What kind of financing is best for your renovation project?
When you apply for funding with Bay Eleven, our lending partners will suggest a range of loan products based on your needs and goals. Here are some of the most common financing products that we offer to contractors, realtors, and real estate investors who are looking to fund a residential construction project.
Residential transition loans (aka “fix and flip” loans)
A residential transition loan is a loan secured by a mortgaged house property, with the funds intended to cover the costs of renovating and reselling the property.
These loans are often referred to by other names, such as RTLs, fix and flip loans, hard money loans, and private capital loans. Don’t be confused—they all mean the same thing, more or less.
The amount of money you can access through a residential transition loan is dependent on the value of the property.
The average term of a fix and flip loan is 12 months, so it’s ideal for borrowers looking to renovate and resell their property in the near future.
Bridge loans
A bridge loan is a short-term real estate loan that allows you to acquire another property before the one you’re currently renovating has been sold.
For many independent real estate investors, it’s not financially possible to invest in your next house-flipping project before you sell your current house and collect the proceeds. A bridge loan helps you take advantage of a good opportunity to acquire another house, even if the timing isn’t perfect.
Because they’re only intended to cover a small time period, bridge loans usually come with shorter terms and higher costs than a typical fix and flip loan. You will also need to prove to your lender that you’ll have the ability to pay two mortgages at once, and that you have a clear timeline for selling the house you’re currently working on.
Ground-up construction loans
A ground-up construction loan is a short-term financing option for projects that involve building a new structure on an empty lot or making significant horizontal or vertical additions to an existing house.
These loans can be used to fund the construction costs only, or to fund the land acquisition as well as development.
Having approved building plans will increase your odds of being approved for a ground-up construction loan. If plans and permits aren’t readily available, a bridge loan might be a better option until the project is build-ready.
Long-term rental financing
Also known as a Debt-Service Coverage Ratio (DSCR) loan, long-term rental financing is specifically used to fund the purchase and improvement of multi-family rental properties. (So, instead of “fix and flip,” think of it as “fix and rent out.”)
The amount of funding you can secure with long-term rental financing is based on the property’s net operating income compared to the amount of money required to pay (or “service”) the debt.
This can give borrowers a lot of leverage in the right circumstances. Acquiring a property with a high potential for cash-flow generation gives you a strong debt-service coverage ratio—making the lender more likely to offer you better terms or a larger funding amount.
