What ways have you creatively financed a renovation?

Question

Besides a heloc, what other unorthodox ways have you been able to front money or finance a renovation or adu?

Joshua Michael Hauman · Answer

It depends on what resources you have at your disposal.

If you were a military general and wanted to make your military campaign as successful as possible you would put together a plan of attack. Your first step would be to assess the weapons and resources at your disposal. You want to know how many troops, what weapons you have, what strategic objective your campaign accomplishes and the layout of the battleground.  Once you have that you can begin to allocate those resources strategically, matching their strengths to specific objectives.

Where do you have equity that you can leverage?

Who do you know that can help you?

What are you trying to do and to what extent? Using military strategy example, how big is the battle and what outcome do you want?

A few ways I’ve battle planned this when it comes to a renovation in the case of flips or BRRRRs:

When I started my first deals were done with Personal Loans.

Personal loans are based on your personal creditworthiness. They are typically unsecured meaning you borrow the money with no collateral. I’ll talk about secured loans when we get to hard money which means some kind of collateral is offered up in case you can’t repay the loan the lender can repossess the asset that the loan is secured by as collateral.

Strong credit and income make it easier to get favorable terms. I was making north of 6 figures in my W2 and had a credit score above 750 so it was advantageous for my scenario. The goal was smaller renovations under 30-40k.

Borrowing amounts vary by lender, typically ranging from $1,000 to $100,000. You can use personal loans for any purpose, including financing property renovations.

If this one is not for you one of the future options might suit you better.

Hard Money Loans:

Hard money loans come from professional lending companies that specialize in short-term real estate financing. The hard money lender's sole focus is providing bridge loans secured against the property itself rather than the borrower's financial strength. This is often why they are called hard money because the loan is referenced to a hard asset. After my first few deals I graduated from doing personal loans to hard money. Hard money loans in my experience are very quick to secure. This might work for you if you don’t have a great credit score but have a great deal.

Hard money loans are often used in real estate transactions where the property or another asset serves as collateral. They are easier to obtain than traditional loans but come with higher costs. Lenders focus on the property's value rather than your credit. Be cautious and understand the risks, as the property is at risk if you default on the loan. Due to the high interest you want to get out of these loans quickly whether it be renovating, stabilizing, and refinancing or selling the property.

When I was using this, I would take the hard money loan and collateralize it against the asset and then use personal cash and credit cards to fund the repairs. For recommendations on the credit card I used for this check out:

https://www.biggerpockets.com/forums/52/topics/1101330-credit-cards-for-real-estate-investors

After I did some hard money deals I began to raise money from friends and family and did some more deals using private money.  I don’t have a rich uncle or anything but the renovations I was doing were not that extensive, so I didn’t need to raise a ton of money. By this point I had a track record and was talking about my deals all the time. This led to networking and raising capital.

Private money loans are provided by individuals the investor knows personally, such as business contacts, friends, or family. The funds come directly from these private parties rather than banks or mortgage companies. Private lenders earn interest on the loan as their return. If you have a network of friends and family that trust you this might be a good strategy. Private money allows for highly customized loan terms and conditions since it is based on personal relationships and lenders can set their own criteria. Interest rates, in my experience, typically range from 8-20% based on the borrower's profile and the deal specifics. The application and underwriting process is also less stringent compared to traditional lending sources.

If you’re looking to understand the differences between hard money and private money more in depth and want to pursue one of these strategies, you can check out the article I wrote here which goes into more detail on the differences between the two:

https://www.biggerpockets.com/forums/67/topics/1142068-the-investors-guide-to-private-loans-vs-hard-money-loans

As I grew my toolkit and did more deals, I used creative financing. I did some buy and hold transactions using seller financing. In these situations, the sellers owned the property free and clear meaning they had no mortgage on it. Seller financing involves a loan agreement directly with the property seller, bypassing traditional lenders. It can be useful if you have credit issues or lack a significant down payment. At a high level it works by negotiating terms with the seller, signing a promissory note, and repaying the loan over time. On the exit, refinancing with a traditional lender is often considered once you have some equity buildup or your financial situation improves.

That is for buy and hold but we’re talking fix and flip, so how does that work?

There's a strategy I’ve used to pay more for a seller’s house than other buyers and still profit. I’ve heard this referred to as a novation agreement or a contract for deed. Essentially what I would do is partner with a seller who wants to sell their house but can’t. Either it needs to be renovated badly or nobody is willing to pay them the price they want. What my team and I would do is offer to come in and renovate their property, sell it, and pay them their price on the proceeds of the sale. Doing this saves me from closing costs and downpayment on the front end and works for them because they get their price on the back end. We only pay closing costs one time and I have no money in the deal other than renovation costs. My profit is then :

Whatever I owe the seller on the sale + the renovation costs – the purchase price we sell the deal at.

This is the strategy I’m continually pursuing now as well as partnerships with other investors whether they have deals and need help getting them done or have money they are looking to partner in as a private investor.

Alternative strategies I know about but have not personally used are the following:

401(k) Loans

Home Equity Loan or Line of Credit

FHA 203(k) Loan

I can’t speak to them as I haven’t done them, but these might be worth looking into.

Derek Dombeck · Answer

@Andy Sabisch,

That is why I target the smaller retirement account holders for these deals. They typically have 50 - 100k and may not have the options to get the higher returns. Furthermore, many of them do not require monthly payments as they do not live off the proceeds. If the deal can afford accumulating interest, we may structure it that way.

If you are not finding this type of available money, change your audience.

Rick Pozos · Answer

I have bought a house sub to, paid the back payments on the mortgage. Gave the seller a few thousand $$ at closing. Asked my sister to get a Home Depot credit card for materials. Gave the homeowner a 2nd for the rest of their reduced equity. Did lots of the work(painting, putting in carpet, install new appliances) myself. Used my credit cards to buy other stuff needed. Sold the house and paid people back.

Derek Dombeck · Answer

I like to bring in small self directed IRA or Solo 401k owners. I give them an interest only payment of 6% to 8% plus a percentage of the equity when I sell or refinance. I do this utilizing a participation note and mortgage. The same thing can be accomplished by selling part of the deal as an Option. This way, you are not taking on debt.

Devin Peterson · Answer

12 month interest free business credit cards

What ways have you creatively financed a renovation?

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