Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

How To Obtain Residential Redevelopment Financing

Written by Paul Esajian

The comprehension of residential redevelopment financing is a necessary component to becoming a successful real estate investor. As one of the basic elements to any investment deal, an investor’s penchant to residential redevelopment financing will have a significant impact on their success, as the numbers will almost always dictate the financial outcome of an investment.

That said, not all residential redevelopment financing is created equal. The way in which you obtain financing will have a direct impact on your real estate investment, including its profitability, cash flow, and the overall health of your real estate portfolio. To gain a better understanding of how it works, the following examines the different types of residential redevelopment financing options available to investors:

How Residential Redevelopment Financing Works

Residential redevelopers funding

One of the biggest misconceptions about residential redevelopment is the amount of money needed to get started. This misbelief continues to hinder a large portion of beginner investors; not because of limited options, but because investors in their infancy are simply not aware of the multitude of real estate financing avenues available. Even with bad credit, there are an abundance of ways to obtain residential redevelopment financing.

For investors, the importance of comprehending residential redevelopment financing is critical for several reasons. Along with helping turn strategies into realities, the ability to recognize and understand the benefits of financing methods, as well as the negatives, will only enhance residential redevelopers in determining the best approach to financing their investment. I cannot stress enough how important it is for investors to have a clear understanding of their finance options, as well as working knowledge on the pros and cons of each route and how it will affect their bottom line.

The first step residential redevelopers should consider is the approval process lenders implement. Although each lender will have their own qualifying standards and processes for residential redevelopment financing, these qualifications typically include:

Debt-To-Income: This ratio represents the percentage of monthly income spent on bills, such as credit cards, car loans, mortgage payments, rent, and other. A debt-to-income ratio is primarily used to determine the risk factor of a person, as well as examining the amount of money they can afford to safely pay back. In most cases, the maximum debt-to-income is 45 percent for conventional loans and 50 percent for FHA-insured loans.

Credit Score: In order to borrow money, residential redevelopers will need to have a credit score in good standing. This three-digit number, which is based primarily on your credit report, is a crucial component to obtaining residential redevelopment financing, as well as negotiating power when seeking loans.

Loan-To-Value: Another lending risk assessment ratio, loan-to-value (LTV) is a calculation determined by comparing the total mortgage amount lien to the appraised value of the property. This ratio is used by lenders to determine the level of exposed risk they’re taking on when providing residential redevelopment financing.

Residential Redevelopment Financing: 3 Options To Secure Funding

Real estate financing

There are several different methods to obtain residential redevelopment financing, all of which offer their own advantages. The following highlights three variations of funding options for real estate investments:

Traditional Lenders: Far and away the most common type of residential redevelopment financing is through traditional lenders. This conventional approach to securing loans and FHA loans is great for beginner investors, especially those looking to take advantage of currently low interest rates. On the other hand, these banking institutes follow strict guidelines with many demands that other financing options don’t require. This include a robust down payment (anywhere from 15-25 percent of the loan), a strong credit score (680 and above), as well as income documentations, such as pay stubs and tax returns.

Private Money Lenders/Hard Money: The majority of residential redevelopers in today’s market utilize a wealth of financing options, with a large portion using private money and hard money lenders. These alternative funding sources offer investors the ability to obtain short-term, high-rate loans that don’t conform to bank standards of creditworthiness, which is ideal for beginner investors. According to my colleague at FortuneBuilders, Than Merrill, more often than not, the average investor isn’t capable of funding a deal with their own money.

“Even if the funds are readily available, investors will seek the assistance of a private money lender. Regardless of a particular investor’s situation, there is an increased likelihood of them needing private money assistance,” says Merrill. “Instead of having to pool money or stretch every dollar, investors are given more options to grow their business with the use of private money.”

For hard money financing, lenders will utilize the “After repair Value” (APR) of a property to determine the size of the loan. Although hard money lenders won’t fund an entire deal, they will provide a substantial portion of the purchase price, which typically range from 50 to 70 percent. That said, their payback terms will generally include higher interest rates than traditional lenders, as well as additional percentage fees based on the loan amount.

Private money lenders on the other hand will provide residential redevelopers with cash to purchase properties in exchange for a specific interest rate. With a payback period from six months to a year, this type of residential redevelopment financing is ideal for investors looking to raise the value of their property over a short period of time.

All-Cash: When it comes to residential redevelopment financing, nothing gives investors the upper hand quite like all-cash financing. This option enables residential redevelopers to not only save on interest and increase cash flow, but get more offers accepted and close deals fast. In addition, all-cash homebuyers paid nearly 23 percent less per square foot than all homebuyers nationwide during the first quarter of 2016, according to RealtyTrac. Cash financing is never a bad idea, but in order to identify the best financing approach for their investment, it’s important for residential redevelopers to explore all options available.

With an array of options for residential redevelopment financing, it’s important for investors to comprehend not only the various types of financing available, but the advantages and disadvantages of each avenue.