How to Finance Your Renovation?

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How to Finance Your Renovation?

Does your house or rental property need a fresh new look, upgrades, or overdue maintenance? How can you improve the value of your property without breaking the bank?

There is a lot of money available in the current market to help with fixing up your property. In this article, I’ll talk about some of the best strategies to get financed without having to spend too much cash out-of-pocket.

In the investment business, we call financing ‘leverage,’ and the best kind of financing lets us get the most income potential, for the least amount of upfront capital, hence the leverage analogy. Essentially, you make a higher return on investment when you use financing instead of cash.

How can you make this work for you?

Read on to hear more about reliable strategies to get the financial leverage needed to improve condition, value, and make yourself and your tenants more comfortable and satisfied with living conditions.

Finance Your Renovation with a Cash-Out Refinance

Got equity? Pull it out!

If you’ve got some equity in your property, then you have the capital to make the needed interior and exterior improvements to achieve your investment and homeownership objectives. There are several financing approaches available to harness this latent capital that is present in your property. You’re not limited to using your equity just for renovations; you can also start or grow another business, or put a down payment towards a new home or rental.

The most common approach, especially if you’re locked into a high-interest or adjustable-rate mortgage, is to apply for a cash-out refinance. There are numerous government backed programs including Fannie Mae and FHA that offer low-rate refinance programs that make it easier to obtain the capital you need. High LTV or loan-to-value ratio refinance options make it possible to get cash even if you have relatively little equity. It might be just what you need to push your portfolio further.

Home Equity Line of Credit

Another viable option is the Home Equity Line of Credit (HELOC). These second position or junior loans are secured against the equity in your property and allow you to treat the equity in your home as a secured credit card. A HELOC typically has two periods: the draw period, during which there are interest only payments, and the repayment period when principle payments start. Most HELOCs are adjustable rate mortgages and carry with them the risk of payment increases when interest rates rise. Although you can get the capital you need, this type of loan product typically offers less economic protection and security to borrowers.

FHA 203k Purchase or Refinance

A low-cost and big-benefit option is the FHA 203k rehab loan. This FHA program is available for purchase or refinance and lets borrowers finance the cost of rehab directly into the loan. These loans offer excellent rates and terms and let you finance up to 97.75% with a combined loan-to-value ratio of 100%. These loans are intended for owner occupants, however, if you own a multifamily property up to 4 units and live in one unit, you can qualify for the program. You can also use the 203k to finance condos, PUDs, modular homes, and HUD homes. If you combine this strategy with the capital gains tax exemption when selling after two years, you can make a very nice margin.

If you need some help figuring out what strategy will give you the most leverage to finance your renovation or other opportunity, please call us at (617) 250-7100 or click here.

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