What are Rehab/Capex Loans
Rehab loans are a specific type of financing that provides funds for the acquisition and renovation of a property. These loans are designed for investors looking to buy properties that require repairs or improvements, which can ultimately increase the property’s value and rental income potential. In the multifamily investing world, rehab loans can be a valuable tool for financing value-add projects.
Challenges in Securing Financing for Capital Improvements
It’s important to note that not all banks or lenders will provide financing for capital improvements or rehab projects. Traditional banks often have strict lending criteria, and rehab projects can be seen as higher risk due to the potential for cost overruns and the uncertainty of the final property value. It is common that Agency Loans (Fannie & Freddie) also will not provide any rehab funds. It is very common for Bridge lenders to provide 100% of the required rehab funds in their loan.
If a lender does not provide rehab funds, this can pose a challenge for investors looking to purchase multifamily properties through syndication. When raising capital for a multifamily purchase, investors need to take into account the potential difficulties in securing financing for capital improvements and plan accordingly. For example, all the funds required to rehab a property might need to be raised as part of the equity.
How Do Rehab Loans Work
Rehab loans work by providing the borrower with funds for both the purchase and renovation of a property. The funds provided by the lender for renovations are split into categories and a dollar amount is allocated to each category. The total amount they provide is based on your due diligence and business plan. It is also common for the lender to include other renovations requirements referred to as lender required repairs. The loan terms and interest rates can vary, but they’re generally higher than traditional mortgage rates due to the higher risk associated with rehab projects.
What to Expect When Using Rehab Loans for Your Multifamily Investment Project
When you obtain a rehab loan, don’t expect the lender to provide the funds for the renovations upfront. Instead, you’ll usually have to pay for the repairs first and then wait for the lender to reimburse you. This reimbursement process, often referred to as a “draw,” can take several weeks or even months, depending on the lender and the complexity of the project. The lender may also require inspections and approvals before disbursing funds, which can further delay the process.
Raising Money for the Purchase of Multifamily Properties through Syndication
Given the challenges in securing financing for capital improvements, it’s essential to factor this into your syndication strategy when raising capital for the purchase of a multifamily property. Be transparent with your investors about the potential financing hurdles and make sure to account for these additional costs and the possibility of delays in receiving reimbursement.
The Importance of Planning and Raising Extra Funds
Having a contingency fund in place can help cover unexpected expenses, such as cost overruns or additional repairs that come to light during the renovation process. This financial cushion can be the difference between a successful investment and a stressful, money-losing endeavor. Is it not uncommon where the time required and the costs to complete a renovation project are more than anticipated. Anyone who has ever rehabbed a single family home to flip or a personal residence can attest to cost overruns.
When raising equity for your multifamily investment deal, make sure to account for the potential difficulties in securing financing for capital improvements. To ensure we get the best financing option available, we work with Brandi Shotwell from Reno Capital, a mortgage broker who has great lender connections and goes above and beyond to serve her clients. Prepare for the possibility that traditional banks may not provide financing, and explore alternative funding sources, such as private lenders or hard money loans, to ensure your project can move forward as planned. With Brandi’s expertise and extensive network, we can navigate the financing landscape and secure the most advantageous terms for your investment.
By preparing for these challenges and raising additional equity, you can position your multifamily investment project for success and enjoy the benefits of strong cash flow and appreciation.
Conclusion
Rehab loans and financing for capital improvements can play a crucial role in the success of your multifamily investment project. However, it’s essential to understand the potential challenges in securing financing and plan for possible delays in receiving funds. By taking these factors into account when raising money for the purchase of multifamily properties through syndication, you can create a more robust investment strategy and maximize the potential returns for your investors.
