Rehab Loans - Are Traditional Lending Institutions The Way To Go Or Should I Seek Private Money?

Whether you are experienced in real estate investing or a newcomer, rehab loans from private lenders may be the right choice for your next project. In today's market, there are a number of advantages to choosing private rather than commercial financing and there are a number of advantages to borrowing, rather than relying on your own capital for repairs.

First of all, many banks have suffered from years of making sub-prime loans to high risk borrowers. There reserves are not as high as they should be. So, today, they are not making as many loans, even to the low risk borrower. While real estate investing is usually considered low risk, bankers are concerned about the sluggish market. They do not want more defaults. To the experienced real estate investor, this means that a rehab loan may be unavailable from the bank that he used five years ago.

Private lenders, on the other hand, have not been hurt by the country's economic struggles. If they had been, they would have stopped making rehab loans. Instead they are making more loans than ever, because people are starting to see the advantages to borrowing this way. Deals can be closed faster, because there is less red tape. Another plus is that there are fewer rules about what the money can be used for.

In order to get a rehab loan from a bank, you would have to get a line of credit, based on the equity that you have in the house. Of course you made a good deal, so you have instant equity, but you also had to borrow money to purchase the house. So, now you have two loans, instead of one, both with interest accruing and it is taking longer than you thought to repair and sell the house.

A private company specializing in rehab loans can provide one loan that can be used for purchasing and making repairs. They are not governed by the same regulations that require banks to make two separate loans.

Now you might be thinking that you have enough capital of your own to make the repairs that the house needs, so why borrow at all. If this is what you are thinking, then you are not considering your cash flow. Suppose it costs a little more to rehab the bathroom than you planned. Suppose you find out that the roof leaks.

Suppose you have finished the repairs, but it's taking longer to sell than you thought. Any of these things could tie up your own money, preventing you from finding other great deals and buying more property. A rehab loan, when used correctly, will allow you to make the needed repairs, buy more houses and make more money faster.

So, you can get one loan that covers the purchase price and the repairs. If you have the right loan to "after repair value" ratio, then you can even roll in the closing costs. In other words, you can buy an investment property without using any of your own money.

You may be able to delay repayment of the loan until the property is sold, so if it takes a little longer, there's no need to worry. Companies that specialize in rehab loans offer a variety of payment plans, schedules and options. You might want to consider this type of financing for your next real estate investment.