-term mortgages or pay loan repayment amounts.
Specific Use of Rehab to Rent Hard Money Loans
☑ Renovating properties for rental
☑ Equity building
☑ Purchasing distressed properties or financing for repairs and renovation
☑ From vacation rental single-family units and foreclosed properties to commercial properties, the loan can be obtained.
Cash-Out Refinance Rehab Loans
The cash-out refinance rehab loan allows borrowers to refinance their existing mortgage and get additional funds by leveraging the value of property equity. The value of equity is determined by the difference between the outstanding mortgage balance and the current value of the property.
Let us understand this through an example:
Equity Formula: Homeowner property value- Existing mortgage balance
If a borrower’s property value is, let’s say, $3,00,000 and the existing mortgage balance is $2,00,000, the balance for equity is $1,00,000. Now if the refinance has an amount of $2,00,000, the left-out balance that can be cashed out for home renovation is $1,00,000 (refinance amount-equity balance).
Key Advantages
- Better loan terms as per the current property value.
- Enhanced property value after renovation.
- Interest on an amount used on a home renovation can be under tax exemption.
- Consolidated monthly payment.
Specific Use of Cash-Out Refinance Rehab Loans
☑ Home renovation like kitchen remodeling, living space improvements, etc.
☑ Structural repairs like plumbing upgrades, roof replacements, and other foundation repairs.
☑ Energy-efficient and external upgrades like landscaping, insulation, etc.
☑ Rental property improvements, or for flipping houses, and more.
Construction Hard Money Rehab Loans
Construction hard money rehab loans are used for new construction or large rehab projects that are funded in phases. The interest rate on the loan is comparatively higher compared to traditional loans, and the interest is also paid in a phased manner.
Key Advantages
- The borrower can convert this into a permanent mortgage once the construction is done.
- A higher loan-to-value ratio is given by hard money rehab lenders for large rehab projects.
- The borrower can use the fund for construction costs, purchasing the property, permits, materials, labor, and more.
Specific Use of Construction Hard Money Rehab Loans
☑ Can be used for various types of properties, such as multi-family and single-family units, commercial buildings, etc.
☑ Building new homes or commercial properties.
☑ Major renovations for properties, including existing structural repair, deferred maintenance, etc.
☑ Land development projects, and more.
Residential Hard Money Rehab Loans
Residential hard money rehab loans are used for renovating single-family, multi-family, and small residential properties. The investor can buy and sell the property after renovation is done for quick profits. The term length is between 1 to 2 years.
Key Advantages
- Quick fund approval process that helps in buying and renovating residential properties fast.
- Investors can make home improvements without any strict restrictions as compared to traditional loans.
- It helps in improving the real estate investment portfolio of investors by going for multiple residential property financings.
Specific Use of Residential Hard Money Rehab Loans
☑ Distressed property acquisition
☑ Buy and hold strategy
☑ Pre-sale home improvements
☑ Auction property purchase
☑ Property conversion from single-family to multi-family units, and more
Conclusion
The hard money rehab loans market is seeing an increased growth rate of 8-10% due to various factors like increasing property values in states like California with experienced and first-time investors going for hard money loans, an evolving regulatory landscape, and a shift in sustainable and energy-efficient property renovations for both rental and owned properties.
It is the right time to identify the potential opportunity to maximize your investment profitability by being informed about the right type of hard money rehab loans for you, market trends like quality renovation trends, the impact of technology on real estate financing, the selection procedure of hard money rehab lenders, and more.
Contact us today to get the right advice and tailored solutions for the complex decision process of the right type of loan as per your need and usage and secure the funding you need to succeed in your real estate investments.
Read More: Pros and Cons of Hard Money Rehab Loans
FAQs
- What is the term length of hard money rehab loans?
The term length of hard money rehab loans is between 6 months and 2 years.
- Are hard money rehab loans for home buyers?
Typically, hard money rehab loans are for real estate investors or borrowers looking to renovate the property for rental or resale use, but home buyers can also obtain the loan for renovation.
- Is there any tax implication on hard money rehab loans?
Yes, whatever interest is paid on hard money rehab loans comes under tax deductions under the umbrella of business expenses.
- What is the risk level associated with hard money rehab loans as compared to conventional loans?
Hard money rehab loans are comparatively riskier due to their higher cost and shorter terms as compared to conventional loans.
- What is the percentage of fees charged by hard money lenders for rehab loans?
The hard money rehab loan lenders charge various fees like origination fees, appraisal fees, underwriting fees, processing fees, monthly service fees, points percentages, and more. The percentage varies as per the type of fee.
