Investment Property Loans
An investment property loan is a private loan used to purchase or refinance an income property. The loan is secured by the actual property, usually through a deed of trust. They are typically used for properties in which the borrower needs to close quickly or is unable to secure a loan through a bank. The borrower will usually intend to refinance into other long-term funding with a lower interest rate at some point in the future.
Knowing which type of loan to use is a key part of real estate success. A good investment property is not going to sit on the market long. When there is competition for a solid investment property, your source of funding could be what determines whether you secure the property or walk away empty handed. Traditional funding typically takes at least 30 days to fund, where private funding can be available in as little as 1-2 weeks. If you can offer a shorter closing time with guaranteed funds, a seller may be willing to take a lower offer price in exchange, even with multiple offers. Private investment property loans allow you to first, secure the property and then secure the long-term financing.
Fix and Flip Loans
Fix and flip loans are private, short-term loans used by real estate investors to purchase homes with the intention of rehabbing or “flipping” the home to then resell it for a profit. The loan is typically secured by the actual property and may or may not include the rehab costs. They are typically used for fix and flips because private investors will loan more than a bank; most banks do not like to loan on these types of properties and will only loan on the current value, whereas a private lender will loan based on the After-Repair Value (ARV). This loan is also used by more experienced investors who undertake multiple projects simultaneously.
Let’s say you want to purchase a property with the intention to fix it up and then flip it for a profit. The home is expected to cost $220,000 and the costs to repair it are estimated to be $30,000. That is a total cost of $250,000. The home’s After Repair Value (AVR) is projected to be $300,000. If you contribute $50,000 of your own money and get a private loan for the remaining $200,000, plus the additional costs of the loan, you will be looking at an estimated $270,000 in total costs. Once the project is finished, if all the projected calculations of costs and sales price are correct, after repaying the loan you should see a net profit of about $30,000, an ROI of 60%.
Experienced flippers use private loans to fund multiple projects simultaneously. This allows them to leverage their returns and grow their businesses at a much faster rate.
Commercial loans are usually borrowed by an individual or business that wants to purchase a commercial property or take out equity in a commercial building. Commercial properties include office buildings, warehouses, hotels and resorts, retail buildings, medical facilities, large residential housing units, and special-use properties such as churches and restaurants. This loan is helpful to those that need to access cash quickly or do not have the credit to qualify for a traditional bank loan. At Vintage Real Estate Fund, we can loan up to $8M for a commercial loan.
Construction and Land Loans
Construction and land private loans are borrowed by builders who typically cannot secure a conventional loan. Construction loans often include funding for the raw land in addition to the materials and other building costs. The funds are typically paid out in draws as the builder reaches certain criteria. The builder will often need to submit project plans, budgets and timelines to the lender.
There are 4 ways to use private funding for these loans.
- Acquisition loans are used to acquire the raw property.
- Development loans are used to fund the necessary improvements to convert the land for use; it can also include the installation of sewer, water, or power lines.
- As a bridge between A&D phases or between and A&D loan and a construction loan funding. Bridge loans sustain the fluidity of the project until the construction begins.
- Various stages of the construction process and project.
Bridge loans are a short-term loan used to “bridge the gap” until either permanent financing can be acquired, or an existing obligation is released. They are also referred to as swing loans, gap financing, or interim financing. With bridge loans, the current property is used as collateral. These loans allow the borrower to attain the funding they need quickly until conventional funding can be secured.
Bridge loans are most commonly used to avoid losing the ability to purchase a new home due to contingency to sell. This allows a buyer to purchase a new home before selling their current one and prevents losing the ability to purchase a new home due to contingency to sell. If you have a contingent offer on a home and the seller issues a Notice to Perform, you can use a bridge loan to remove the contingency, allowing the sale of the home to continue to move forward. However, not all sellers are willing to accept an offer with a contingency attached to it, especially in a hot market. In this case, a bridge loan allows you to make a non-contingent offer, providing the seller the comfort of knowing that they will be able to sell their home without worry of the buyer having to first sell their current property.
If you want to know more about the different loan programs we offer or are interested in acquiring a loan, contact us today! We’d love to help you understand all your options and assist you in building your investment portfolio.