How to finance a Buy, Rehab, and Rent Property

Ok, you’re convinced: rentals are a great strategy for producing income and the Buy, Rehab, and Rent method makes sense for your business model.

Now what? Get your financing!

A great first step is to get pre-qualified for a loan. This allows you to know how much you can spend and helps tighten your search criteria. Note that although “pre-qualified” and “pre-approval” are often used interchangeably, they’re not exactly the same, and neither is final. The loan isn’t technically approved until later, when the property is under contract and you’re about to close.

However, a pre-qualification helps you answer a number of questions up front, from the price point to any gaps you might need to fill in, i.e. working to improve your credit score or securing a bigger deposit. You’ll also get a peek at the process and likely build a relationship with a lender as well.

Next: Find a property.

Nothing happens without a good deal, so it’s time to get to work identifying one! With a pre-qualification in place, you’ve got a solid idea of what to look for. And when you work with a company like ABL, you’ll be educated, too. A local loan officer who understands your business will walk you through potential loan programs and deal economics. This is vital when you’re analyzing properties and negotiating with sellers.

You can search on the MLS with the help of a trusted real estate agent; look online via sites like Zillow, Trulia, or Redfin as well as Craigslist and For Sale By Owner sites; work with a wholesaler; use direct marketing — or all of the above. Most seasoned investors wind up working all of those angles throughout their careers.

When you’ve found a property you want to buy, it’s time to move things forward. One key figure to know is your loan-to-value ratio, which is what the loan is based upon. While conventional lenders typically consider only the property’s as-is condition when evaluating and processing a loan, a hard money lender will evaluate its potential and use a different set of criteria. In short, the hard money loan is essentially secured upon the value of the property more than your personal net worth or credit (though these still count).

This is considered higher risk and the interest rate reflects that. A hard money loan is also a short-term loan, generally due in a year, sometimes two. The idea is to fix the property and sell it or refinance into a traditional loan at a lower rate.

What does this have to do with loan-to-value ratio? A hard money lender will take your After Repair Value (ARV) into consideration, while a conventional lender usually doesn’t. And you will likely be able to finance most of the rehab costs.

You’re still responsible for having some “skin in the game” and will need to produce some portion of the purchase. The amount varies by loan product and property. A lender will sometimes check your credit, but not always. Regardless, it’s imperative that you do your due diligence and have accurate numbers; this will go a long way toward helping you finance that first property and then establishing a reputation as a reliable borrower who a lender will want to do repeat business with.

Before final loan commitment, the lender will want to see the property to verify condition and repairs, and to confirm whether the purchase price and the estimated rehab figures are accurate. In non-traditional transactions, this can happen quickly; while a conventional purchase often takes four to six weeks to close, you can close in 10 days or less with a lender like hard money lenders in Washinton DC