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How to Save & Make Money Buying a “Fixer Upper” as an Investment Property

By Scott Bialek, Co-Founder of Hurst Lending

In my fist blog of this 3-part series, I shared a case study in which a bridge loan was the key to not only winning an edge over other buyers, but also saving money on a real estate investment deal.  Those strategies work extremely well for a property that is turn-key and inhabitable.  But what about purchasing a property that needs repairs? How can you make that property deal work for you without excessive costs and cash outlay?  Part 2 of my series addresses these concerns and offers more solutions for real estate investors.

Many real estate investment properties aren’t fully livable, and that’s often the main reason a property is an attractive investment.  Properties may just need flooring and paint, or they may require extensive renovation, everything from the floors to the roof.  Since traditional lenders require properties to be habitable, investors historically either negotiate with the seller or seek other funding options.  If the seller is unable or unwilling to make the necessary repairs, or you prefer to plan and implement your own upgrades and renovations, the only option in the traditional market place has been a hard money loan.

Hard Money Is An Expensive Way to Go

Hard money loans, typically asset-based loans secured for a specific purpose with specific criteria for repayment, are an expensive way to purchase an investment property.  Their benefit is that they allow investors who can’t get a regular loan for these uninhabitable properties to buy investment properties and borrow based on the “after repair value” of the property.  Their downfall is cost.  Hard money loans typically include a 2-3% origination fee plus a 12-14% interest rate.  On a $200,000 property, that’s about $28,000-34,000 for 6-12 months of financing!  Is the term “loan shark” swimming in your head yet?

The hard money loan covers construction and repair costs, but investors pay a high price for it.  After the initial origination and interest costs, investors traditionally wait for a seasoning period until they can refinance the property with low-cost, long-term fixed financing. This adds additional time, closing costs and fees to your investment, and can drive the cost of business up to 20% or more of the purchase price.

A NEW Solution: Using a Soft Money Bridge Loan to Purchase Investment Property, Then Converting to Long-Term Financing

Soft money, by contrast, is a more traditional loan with lower interest rates than hard money and longer repayment periods. It’s typically backed by the value of the property and is a much more attractive product for real estate investors, but hasn’t been an option in the past.  At Hurst Lending, I developed a product to allow investors to acquire this type of loan for those uninhabitable properties without the high cost of traditional lending options.  This is great news both for the individual buyer who wants to buy a home needing repairs or the investor who is looking for a major renovation project with the opportunity for a bigger return on their investment.

In Part 1 of this series, I described bridge loans and how they can be a tremendous asset for buyers and investors alike.  Now we’re talking about a solution that combines our bridge loan with a soft money loan and incorporates our no seasoning product.  This Soft Money Bridge Loan allows you to invest in the less-than-perfect property and not only have a realistic opportunity to get financing, but to get it at a much lower cost.  Borrow based on the after-repair value of the property, pay 1-2 points and typically 9-9.5% interest, with no seasoning requirements and the savings stacks up.  Now that same $200,000 property now costs only $20,000-23,000, saving investors $8,000-11,000 on a low-cost property and translating to thousands more on larger investment properties.

Refinance with No Waiting at The Improved Value

After the house is refurbished, Hurst Lending can help you refinance at the improved with no seasoning period (commonly a property must be held for a year before refinancing at a new appraised value).

For more solutions to your real estate investment challenges, watch for my next blog post in the 3-part series on Creative Investor Solutions for Winning a Competitive Real Estate Edge.