How to finance a fixer upper

Question

Hey all I am a new investor . I am now looking to buy my second property. My first property is a turnkey property in the Scranton area and is all rented out now. I am now debating if I should attempt a property that needs to be fixed up a little. However I'm not sure how that would work using a conventional loan. For example would I take out a full 200k loan for an old 100k property and use the rest of the loan to fix up the property? I'm just not 100% sure how that works or which type of loan/ financing to use. Also do you think it's better to invest in turnkey properties for this area or is finding a fixer upper a good idea as well? I'm open to any ideas, advice or experiences

Bruce Woodruff · Answer

Depends just how much of a 'fixer-upper' it is. As a GC, I always made good $$ on the fixers, usually bought with cash, but you can get a loan on some of them. I would get a house that needs serious repairs, but nothing like roof or foundation that scares the lenders. You can find plenty that have been very  mistreated, smell like dog pee, need everything inside replaced, etc....

Nicholas L. · Answer

@Brandon Morgan

for a fixer upper, you would not typically use conventional financing.  instead, many 'hard money' lenders will lend on the purchase price and the rehab cost (most will still require a down payment.)  i would find out which companies other investors in your area are using and approach them about your potential project.

turn key vs fixer upper - you'll have to make that determination for yourself.  one question is, do you have the time, energy and interest to oversee a big rehab?

Brittany Minocchi · Answer

Conventional financing won't be an option for a property that needs rehab UNLESS you plan on living in it.

For strictly an investment property, you'd start with a bridge loan (fix/flip or fix/hold). These usually have a term of 6-12 months and are interest-only. The lender will finance a portion of the purchase price and up to 100% of the rehab. As a new investor, you could need anywhere from 10-25% of the purchase price to put down, as well as reserves (x number of month's worth of payments available in your bank account). You will need to find the rehab to start, then request draws as work gets completed on the property to reimburse yourself. Once rehab is completed and before the balloon comes due, you'll refinance into a long-term loan if you plan to hold, or you can sell the property. DSCR loans are popular for this because you can get around the 12 month seasoning requirement that a conventional cash out refinance will require.

Hopefully that helps a bit, feel free to reach out if you need me to elaborate on anything!

Jeremy Horton · Answer

Starting with a fixer upper that needs a light rehab is a great idea - this is how I purchased all of my LTRs - key being rehabs between 20-40k

I would typically buy with conventional (if it's in really bad shape you may need to use a local bank or buy with cash) then you have some options - I used a 401k loan, 0% credit cards (usually you can get 0% APR for the first year and then just balance transfer if you can't pay it off) and cash

I personally don't mess with bigger rehabs - too much time/risk. And buying a distressed property is the best way (imo) to get a good deal

Kerlous Tadres · Answer

With fixer-uppers, a conventional loan won’t cover the renovation costs. You’d only be approved for the purchase price or appraised value, whichever is lower. So you can’t get a $200K loan on a $100K property to use the rest for rehab.

If you want to finance both purchase and rehab, you'd need something like an FHA 203(k) loan (if you’ll live there), a HomeStyle renovation loan, or use hard money or private funds and refinance after the rehab.

Turnkeys are easier and more passive. Fixer-uppers can build equity and offer better returns, but come with more work and risk. It just depends on your goals and how hands-on you want to be.

Kerlous Tadres · Answer

With fixer-uppers, a conventional loan won’t cover the renovation costs. You’d only be approved for the purchase price or appraised value, whichever is lower. So you can’t get a $200K loan on a $100K property to use the rest for rehab.

If you want to finance both purchase and rehab, you'd need something like an FHA 203(k) loan (if you’ll live there), a HomeStyle renovation loan, or use hard money or private funds and refinance after the rehab.

Turnkeys are easier and more passive. Fixer-uppers can build equity and offer better returns, but come with more work and risk. It just depends on your goals and how hands-on you want to be.

Brandon Morgan · Answer

@Nicholas L.  That makes sense. Tbh I like turnkey properties because I can rent right away without too much hassle.  But I have been reading that the forced appreciation from doing a rehab is where the money is at.

How to finance a fixer upper

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