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How to Find the Best Renovation Loan for Your Investment Property (And See a Return!)

Investing in real estate can feel like the biggest reward ever, especially when you consider the potential returns from renovating investment properties!

But it’s all about securing the right funding for these renovations so you’re not breaking the bank. Renovation loans are certainly talked about a lot– but how can you know the best renovation loans for your investment property? And how can you use them to unlock the fullest potential of your investment property?

Understanding Renovation Loans

Renovation loans are specialized loans that provide funding for both the purchase of a property and the renovations needed to increase its value.

Unlike traditional home loans, which only cover the purchase price, investment property renovation loans allow you to finance the cost of improvements as well. This can be a significant advantage, especially when you're looking to renovate a property to increase its value.

image of a man installing hardwood flooring

Benefits of Using a Renovation Loan

There are lots of benefits to leveraging a renovation loan over a traditional home loan. Some of these include:

  • Flexibility: Renovation loans offer flexibility in terms of the types of properties you can finance. Whether you're looking to renovate a single-family home, a multi-unit property, or a commercial building, there's a renovation loan that can meet your needs.

  • Increased property value: Renovating an investment property can significantly increase its value. By using a renovation loan, you can finance these improvements upfront, allowing you to increase the property's value without having to use your own capital.

  • Competitive interest rates: Renovation loans often come with competitive interest rates, making them a cost-effective way to finance your investment property renovations.

  • Tax deductions: In some cases, the interest paid on a renovation loan may be tax-deductible, further reducing the cost of financing your renovations.

  • Streamlined process: Many lenders offer streamlined processes for renovation loans, making it easier and faster to get the funding you need for your investment property renovations.

Types of Renovation Loans

You still might be wondering about renovation loans for investment property for your specific properties– especially since there are so many out there.

With a quick Google search, it can get overwhelming when trying to weigh your options. Let’s break them down simply, as each type of loan has its own set of requirements, benefits, and limitations. Here are some of the most common types of renovation loans available:

  • FHA 203(k) Loans: These loans are backed by the Federal Housing Administration (FHA) and are designed to help homebuyers finance both the purchase of a property and the cost of renovations. FHA 203(k) loans are popular among first-time homebuyers and offer low down payment options.

  • Fannie Mae HomeStyle Loans: Fannie Mae HomeStyle loans are conventional loans that allow borrowers to finance renovations up to 75% of the property's after-repair value. These loans can be used for a variety of renovation projects, including structural repairs and cosmetic updates.

  • Conventional renovation loans: Conventional renovation loans are offered by private lenders and are not backed by the government. These loans typically require higher credit scores and larger down payments compared to FHA 203(k) loans and Fannie Mae HomeStyle loans. However, they may offer more flexibility in terms of loan amounts and renovation projects.

image of a white room with a woman on a ladder taping the wall for paint while man holds ladder steady

Factors to Consider

When weighing your options for renovation loans for your investment property, you’ll want to consider a few key factors in your decision-making process:

  • Interest rates:: Compare the interest rates offered by different lenders to ensure you're getting the best deal. Remember, a lower interest rate can save you thousands of dollars over the life of the loan.

  • Fee: In addition to interest rates, be sure to consider any fees associated with the loan, such as origination fees, closing costs, and inspection fees. These fees can add up quickly and impact the overall cost of your renovation project.

  • Repayment terms: Look for a loan with repayment terms that fit your budget and renovation timeline. Some loans offer flexible repayment options, such as interest-only payments during the renovation period, which can help manage cash flow.

  • Loan amounts: Consider the maximum loan amount offered by each type of renovation loan and ensure it aligns with your renovation budget. Keep in mind that some loans may have limits on the amount you can borrow based on the property's after-repair value.

  • Renovation goals: Choose a loan that aligns with your renovation goals. For example, if you're planning a large-scale renovation project, you may need a loan that offers higher borrowing limits and allows for extensive investment property renovations.

Maximizing Return on Investment

When renovating an investment property, it's important to focus on projects that will provide the highest return on investment (ROI).

First, focus on high-ROI renovations. Certain renovations tend to offer a higher ROI than others. For example, kitchen and bathroom renovations typically yield a high ROI, as these are key selling points for buyers and renters.

You’ll also want to enhance curb appeal. After all, first impressions matter, so consider investing in landscaping, exterior painting, and other curb appeal enhancements. A well-maintained exterior can attract more buyers and renters, increasing the property's value.

Energy-efficient upgrades, such as installing new windows, upgrading insulation, and replacing old appliances with energy-efficient models, can not only attract environmentally-conscious buyers but also save money on utility bills, increasing the property's value.

And considering the neighborhood’s demographics and market trends if the neighborhood is popular among families, adding a play area or upgrading schools nearby could increase the property's appeal and value.

Calculating Return on Investment

Calculating the ROI for a renovation project can help you determine if it's a worthwhile investment. The formula for calculating ROI is simple:

ROI= (Net Profit/Cost of Investment) x 100%

For example, if you spend $20,000 on a kitchen renovation and it increases the property's value by $30,000, the kitchen renovation return on investment would be 50%.

image of a white kitchen in the middle of a renovation

In fact, kitchen and bathroom renovations are known for their high ROI!

For example, a minor kitchen remodel costing around $25,000 could increase the property's value by an average of $20,000, resulting in an ROI of 80%.

Similarly, a bathroom remodel costing around $10,000 could increase the property's value by an average of $11,000, resulting in a bathroom renovation return on investment of 110%.

By focusing on renovations that offer a high ROI and carefully calculating the potential return, you can make informed decisions that maximize the value of your investment property.

Finding the Best Renovation Loan

Shopping around for the best renovation loan for your investment property is crucial for maximizing your return on investment. Here are some tips for finding your best renovation loans for investment property:

  • Compare your loan options. Take the time to compare different types of renovation loans, including FHA 203(k) loans, Fannie Mae HomeStyle loans, and conventional renovation loans. Consider factors such as interest rates, fees, and repayment terms to find the best fit for your needs.

  • Research lenders. Look for reputable lenders who specialize in renovation loans for investment properties. Check online reviews and ask for recommendations from other real estate investors to find lenders with a track record of providing competitive rates and excellent customer service.

  • Use online resources. There are several online resources available that can help you compare renovation loan options and find lenders. Websites like Bankrate, LendingTree, and Zillow offer tools for comparing loan rates and terms from multiple lenders.

CRE Professionals Can Help You Find the Best Renovation Loan for Your Investment Property!

Remember– don't hesitate to seek advice from a financial advisor or real estate professional if you need assistance figuring out the best renovation loans for investment property for you! CRE Professionals is looking forward to helping you make the most of your investment!

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