Many first-time real estate investors consider renovation loans as an option to help them build their budding portfolio of investment properties or get a jump-start on their first fix-and-flip project. Are renovation loans a good fit for real estate investors?
Consider three (3) reasons why renovation loans may not be a good fit for real estate investors.
1. Large Down Payment Required
When financing an investment property that needs repairs or updating, government-sponsored mortgages with low down payment requirements are not an option. Conventional renovation financing is available, but it requires a minimum 15% down. If you do not qualify for private mortgage insurance, you may have to put down as much as 20%.
Keep in mind, the down payment requirements apply to both the purchase price and the renovation costs, fees, and reserves. For example, if the property purchase price is $150,000 and it will take $75,000 in renovation costs, fees, and reserves to update the property, the down payment would be based on a total of $225,000. At 20% down, that would be $45,000.
2. Do-It-Yourself (DIY) Repairs May Not Be Allowed
Most real estate investors prefer to do some or all of the work themselves to save money and maximum their return on investment (ROI). However, your lender may require you to hire a licensed and insured contractor who provides a bid for labor and materials at retail cost. Good ol’ fashioned sweat equity may not be allowed.
3. Property Limitations
If you are looking to fix and flip a property, a single-family residence may be an attractive option for quick re-sale.
If you are looking to retain your investment property, you may be leaning towards a 2-4 unit property. Unfortunately, multi-unit properties are not eligible property types for conventional renovation mortgages. You may be limited to 1-unit properties.
If you have liquid assets available for a sizable down payment, don’t mind hiring a licensed and insured contractor to perform the work, and can find a single-family residence that will yield the ROI you are looking for, a renovation loan may be just the tool you need to begin your real estate investment career. Otherwise, renovation lending may not be a good fit for your investment strategy.
Jennifer Goldsby, NMLS #591226 | VP, Renovation Lending
Diamond Residential Mortgage Corporation NMLS #186805 | Equal Housing Opportunity
Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.
