Investor rehab loan
What do you mean by investment
For corporations and enterprises, it is the rate of capital formation but for individuals like you and me, investments means spending our hard-earned money or savings on an asset with a view to multiply both current and future income and thereby accumulate wealth.
How do we go about it
Now there are different assets where you could possibly park in your money. Shares, stocks, equity is the easily and the most heard of, yet unsurprisingly the least understood option. You could invest in stocks in at least three instances. First, if you are an impulsive speculator/gambler with an itch for taking a dip in murky waters, that is, you are willing to part with a portion of your wealth to invest in stocks just to feel the thrill of the windfall that may accrue if circumstances favor you and you wont be sorry, even if they dont. Second are those who invest in stocks based on rational judgment, that is, who make a meticulous study of a companys balance sheet, carefully scrutinize the figures, analyze its current performance and future prospects, and based on the study, take a decision, whether to invest or not.
However, the majority belong to the third category. Those, who want to reap the benefits but are afraid to burn their hands. So what do they do They entrust the money to those who know the business, like the investment bankers. In lieu of a fee, they do all the hard work for you and assure you a reasonable return.
How about an alternative
But investment in stocks is not the end of the story. There are other areas equally attractive which can generate a fair return and even more. Real estate investment is one such attractive alternative. It includes investment in residential, commercial, multi-family rental apartments and buildings. At the outset, however, it may be mentioned that this field is a bit tricky and people with little/no experience must be careful before taking the plunge.
How does it work
You could acquire a new property and lease it out on rent or alternatively, you could buy a run down house, repair it and then sell it or refinance it for rental income. In both cases you need finance. That is, your own resources may be inadequate so that it may be well advised to borrow funds for financing such acquisition. The beauty of such investment lies in the fact that you could earn handsome returns even without spending a single penny from your own pockets. And this is where rehab loans or hard money loans come into picture. They are non-conventional real estate loans usually funded by private money sources and specialist lenders. Interest rates and points on such loans are usually higher and terms usually range from 3 to 12 months. However, hard money loans have one basic requirement. There has to be some substantial equity in the property to give the lender a reason to invest their funds in an otherwise risky venture. And in these cases conventional financing is not suitable for it takes too long to secure.
Rehab Loan advantages
A rehab loan offers many advantages. Typically, a home in poor repair can be purchased for less than market value, even when considering the cost of the project. For instance, take the cost of the home and add the cost of the project. This total is called the "cost of acquisition". As long as the finished home will appraise for an amount equal to or greater than the cost of the project, your home will qualify as a rehab project. It may be remembered that rehab loans can be used for both owner-occupied as well as investment properties.
Rehab Loan down payment
As for down payment, it varies from lenders to lenders. Some demand no down payment as long as the loan amount does not exceed a particular percentage of the ARV (after repair value) say 65% to 70%. Others analyze your credit history and record as well as the quality of your investment before granting any such exemption.
Secure the maximum discount
Before making a purchase of a property, make sure that you get it less than its market value so that after conducting any repairs if any, you can maximize your profits by selling it at its market value. The difference between the acquisition price and its market value is the spread or the discount and greater the discount you can get from the seller, the greater will be your profit. You can get a substantial discount provided you can pay the purchase price as early as possible. That in turn depends on your finding a good lender who is flexible in his terms and conditions and can finance at very short notice.
Some unpleasant facts
On the flip side, the cost of doing this business is high. It begins right at the level of interest rates with the average threshold rate around 15% that may vary according to the cyclical swings in the economy as well as the policies of Fed that influence the various economic indicators in the economy including interest rates. In addition to it there are a host of costs that come under a common head namely fees such as inspection fees, attorneys fees, processing fee, recording fees as well as taxes and insurance for the year. It would be, therefore, prudent to set aside some funds on your own to meet some unanticipated but mandatory expenditure. Above all, the biggest risk is whether your investment would be fruitful or will it end up as an avoidable drain of wealth For a novice, the stakes are indeed high but with the right guidance and a little common sense, there is no reason why you cannot succeed in your maiden venture. For those who have had a bitter experience and are reluctant to invest again, analyze the reason for your prior failure and if possible avoid similar pitfalls in future. There is nothing sweeter than success so persevere until you succeed.
So if you are seriously contemplating investing in real estate, make sure you go through FHA (Federal Housing Administration) guidelines to make yourself aware of the practical issues involved in housing investment. Real estate investment backed by rehab loans is a viable alternative for earning a steady stream of assured income, provided you do your homework carefully before stepping in and a little bit of luck in your way should do your cause no harm.
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